The Workplace

October 23, 2008, 5:00PM EST - BusinessWeek

Now Severance Packages Are on the Chopping Block

As the economy swoons, some companies are cutting workforces—and severance benefits

By Michael Orey

Cynthia Alsman knew the auto industry was struggling, but she was still surprised at being laid off from her job handling purchase orders in Ford Motor's (F) finance department in July. Then Alsman, who started at Ford in 1979, got another shock: Instead of getting the full year's salary to which longtime white-collar workers are entitled under a company severance plan, she was offered one month. The reason: In 2000, Ford spun off its parts operation into a company called Visteon (VC), making Alsman a Visteon worker. Five years later, with Visteon foundering, Ford reabsorbed many of its employees. Alsman, 49, was considered a "rehire" entitled to $5,750 in severance instead of $69,000. That, she says, "means the difference between paying your bills and not."

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While Alsman's situation may be unusual, her predicament is not. With the economy sinking into recession, companies around the U.S. are slashing workforces. In October alone the dozens announcing job cuts included Kraft Foods (KFT); Mervyn's department stores; trucking giant YRC Worldwide (YRCW); and drugmaker Merck (MRK). Already, indications are that the weak economy is squeezing exit packages. David Broman, CEO at compensation adviser Syzygy Consulting Group, says his firm's annual survey shows "a significant pullback in what [companies] are willing to pay outgoing employees during downsizing."

In most cases the law doesn't require employers to pay a cent to laid-off workers. While top executives often negotiate lucrative departure packages, few employees have such contracts. "Severance is a gift," says Steven Andrew Smith, a Minneapolis attorney who represents employees.

According to a 2007 survey by WorldatWork, a nonprofit human resources organization, most policies offer one or two weeks' pay for each year an employee has worked, often to a maximum of 26 or 52 weeks. But employee handbooks that set forth severance policies typically state that the companies are free to modify them. Says Steven Gross, who advises businesses for HR consultant Mercer: "Companies have gotten very stingy in their stated policies so they can come back and be more generous if they want to be."

In this environment, though, acts of generosity stand out. "Man, why can't I get laid off by eBay (EBAY)?" began a lament posted Oct. 7 on Valleywag, a Silicon Valley Internet gossip blog. A day earlier, eBay had announced layoffs of more than 1,000 employees with severance pay and continued health benefits for up to five months. As it happens, Valleywag had just cut its own staff. EBay declined to comment on specifics, though it did announce that it would take a $70 million to $80 million charge for severance and related costs.

There are compelling reasons to pony up for layoffs. Many managers feel that treating ousted workers well sends an important message to those who remain behind. "Everybody who survives looks at how well the other people were treated because someday they may be in that situation," says Mercer's Gross. But the primary reason employers offer severance is that they extract something in return: The departing worker must waive all rights to sue the company. Mass layoffs in particular put companies at risk for age discrimination suits, because cutbacks often target higher-paid workers, who tend to be older. Demanding a waiver is "really a mechanism that employers are using in a very effective way to eliminate the numbers of claims that come out of a reduction in force," says New York employee attorney Pearl Zuchlewski.

Not that the waivers always guarantee peace. Phillip Woolston signed one when he was let go from his computer help-desk job in Tustin, Calif., by Toshiba America Medical Systems (TOSOF) last year. But in September he sued Toshiba for allegedly failing to pay him overtime. (His attorney, Michael L. Tracy in Irvine, Calif., contends that the law does not allow waivers of wage claims.) Toshiba in turn has sued Woolston for violating the waiver agreement and is seeking his severance payments back.

Employees' ability to improve a severance offer has declined as the economy has tightened. "For years and years we could always negotiate an enhanced severance package," says Robin Potter, a Chicago attorney who represents employees. Now, Potter says, company representatives are telling her: "We don't have a budget for that." Cliff Palefsky, a San Francisco attorney who frequently represents senior managers from Silicon Valley, says he's seen an increase in companies scrutinizing years of expense reports and checking if a terminated executive visited inappropriate Web sites, all with the aim of denying severance by alleging "made-up, frivolous assertions" of improper conduct.

Sometimes the money simply isn't there. On Oct. 3, Lehman Brothers sent a letter telling workers it fired earlier this year that their severance payments were being cut off immediately because of the firm's Chapter 11 filing. Employees must now line up in bankruptcy court with other creditors to see what they can recover.

The best exit packages often go to those at the upper echelons. Matthew A. Kaufman, an attorney in Sherman Oaks, Calif., says he was consulted by a Countrywide Financial mortgage executive whose compensation was halved after Countrywide was acquired by Bank of America (BAC) in July. Countrywide's change-of-control severance plan offers generous payouts to those who suffer a pay reduction following an acquisition, which it deems tantamount to getting fired. But that's only for senior managing directors or above. The executive, who still works there, is just below that rung. Bank of America says its own plan would give severance to lower-ranking employees if their pay were significantly reduced.

Alsman, for one, refused to accept Ford's severance offer. Instead, she and about a dozen other former employees have gone to court, alleging that Ford violated federal benefits law when it classified the Visteon workers as new hires. Kevin M. Carlson, a Royal Oak (Mich.) lawyer representing the claimants, alleges in an interview that the company deliberately engaged in a "benefits avoidance scheme." In a court filing, Ford says its treatment of Alsman and others as rehires was based on long-standing practice. Alsman may be unhappy with her exit package, but attorneys familiar with such lawsuits say she faces a high hurdle to prove it was illegal.

Orey covers corporations for BusinessWeek.