Business, Career, Severance pay series

Severance Pay Series: Three Solutions for Firms Overspending on Severance Pay

The practice of severance hasn’t really changed since its creation, and too often companies are overspending on terminated workers who aren’t among the ones most in need.

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That’s according to the Buck Consultants January 2009 report entitled “The Role of Severance in Today’s Employment Environment.”  Buck Consultants is a global employee benefits and human resource consulting firm.

The paper supports a career transition benefit period that includes job training, counseling, outplacement, unemployment benefits and continued health care. In the meantime, it addresses the issue of severance agreements based on tenure only that continues beyond the unemployment period.

Overspending via “double pay”

The law doesn’t require employers to offer severance, but they do for many reasons, such as a peaceful separation and maintaining a positive reputation. However, some workers are receiving “double-pay.”

“Many companies that offer severance overspend on easing the unemployment burden of people whose skill set and work experience make it possible for them to find other employment at comparable wages relatively quickly, while under-supporting those whose work history and current skills do not readily lead to new employment,” writes National Product Leader Rob Gallman.

In 2008 some Wall Street firms came under fire for their generous termination packages.

“Lost amid the din of grimness is the reality that many of those recently redundant Wall Streeters are tumbling onto pretty significant cushions – in most cases, tens of thousands of dollars in lump sums,” the New York Observer reported in its article, “The Benefits of a Big Package.”

Another instance of overspending occurs when terminated employees get severance payments even after they’ve found a new job.

“Some terminated employees receive state unemployment benefits – which the employer has partially funded – in addition to severance benefits. This can result in some former employees receiving more than 100 percent of the salary they had been receiving while employed,” writes Gallman.

Three solutions to ease spending and the employee job transition

Severance spending can be eased Buck Consultants believes and suggests three flexible ways for it to occur.

The first suggestion is to eliminates, for both the employer and employee, the Federal Insurance Contributions Act, an employment tax paid by the employee and employer that provides money for Social Security and Medicare, and the Unemployment Tax Act (FUTA).

“When an employer sets up a trust and pays severance benefits on a periodic, installment basis with employee eligibility tied to ongoing unemployment, neither the employer nor the employee pays these taxes on the severance payment,” the report explains.

The second approach combines severance pay and state unemployment benefits to guarantee workers 100 percent of their pay prior to the layoff, and it avoids financial windfalls.

The last option requires severance used solely as a bridge to new employment by only providing some of the benefits to those who remain unemployed and ending benefits for terminated workers who find and accept a new job before the severance payment period ends.

These approaches, Buck Consultants states, can be used separately or combined and result in cost savings between 5 and 50 percent.

Ultimately, employers can help workers most in need and spend less by tweaking their employee severance policy.

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