Business, Career, Severance pay series

Severance Pay Series: Is the WARN Act Overdue an Overhaul?

Some displaced workers who’ve received inadequate warning of a layoff  are seeking severance pay and have sued under the federal Worker Adjustment & Retraining Notification (WARN) Act, but prior to the recent economic events this law, often described as confusing, is seldom used.

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The two-decade old WARN Act, commonly called the “Plant-Closing Law,” gives employees more protections in unfavorable economic conditions and requires employers to use caution as they plan layoffs.

Generally, employers that have 100 or more workers must give their employees and local and state governments a 60-day advance notice of its intention to close a plant that would cut 50 or more jobs at a work site. They must also give this notice prior to a mass layoff affecting 500 workers or more than one-third of the workforce, according to U.S. Department of Labor.  

The law allows three exceptions to the notice. The first applies to plant closings.  It indicates that the plant’s not liable if the company “sought new capital or business in order to stay open and where giving notice would ruin the opportunity to get the new capital or business.” The second exception is a reasonable unforeseeable business circumstance. The final allowance involves a natural disaster.

Violators potentially must pay employees who aren’t notified 60 days’ compensation, benefits and lawyers’ fees.

The law was rarely used until the recent recession.  Most lawyers found the law puzzling in practice, and undefined terms made it vague. They considered an unforeseeable business circumstance a loophole as well as the fact that some workers don’t even meet the thresholds stated in the law. Employment experts noticed in the Finance & Commerce 2009 story “WARNing Failure: Most Laid-off Workers Not Covered by Notice Law“ that more than 70 percent of the layoffs involved businesses that had fewer than 100 workers or made staff reductions of less than 50 employees.

Lawmakers have worked to address and close these loopholes in the federal law.  Some states, such as New York, have come up with their own versions. For instance, New York lengthened the notice period to 90 days and applied the law to companies that laid off as few as 25 employees.

The federal government tried to give the law a makeover. In July 2009 Rep. George Miller, (D-CA), introduced some changes with the Forewarn Act (H.R. 3042). The amendments included expanding the law to smaller sites and doubling damage amounts, but it stayed in committee at the end of the legislative session.

Career, Severance pay series

Severance Pay Series: Situations That Either Cut or Reduce Severance Packages

 Some workers were abruptly laid off without an agreement, or learned their severance agreement would end early. The common reasons for this abrupt change have been a steep decline in the economy and/or a business’ bankruptcy.  

Employees started to receive smaller severance packages toward the end of the Great Recession and had fewer opportunities to negotiate better terms. Some employers had to shave or eliminate severance packages to save money and avoid bankruptcy filings. Some employers had to make quick decisions about layoffs leaving jobless workers with little notice and no severance package. This led angered workers to sue.

Even a state government attempted to cut severance pay. In Idaho a proposal to stop the state from using “funds to pay any sort of severance packages to any state employees, with the exception of those employees of higher education institutions in Idaho,” was supported by both the House and Senate, according to

A Bankrupt Business

A firm unable to pay its debts can file bankruptcy. This complex process allows the business to pay back creditors through an organized manner under the watchful eye of the U.S. government. Companies, realizing they have no future, may file a Chapter 7 liquidation bankruptcy and those that believe they can overcome their financial difficulties and stay open throughout the bankruptcy file a Chapter 11 reorganization bankruptcy.  

In many situations an employer’s bankruptcy may eliminate or delay severance payments. The employee is considered another creditor, and the claim for payment is considered unsecured. Unsecured creditors are usually last to get paid. For instance, Former Lehman Brothers employees learned their severance payments would be cut off because of the firm’s Chapter 11 filing.  

Other companies tried non-traditional alternatives. The media company Gannett tried supplemental unemployment benefits during the Great Recession. This allowed it to share part of the cost of severance pay with the states. This wasn’t a win-win situation for employees, according to the New York Times report,”As It Cuts Jobs, Gannett Also Cuts Severance Pay.” Some former workers ended up with less.

Despite the challenges that may arise, employees can still negotiate a severance package. Employment lawyer David Cashdan advised in the New York Times article “Employers Cut Back on Aid to Laid-Off Workers,” workers can ask for more flexibility choosing an outplacement services firm, a guarantee of placement on the rehire list, a recommendation and assurance nothing negative will be said to prospective employers.






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 Receiving a severance package is not a guarantee. However, severance agreements have become a common practice with midsized and large companies. Smaller organizations may or may not mention the agreement in the labor contract, so make sure to check. These packages attempt to preserve goodwill and ward off lawsuits. The cash payments have often offered one or two weeks’ pay for each year an employee worked.  

Economy Nose-Dives

Business, Career, Severance pay series

Severance Pay Series: Six Tips to Help Severance Agreement Negotiations During an Economic Slump

As an economic downturn deepens, some employers may become more conservative with their severance packages by making them smaller. Regardless, this is when negotiating becomes critical for the newly jobless because there’s no indication how long it will take to get a new job.

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Severance packages are usually one or two weeks for every year of service and will depend on the company’s size and job.

In fact, it’s more possible to negotiate now than it was in previous recessions.

Since 2001 the number of employers who say that negotiation played a role in severance packages increased more than 520 percent for employees at the professional level and 450 percent for employees at the administrative level, according to a news release from Lee Hecht Harrison (LHH), a work-force consulting and outplacement-services firm.

Here are six tips for negotiating severance pay when the economy continues a steady decline:

Call recruiters. Start by calling a few recruiters to get an estimate of how long it will take to get a new position.

Discuss hardships. When meeting with the former employer, mention the estimate provided by recruiters and any possible hardships that may arise, but remember to keep emotions in check, treat this meeting as a business transaction.

Ask for pay and benefit extensions. Try asking for an extension in severance pay and/or benefits for the length of time it will take to get a new job, especially keep health insurance in mind.

Remain “active.” If a pay and/or benefits extension doesn’t work, ask to have an “active” employment status even though money or benefits won’t be received. The extension of the termination date will help not only with the job search but also with credit and loan transactions.

Get rehired. Ask for placement on the firm’s list of rehires.

Request job-hunting assistance. Last, don’t forget to ask for references and financial help with outplacement services and memberships for professional and networking organizations.

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.


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.