Should Your Pay Severance When Firing an Employee?

First, by law, you need to immediately remunerate a terminated employee for any unused vacation or personal time, all regular and overtime hours worked, and previously unpaid, earned bonuses and any other earned pay.

When you fire an employee, even if he or she has only been with you for 90 days or less, for any just cause short of confiscating the queen’s jewels, you should pay at least some severance. It is the decent thing to do, remaining employees expect you to have done it, and it makes you look better in the worst of situations. It also decreases your risk of a lawsuit.

Generally in the U.S., employers are not required to pay severance or provide advance notice of closings or layoffs. However, one exception is the WARN Act. The Worker Adjustment and Retraining Notification Act (WARN) protects workers, their families, and communities by requiring most employers with 100 or more employees to provide notification 60 calendar days in advance of plant closings and mass layoffs.

How Much Should I Pay for Severance?

Many firms voluntarily pay severance, with two weeks’ pay being common. Others pay two weeks plus one week for each year of service the employee has given to the company. Still, others are considerably more generous, particularly to employees who held senior positions. In this case, six months’ to a year’s pay is not atypical and is predicated on the assumption that a senior-level employee will have a more difficult time obtaining a new and equal job than will an entry-level employee.

Although it is nice to pay out a lot of money to departing employees, if you own a small business, you need to be concerned about staying in business and paying your remaining staff members. But whatever you decide to do regarding severance pay, in all termination situations, severance for similar positions with similar service time should be consistent. If you continually change your severance policies, you are only adding to your legal risks.

You should only pay severance, however, if the employee agrees to sign a document that forfeits his right to sue you for wrongful termination. Don’t be cheap in this lion’s pit of potential danger. Have a lawyer draw up the release document so that it is, as much as possible, bulletproof. You should give the employee 24 hours to review, sign, and return the document to you; otherwise, it may not hold up in court should the employee decide to sue you anyway. If the employee is age 40 or over, you must, by law, grant the person 21 days to review such a document.

Takeaways You Can Use

• It is good practice to provide some severance, except in cases of truly egregious behavior.
• Continual changes to a severance policy may increase your legal risk.
• Severance should be conditional on the employee forfeiting the right to sue for wrongful termination.
• Have the employee agree not to sue you, especially if you’re paying out a significant amount of severance.

Bob Adams is a Harvard MBA serial entrepreneur. He has started over a dozen businesses including one that he launched with $1500 and sold for $40 million. He has written 17 books and created 52 online courses for entrepreneurs. Bob also founded BusinessTown, the go-to learning platform for starting and running a business.