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Strategic Separation

The policies and practices employers use when letting people go can do a lot to protect companies from litigation and other problems down the road.

Saturday, April 1, 2006
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Some things in life may be good ideas even though we prefer not to think too much about them. Life insurance. Flu shots. Prenuptial agreements. For human resource executives, severance strategies may make a good addition to the list.

At its simplest, a severance policy offers a basic quid pro quo. An employer articulates plans for paying employees following job terminations, and the affected personnel agree not to file complaints or lawsuits.

"We advise our clients to require employees to sign general releases that protect the clients from some liabilities in return for the discretionary severance payments," says Jay McLamb, chief financial and operating officer of the Castleton Group, a Raleigh, N.C., firm specializing in human resource outsourcing. "The signing of the release must be voluntary for the employee, but the severance is declined if the release is not signed."

According to William Emer, a Santa Monica, Calif.-based partner with the law firm Perkins Coie, such practices can go a long way in protecting employer interests.

"Many of the employers I represent have successfully avoided litigation by utilizing a written severance policy," he says. "This is particularly true in the case of global workforce reductions."

Despite their usefulness, severance strategies may be weak links on the HR chain for many employers. In a recent survey of nearly 500 major employers conducted by Scottsdale, Ariz.-based WorldatWork and Chicago, Ill.-based Aon Consulting, some 30 percent of the respondents reported they do not have a formal severance plan in place, even though 28 percent were planning layoffs in 2006 and another 26 percent thought reductions in force might be necessary. The study also showed that, of those companies with a plan in place, less than one-fifth had reviewed their plans within the past two years.

With increases in mergers-and-acquisitions activity, not to mention the potential for ordinary business downturns, organizations that have not taken the time to define or update severance strategies might do well to explore this issue, according to those familiar with such practices.

"Companies that don't handle severance well are open to litigation and are likely to suffer poor morale among remaining employees," says Bernadette Kenny, executive vice president at Lee Hecht Harrison, a global HR consulting company headquartered in Woodcliff Lake, N.J. "They also may have a harder time attracting future talent."

Underlying Problems

Poorly defined or nonexistent practices can also contribute to other problems, as can a failure to treat personnel equitably in following policies that are in place.

"Companies must realize that employees remain acquaintances long after they are terminated and they will exchange notes," says Nancy Howell, director of human resource services at Odyssey OneSource, a professional employer organization in Euless, Texas. "If one employee is treated differently in a similar situation, it could cause a myriad of problems."

She recalls a situation in which a terminated employee broke into her company's e-mail system and began sending defamatory messages to all employees, claiming unfair treatment from the CEO. She stopped only after receiving a cease-and-desist letter from the company's attorney. She then filed an EEOC charge and eventually a lawsuit.

"The company had failed to ask for a release-and-waiver agreement not to sue the company in exchange for the severance," Howell says, adding that the employer ended up spending more than $75,000 to settle the claim and pay attorneys' fees. "It was a hard lesson to learn."

Other repercussions range from deleting e-mails or destroying paper documents to spreading negative opinions among peers or customers. In some cases, the company may end up as the culprit in media coverage.

The perception of fairness is also a major consideration, and one that can be challenging to achieve.

"A fair severance plan requires walking a fine line," says Bill Coleman, senior vice president of compensation for Salary.com. "You're caught between not taking care of the terminated employees, which will upset the continuing employees because they believe friends and former co-workers are being mistreated, and over-compensating the terminated employees. That will also upset the continuing employees because they'll want to know why others get a bigger bonus for being fired."

Along with deflecting damage to the organization, the needs of individual employees can be better met with solid policies in this area, says Kenny.

"Companies that have no standard formula for severance and expect each employee to negotiate his or her own package not only face negative repercussions but also do a real disservice to those facing a transition," she says. "An individual who feels he or she needs to prepare to negotiate a separation package is deflected from beginning a job search and moving on with his or her life."

Susan Jespersen, who teaches HRM in the M.B.A. Program at Walden University, an online university based in Minneapolis, points to the potential of even more extreme problems for terminated employees.

"Inadequate severance benefits have caused employees to deplete life savings and cash out 401(k) funds with significant tax penalties," she says. "They have also caused employees to lose their homes due to non-payment, and in some cases, file bankruptcy."

A Fair Approach

Fortunately, well-designed severance strategies can address the needs of both the employer and the workforce. With the most effective practices, a common thread seems to be an effort to treat employees with some level of uniformity.

"Consistency and fairness are key," Kenny says. "Except at the very senior level, where it is traditional for severance to be negotiated, people of like level and title should get the same treatment. Severance on a mass scale should not be negotiated on an individual basis."

Of course, fairness is a relative concept. But attempts to be fair can help limit resentment in affected employees while also providing a more defensible approach in the event of litigation, according to Howell.

"The severance strategy should be communicated in advance of an employee separation both in a policy manual and policy training, and should be followed consistently," she says. "Employees should have confidence that the policy will treat everyone fairly and in good faith when they separate from their employer. This will minimize any problems after their departure, and their co-workers left behind will gain respect for, and trust in, the company."

The attitudes of employees who are not terminated should not be taken for granted, Howell says.

"Too many times companies do not think about the impact on the survivors when they lose their friends and co-workers," she says. "But if these guidelines are followed, it minimizes problems from the terminated employee and preserves the morale of remaining personnel."

In fact, employees may not be the only ones who sit in judgment of severance practices.

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"The reality is everyone is watching," says Dr. Dennis Garritan, associate professor and director of the master's program in human resource management at the New York University School of Continuing and Professional Studies. "Your competitors in the industry, future prospective employees, university graduates you may hope to recruit someday, recruiting firms and, most of all, the employees who will survive the RIF are all interested spectators. Everyone will be watching to see how fairly these employees are treated through severance practices."

Planning Ahead

While it may not be possible to project workforce trends with any degree of accuracy over the long haul, severance strategies can be developed for use in virtually any contingency.

"When HR learns about the events, it may be too late to formulate a strategic severance policy," says Jespersen. "For instance, when a company merges or acquires another firm, significant clauses regarding the treatment of redundancy of employees are likely to be included in the initial agreements between parties before HR is informed that the merger is being considered."

Advance planning also allows time for unhurried review by attorneys and management, as well as for developing alternative strategies.

"Implement a severance strategy well before it's needed that will be able to withstand legal challenges and will be nondiscriminatory in the agreement's terms and conditions," Howell says. "Engage legal counsel to help draft the formal severance plan and the release-and-waiver agreement, and decide if you will have a separate plan for executives."

Once they are in place, severance strategies bear re-examination on a regular basis. Kenny suggests they be reviewed at least every three years to ensure they are current.

Such analyses frequently lead to improvements, says Kenny. She notes that in a 2005 LHH study on severance and separation benefits, 33 percent of respondents who had reviewed their policies in the past three years made changes as a result.

In addition to legal considerations, the unique needs of a given organization, and the people who make it up, should not be overlooked.

"In planning a severance strategy, human resource officers should carefully address the organization's culture and what the purpose of a severance policy is," Coleman says. "It is important to keep in mind the difference between a set of guidelines and a published policy."

He adds that any plans should take into account special circumstances that might trigger different treatment, such as a major employer in a small town scaling back or a workforce being replaced by offshore workers. And whatever the situation, good communication is a must.

"Severance is about the money, but it's not just about the money," Coleman says. "A good severance policy will include communication messages and strategies to ensure that all interested parties understand what is going on and why. Communication is also critical to make sure the terminated employees see the severance as a bridging vehicle to help them maintain their standard of living through their transition."

Coleman suggests that, in the process, employers consider non-cash benefits, including continued health-care and outplacement services. If used, they should be clearly explained so employees understand their value.

At the same time, the appropriateness of written agreements within any given organization should be assessed. Coleman says severance is not a one-size-fits-all proposition, and that keeping pace with other employers in this area may not be especially important.

"Understanding and incorporating general market standards is important in designing a severance plan, but keeping up with the Joneses isn't," he says. "Because severance is a one-time rather than ongoing benefit, its comparability is less critical than direct compensation or major benefits, like health care and retirement."

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