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Advantages and disadvantages of offering severance packages

When you have to let an employee go, it can be a serious disruption to your Arizona business. You want to take every precaution to protect yourself and your company from any negative backlash, either from the separated workers or from other employees. Firing someone, whether because of a decline in profits or for serious misconduct, is seldom easy. Some employers use severance packages to cushion the blow.

Offering a severance package is not something you should do without careful consideration of the advantages and disadvantages. A severance can portray you as a caring, supportive employer, but it can also create unexpected consequences.

When you must offer a severance

The purpose of a severance is to provide a terminated employee funds and other benefits to make the transition from your job as smooth as possible. Your severance may offer a certain amount of pay, continued health benefits and job search services. You may include a glowing letter of recommendation, depending on the circumstances.

This may be a simple gesture of goodwill, or you may also obtain some benefit of your own, such as getting the employee to relinquish any rights to sue you for wrongful termination or other employment law violations. Additionally, some situations may require you to offer a severance to an employee, such as:

  • Your employment contract includes terms that stipulate you will offer a severance package for involuntary separation.
  • Your handbook promises severances to employees whom you must fire or lay off.
  • You have routinely distributed severance packages to other employees who left the company under similar circumstances.
  • You made a verbal promise to your employee that you would grant a severance at the employee's termination.

Failing to follow through with a severance in light of any of these factors could place you in serious legal trouble if your employee decides to challenge your decision to withhold such as offer.

Do I have to?

While a severance is an ideal way to thank and reward a faithful employee whom you have no choice but to terminate, there are situations in which it would send a negative message. For example, if you offer a severance to an employee whom you fire for stealing or simply not producing, your other employees may interpret this as a reward for negative behavior. This could damage the morale in your company.

Your best option may be to establish a policy for offering severance packages and act consistently when applying that policy. You may also benefit from discussing your severance policy with an attorney and obtaining sound legal advice when the time comes to terminate an employee.

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