Monday, March 24, 2008

Severance Pay Considerations

Severance pay is one of those tricky items that can come back to bite an employer if care is not taken. In New York, for example, there is no statutory right to severance pay. However, if an employer either has a written policy or a regularized and well-known past practice of furnishing severance pay, then the employer is typically obligated to make the payment and apply the severance policy uniformly. If the employer maintains an unwritten, known past practice of providing severance, that’s generally just as binding as if a written policy existed. In short, by having a severance policy, written or unwritten, an employer may create an ERISA-protected benefit, any deviation from which could be unlawful.

New York employers may, however, retain discretion to vary the amount of severance in each individual case, and even award no severance pay at all, provided that such discretion is contained in the written severance policy or is part of the known, past practice. I am no fan of unwritten, past practices when it comes to employment policies as they are usually open to interpretation. This is true particularly in instances where the employer’s stated “understanding” of the policy differs markedly from that which may be provided by former and current employees. IMHO, an employment policy is as good as the paper upon which it is written.

In reviewing severance policies, employers may wish to consider whether to: (a) put the policy in writing if the policy is based purely on past practice; (b) retain discretion to vary the amount of severance or eliminate it altogether on a case by case basis; and (c) require the employee to execute an appropriately drafted Release as a condition for the severance payment. The matter of a Release is something which I find that most employers have ignored, often to their detriment.

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