Why Should Your Small Business Provide Severance Pay to Employees Terminated?

As an entrepreneur, you are to face several Business liabilities. Recession and poor revenue might mean having to lay off some employees. It can be a really difficult task especially when it comes to informing them about their getting terminated from the job. Unfortunately, no pleasant or easy way exists to have such a conversation. But this decision is something you need to make at the earliest to benefit your company. This is irrespective of whether you are laying off one or many employees at a time, considering severance pay.

Should you provide terminated employees with severance Pay?

The question that might arise in your mind is whether to pay your terminated employees compensation or not. Usually, it is offered to provide such employees with financial assistance to cope with their transition from getting unemployed to being employed. An advantage of such a package is that your organization can derive some legal protections.

1. On accepting the package, the employee signs a separation agreement.

2. Such an agreement can help the organization to mostly avoid complaints or lawsuits being filed by the terminated employee.

3. But still, employees do have the right to go ahead and file a complaint against your company for getting terminated. However, the compensation policy and separation agreement prevents them from getting any monetary benefit.

4. For confidentiality or NDAs, some states tend to have varying standards. This is because they relate to contracts that are severance-related. Your legal representative can help ensure that the language used in the agreement complies with the prevailing state laws where the company is registered and employees work.

The Reason for not mentioning such a pay package in the company’s employee handbook is mostly financial.

1. In case you lay off 1-2 employees, then such packages are considered a small price for releasing legal claims.

2. In case a good number of employees are terminated, then offering such a package to them can mean significant financial obligation. It might not be feasible to check your balance sheet.

What should you consider if offering this package?

Each company needs to decide on its own concerning compensation policy and this pay package. In case you choose to offer severance:

1. Provide employees to be terminated with a final agreement either on their last working day or later. A draft document can be presented before the final working day.

2. Explain to them the agreement. Communicate with them and state that they need to make the decision to go ahead with signing the agreement or not. You should not make any recommendations or pressure them to do so.

3. The other available option will be to courier the agreement to the respective employee’s home. Provide them with the opportunity to review alone the document. It will offer you some legal protection from future allegations.

What to offer and when?

Your company’s employee handbook can clearly mention the essential terms and conditions in case of unforeseen events. In case struggling in business, then it is better to announce layoffs in advance. Such news can be quite hard on the employees. But knowing it in advance helps to cushion the blow, especially for those who are likely to be impacted by it. Also, they get some time to look for other job opportunities when there is still time.

But you need to be careful to not lose your best employees in the process. Mediocre employees staying back will only mean increased business liabilities. The agreement is to include a minimum of two weeks’ salary along with additional money depending on their service tenure. Also severance pay can be provided, along with training or outplacement counseling!

Effective tool

Severance Pay can be used to terminate mediocre employees and retain and attract the best ones. This can be achieved in amicable terms.