October 2014

By: Nancy E. Joerg, Esq.

It is a common question that clients ask me: Does our company have to give severance to the employee we are planning to fire?

Surprising to many clients, there are no actual legal requirements that a company must give severance to a departing employee. There is a wide-spread urban myth throughout the United States that a company must give one week of severance for every year that an employee has worked at a company. This is absolutely untrue.

There may have been such a custom or policy in certain companies years ago, but that was never a law and today it is not even a common practice. In today’s world, companies are “all over the place” as to what severance, if any, they will offer a departing employee.

CONTRACTUAL PROMISE: Of course, if a company has a contractual promise in a written employment agreement about severance, then the company must abide by the terms of that contract. For example, let’s say a Vice President of Marketing has a contract with his/her employer that says if he/she quits or is fired, the company will give six months’ of salary (severance) upon separation of employment for any reason. If such a contract exists, the company must abide by those contractual terms. If the company doesn’t abide by the contract, it is in serious danger of being sued for breach of contract (and being on the losing end in such litigation).

Usually, employment contracts for only very highly paid employees contain any mention of severance if the employee departs from the company. It is becoming a rarity.

SEVERANCE PROVISIONS IN EMPLOYEE HANDBOOKS: Some companies have a severance provision in their employee handbooks stating (for example) that the employee will get so much severance for each year the employee has worked at the company, but this kind of provision is becoming increasingly outmoded. Most companies do not mention severance at all in their employee handbook.

OFFERING SEVERANCE IS USUALLY DISCRETIONARY: So, for the vast majority of Illinois companies, severance is completely discretionary on the part of the company. This means that when an employee quits or is fired, the company is under no legal obligation whatsoever to give the departing employee any severance.

Some companies may decide they want to give severance to a particular departing employee. In that sense, severance is a discretionary gift on the part of the company, and only as to that employee.

SEVERANCE IS NOT CONSIDERED WAGES FOR ILLINOIS UNEMPLOYMENT PURPOSES!: What comes as a surprise to many clients is that, in Illinois, severance is not considered wages by the Illinois Department of Employment Security (IDES). Rather, severance is considered by the IDES to be a gift for past services.

Therefore, in the IDES view, severance does not block unemployment. What this means is that a departing employee can collect both unemployment insurance benefits from the IDES and severance from the ex-employer at the same time (and one is not a set-off to the other in any way). This, of course, is welcome news to the employee!

SEVERANCE IN EXCHANGE FOR SIGNING A RELEASE OF ALL CLAIMS: Another key reason that Illinois companies choose to give severance to departing employees is in exchange for that departing employee signing a release of all claims. Giving an employee severance (it could be any amount within the sole discretion of the company) in exchange for the employee signing a release of all claims is a way a company buys protection from potential litigation.

If a company is planning on terminating an employee whom the company feels may be litigious or may be a “high-risk termination,” then the company may want the employee to sign a release agreement in exchange for the company giving the employee a stated amount of severance.

MANY FORMS OF SEVERANCE: Severance can be any amount of money; usually a certain number of weeks or months of salary. Normal payroll deductions are taken out of the severance. Sometimes a company will decide to extend health insurance coverage (paid for by the company) as part of the severance. Sometimes a company will offer to transfer the title of the company car over to the employee as a form of severance. It could be signing over ownership of the employee’s company laptop computer. There are many forms of severance, but the main point is that it must be something of monetary value given to the employee.

CONSULT WITH AN ATTORNEY REGARDING THE RELEASE AGREEMENT-MANY LEGAL ISSUES IMPACT SUCH AN AGREEMENT: If a company decides to offer a severance and release agreement to a departing employee, it is extremely important that the company have an attorney carefully review that document because there are many legal issues which impact such an agreement. For example, departing employees who are 40 years or older must have special terminology (required by Federal law) in their release agreement for it to be enforceable. Also, if a company is planning on terminating/laying off a group of employees (a group defined as two or more departing employees), then a special group release must be drafted in order for it to be enforceable in such a situation.

Severance can be a remarkably effective tool. Companies should be aware that this option exists and can give the company great protection in high risk termination situations.

For assistance with difficult terminations, release agreements, IDES benefits claims, etc., contact Attorney Nancy E. Joerg who can be reached at Wessels Sherman’s St. Charles, Illinois office: 630-377-1554 or email her at najoerg@wesselssherman.com.