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Under federal and state laws, employers have certain legal obligations to the employees they fire with respect to continuing health coverage, unemployment insurance benefits, and vested retirement benefits. Apart from those benefits, the law generally does not require employers to provide severance payments or other benefits to the employees they fire. However, it is not uncommon for employers to agree to provide such payments or benefits as a matter of company policy or pursuant to a negotiated separation agreement with a fired employee.
Discussed below are the principal benefits to which fired employees may be entitled under federal and state laws and with respect to which the employer may have some responsibilities.
Continuation of health benefits. Under a federal law known as COBRA, employers with group health plans must offer most fired employees and their spouses and dependent children the opportunity to continue to receive health insurance benefits at the employee's own cost.
Employees who are fired for gross misconduct are not eligible for continuation coverage under the federal law. The law does not define the term "gross misconduct." At a minimum, the term likely encompasses felony offenses and other intentional acts of misconduct that are committed in connection with an employee's job.
The federal law does not apply to employers having fewer than 20 employees. However, some states have comparable laws that may apply to smaller employers not subject to the federal law.
Unemployment insurance benefits. Employers must notify each fired employee of the employee's possible eligibility for unemployment insurance benefits. An employer who fails to provide this notice runs the risk of being sued if the employee is eligible but fails to timely file a claim. In most states, however, an employer can avoid this obligation by posting state-supplied information about unemployment benefits at a place where employees are likely to see the information.
Employers have a right to contest a former employee's eligibility for unemployment benefits. Because claimants are generally presumed to be eligible for benefits unless their former employer raises timely objections, you may be able to include a promise not to contest the claim in a negotiated severance package. However, because your payroll tax rate is affected by your past claims experience, this is not a choice that should be made lightly. For further details on contesting claims, see defending against unemployment insurance claims.
Vested retirement benefits. Fired employees remain eligible to receive any pension or profit-sharing benefits with respect to which they have vested under the terms of the plan.
Company severance policies. You may decide to voluntarily provide for severance pay and other benefits as a matter of policy. If you want to do this, you'll need to put your plan in writing. Clearly define the circumstances under which you will provide payments and benefits, as well as the manner in which you will determine their amount and their method of payment. Specifically reserve the right to withdraw the plan or to change it at any time. Also, consider requiring that employees who accept a severance package must agree to sign a release that protects you and your business from future employment-related lawsuits and claims.
A severance pay arrangement that you adopt as a matter of policy is subject to ERISA, which is a federal law that imposes on employers numerous record-keeping and notice requirements with respect to employee benefit plans. For example, under ERISA you could be subject to penalties if you fail to distribute copies of your severance plan to your employees. For this reason, it's usually better not to have a preset plan, but to individually negotiate any severance agreements as the need arises.
Negotiated severance arrangements. Let's assume you decide not to adopt a formal severance plan. This decision will not preclude you from providing severance pay and other benefits on a case-by-case basis. For the most part, you are free to negotiate what benefits, if any, you will provide to each employee. These can be anything from lump-sum or periodic cash payments to temporary health coverage to assistance in finding new employment to an agreement not to contest unemployment insurance claims.
In some situations, you may have a strong incentive to offer a severance package. This is when an employee is leaving your business, either voluntarily or involuntarily, under circumstances that raise a risk of future litigation. For example, you may have concerns about a potential wrongful discharge suit if you need to fire an employee who has previously complained about being sexually harassed by other employees or being treated unfairly.
You can use the offer of a severance package to negotiate a release from the employee of his or her right to sue you for employment-related claims. Be aware, however, that offering severance packages as a means of "buying out" employees is not without its own risk. The offer could backfire if it alerts an employee to possible claims that the employee did not realize existed.