What Are You Legally Required to Pay Employees at
Termination?
Severance Pay
The law generally does not require you to provide severance pay to
departing employees. However, many employers do agree to provide such
payments as part of company policy and in exchange for a release of
claims against the company. These benefits can be determined in
accordance with your company's written severance policy, or may be
negotiated on a case-by-case basis. Severance benefits may be comprised
of a lump-sum payment, continued salary
for a
certain period, payment for health coverage, and/or job search
assistance through an outplacement program.
Many
employers use a formula for calculating severance based on how long the
employee worked for the firm, such as a week, two weeks, or a month of
pay for each year of service. Paying in a lump-sum vs.
installments over a period of time usually comes down to whether you
have the cash to pay in a lump-sum. If you're laying off a number
of workers at one time, paying in installments may be the way to go so
you can better manage your cash flow. However, the government
agency that handles unemployment benefits in your state may determine
that your former employee is still receiving wages and therefore,
ineligible for unemployment benefits. Check with your state's
unemployment agency when making the decision whether to pay severance in
a lump-sum or installments.
(The Instant HR Solutions
Corrective Action & Termination Toolkit includes a
Separation Agreement & Release that can be used when paying severance to
a terminated employee).
Health Benefits
Under the federal law called COBRA, employer must offer terminated
employees and their dependents the opportunity to continue health
insurance at the employee's own cost, unless the employee was fired for
gross misconduct. COBRA does not apply to employers with less than 20
employees. Some states have comparable laws that apply to companies with
less than 20 employees, so make sure to check the law in the states
where you operate your business.
Unemployment Insurance
Employees who are laid off are considered eligible for unemployment
compensation so you should not contest their claims. Benefits are paid
by the state from the insurance fund you have paid into as an employer.
Your payroll tax rate is affected by your claims experience so you may
see some increase. If you are paying severance benefits, some
states view severance as continuing wages and will not pay unemployment
benefits until severance pay is exhausted. Other states only
restrict unemployment benefits if the individual is barred from working
for another company while receiving severance pay. Check with your
state's unemployment agency to determine how severance pay may impact
unemployment benefits.
Vested Retirement Benefits
Check your specific plan documents, but in general, employees who are
terminated remain entitled to any pension, profit-sharing, or retirement
benefits that are vested at the time of termination.
Unused Time Off
Federal employment laws do not require that you pay for unused vacation,
sick or personal time at termination, but some states do, so you will
need to check the law in your state. If you have an employee handbook
or company policy that states you pay for it, then you must comply with
your own policy. Even if you don't have a written policy but your
practice has been to pay it upon termination, then you risk a
discrimination claim if you pay it to some but not all. Be consistent!
