Small Business Advice
At times our own light goes out and is rekindled by a spark from another person. Each of us has cause to think with deep gratitude of those who have lighted the flame within us.?
— Albert Schweitzer
One part of letting an employee go is trying to ascertain if severance pay should be given and, if so, what amount should be paid. The first thing you should know about severance pay is that there is no law that requires an employer to pay it. Whether or not severance pay is given is purely up to the employer.
Another important thing to understand is that unused vacation and earned pay should not be included in a severance agreement. While earned vacation and pay are owed to the employee, you are not required to pay it immediately. It just must be paid by the next regularly scheduled payday.
The owners of one firm we assist did this type of analysis and they were very surprised at the result. Certain customers they thought they were making a lot of money on were the exact customers they were loosing money on. Just because you have a large amount of sales from a customer and you “think” that you are making money on them, does not guarantee actual levels of profit. There are so many ways for profit to vary from your projected levels due to additional labor or materials that you had not factored in to your price.
If an entrepreneur decides to issue severance pay, the entrepreneur should require an employee to sign an agreement not to sue the firm. There are some peculiarities on the law here so I would advise you to have an attorney review the agreement before presenting it to the employee.
The amount of severance pay is up to the employer’s discretion as well. While there are not any standards for severance pay, clearly there should be a large difference between the amount paid to employees terminated with cause and the amount paid to those terminated for reasons that are not of there own making (e.g. layoffs).
As unappealing as it may seem, there will be times that you are just going to have to give severance pay to an employee that you have terminated with cause just to stop them from hiring a lawyer to sue you. In these cases, you obviously want to pay as little as possible; however, it will have to be enough to stop the employee from suing. However unappealing, it is worth it in the end as being sued can be so expensive.
In my mind, the more important time to give severance pay is when an employee is terminated through no fault of their own. Some reasons for such a termination might be firm downsizing, loss of a major client, abandoned product line or merger into another firm. Paying severance is like giving an employee some breathing room until they find a new job. Of course, most employees are going to be eligible for unemployment benefits, but these benefits are just are not going to be nearly enough to compensate for their lost income.
Most firms pay out at least two weeks of severance pay. Many others pay two weeks plus one week’s salary for every year the employee has worked there. Severance pay for senior level employees can be very high and, in some cases, verging on absurd. Home Depot’s Board of Directors paid Robert Nardelli over $210 million in severance pay.
While each company has to have its own severance policy, the main thing to remember is that the more consistent you are the better. Now go out and make sure that you have thought through the amount of severance that you might offer to employees.
You can do this!
Jerry Osteryoung is the Jim Moran Professor of Entrepreneurship in the College of Business at Florida State University. He is also the Director of the Entrepreneurship Program at FSU and Executive Director of the Jim Moran Institute of Global Entrepreneurship. He can be reached by e-mail at email@example.com or by phone at 850-644-3372.