Five Steps to Help Small Businesses Create Fair Severance Packages

“ I don’t know what else to do. There is no way we can keep that department open and still stay afloat. We’re going to have to dissolve that part of the company if we want to stay in business. I hate breaking the news to Karen and Steve. It’s going to devastate them.”

While no company enjoys laying off workers, it is especially hard for small businesses where there are very few employees and everyone works closely together. But there are times when letting an employee go is unavoidable. To smooth the transition for your former employee and to show good will, it’s important to offer a fair severance package.

Even when the termination of the employee is prompted by more than a necessary layoff, offering a severance package is a wise move to prevent backlash from the displaced worker.

So how do you put together a severance package?

Look over the employee’s current benefits

Before putting together a severance package, go over your soon-to-be-former employee’s employment file. What types of benefits is he or she presently receiving?

Unless you are an extremely small business, there could possibly be healthcare and dental benefits, vision benefits, flexible spending accounts (FSAs), health savings accounts (HSAs), life insurance, long-term disability insurance, a retirement program, accrued sick leave and paid time off (PTO), accrued vacation benefits, tuition benefits, legal benefits, cell phone benefits, and even auto and home insurance benefits, and more.

Decide on the terms of the severance agreement

After carefully looking  over the employee’s file, you must determine which benefits will stop immediately or, if you decide some of them should continue for a specified period of time, how long. You will need to determine the monetary value of the accrued sick leave, PTO, and vacation time and be prepared to compensate the former employee with his or her final paycheck. If your employee had a company-owned cell phone, you need to decide if the phone should be returned or if the employee can keep it. There will be lots of big decisions and little decisions to make in deciding which benefits a former employee should be able to keep.

In addition to making decisions about benefits already in place, there will be some additional benefits you may want to add:

Severance pay. Although the Fair Labor Standards Act doesn’t require a business to offer severance pay, it is common practice to do so. The amount of pay is usually based on how long the employee worked for your company. Generally speaking, severance pay is generally one or two weeks for every year in your employ.

Insurance benefits. These are some of the scariest benefits to lose when a person is terminated. The Consolidated Omnibus Budget Reconciliation Act (COBRA) allows individuals to keep coverage for up to 18 months, but it is costly when a company is no longer paying its portion. When putting together the terms of the severance package, be aware that your former employee will most likely try to negotiate with you to continue to pay a portion of health insurance premiums. Be prepared to counter offer or send them to Healthcare.gov to get lower rates.

Outplacement benefits. As a small company, most likely you won’t have in-house outplacement services to offer to the employees you must layoff. But if possible, offering to pay for professional outplacement services to help with professional resumes, career coaching, and more for your displaced employees, will help them secure new positions more quickly, and will give your company a reputation as a fair and compassionate place to work.

A letter of reference. A good letter of reference will go a long way toward good will. If you can honestly give your former employee a glowing letter of recommendation, offer that in your severance package.

Write a formal list of the terms of the severance package

Once you’ve decided which benefits will stop immediately and how long other benefits will continue, how much severance pay (if any) you are willing to pay, what portion of the COBRA payments (if any) you are willing to pay and for how long, and whether or not you will pay for outplacement benefits and provide a letter of reference, it’s time to put it all in writing. You may want to adapt a template to fit your needs.

It’s best to list the benefits individually so that the employee can easily see, and agree to, each point. At the bottom of the formal severance agreement, make sure you leave lines for signatures. In addition, create a document the former employee must sign stipulating that in exchange for the severance package, he or she will not sue you in the future. Getting a notary to witness the signing is a smart way to prove its legality and make sure it is binding.

Deliver the termination news along with the severance package

As much work as preparing the severance package is, delivering it, along with  the bad news of being terminated, is the hardest part of the whole process. Chances are, the employee probably had an inkling a layoff was imminent if he or she has seen the company struggling. But still, the shock of losing a job is devastating and hard to swallow.

In delivering the news, be compassionate and understanding, and don’t take it personally if the employee reacts with anger. Offer them the severance package and give them time to evaluate the offer, and bring it back after they have a chance to calm down and think clearly.

Wait for an acceptance of terms and evaluate counteroffers

Just as you might expect a job candidate to negotiate terms before accepting a job, you should expect a terminated employee to try and negotiate the terms of his or her severance package. Once again, be compassionate when evaluating counteroffers and try not to take any demands personally. Your former employee is fighting for an uncertain future and is scared about what that future might look like if he or she is unemployed for a substantial period of time. Be fair in your evaluation of the counteroffer, and compromise if you can to offer the best package possible to help ease the employee’s mind and make a hard transition go smoothly.

Laying off employees is never fun, but sometimes it’s necessary. In spite of occasionally needing to terminate employees, you can still retain your integrity as an employer if you offer a well-thought-out, fair severance package that includes all monies due, sufficient severance pay, at least some sort of insurance help, outplacement benefits, and a letter of reference. It’s hard to make these kinds of business decisions, but if you do all you can to help your former employees transition, you can sleep well knowing you’ve done the best you could for them.