KNOW YOUR RIGHTS: SEVERANCE PAY
by Doug Bonney
When people lose a job involuntarily, through a layoff or a firing, one of the first questions they have is whether they are entitled to severance pay. Many people believe that the law requires employers to pay severance. Unfortunately, however, no Kansas, Missouri, or federal law requires severance pay.
Many employers, especially large employers, have adopted policies that grant severance pay to employees in certain situations. Most commonly, these policies provide severance pay for employees who lose their jobs through no fault of their own, such as in a layoff or plant closing, for instance. Employees who lose their jobs because of misconduct are rarely, if ever, entitled to severance pay under such policies. A fairly common type of severance policy among larger employers provides for one week of pay for each year of service. Thus, an employee with 25 years of service is laid off in a plant closing, the employer’s policy might grant that employee 25 weeks of pay.
Although this is a common type of policy, it is not required by law All that the law requires is that employers keep their contractual promises to their employees.
Because a severance pay policy is a contractual promise to employees, the employer must keep that promise as long as it maintains the severance pay policy. A severance pay policy can be either written or oral, and it forms a binding contract either way. If the employer tells employees it will give them severance pay in a layoff and then refuses to pay severance when a layoff occurs, the employer has breached its contract with its employees, and the employees can sue the employer for their severance pay. In contract law, however, the only damages available are the value of the contractual benefits; damages for emotional stress and punitive damages are not available. Furthermore, severance pay policies often fall within the definition of employee benefit plans under ERISA, the Employee Retirement Income Security Act, which regulate; pension. heath, and other employee benefit plans. When ERISA applies, employees seeking severance pay are limited to filing suit under ERISA, and their damages are limited to lost benefits and possibly attorney’s fees.
In a non-union workplace, however, an employer is free to change or abolish its severance pay policy at any time without consulting its employees. If an employer abolishes its severance policy before an event occurs that would otherwise entitle employees to severance pay, the nonunion employer can change or abolish its severance policy without breaching its contractual promise to its employees.
In a unionized workplace, the federal labor laws generally require employers to bargain with the union before implementing changes in wages, including severance pay. If the severance pay obligation is written into the collective bargaining agreement between the employer and the union, the employer could not legally change or eliminate the severance pay provision until the union contract expires, and then the employer could only change the policy by agreement with the union or after bargaining over the change to an impasse. This restriction on the employer’s right to make changes in its promises to employees shows the substantial advantage employees in unionized
workplaces have over employees in nonunion workplaces.
One federal law, the Worker Awareness & Retraining Notification Act (WARN), is somewhat related to severance pay. The WARN Act requires large employers to give employees 60 days advance notice of plant closings and mass layoffs. If an employer gives at least 60 days advance notice, no severance pay is required. But, if the employer fails to give the required notice, the law requires that the employer pay its employees for up to 60 days. This is the only federal law that even comes close to requiring severance pay, and it applies only to large employers and only to large layoffs so that it is by no means generally applicable to layoffs generally’. I will describe the
details of WARN in a future Know Your Rights segment.