As the recession continues to grip the nation, more employers are laying off -- or making plans to lay off -- employees. The coming year will bring more of the same, experts say, so it's a good time now for HR leaders to scrutinize their severance policies.

By Paul Gallagher

The national employment picture has been steadily fading this year, particularly since September. The Department of Labor's recent announcement that employers cut 533,000 jobs in November pushed the national unemployment rate to 6.7 percent, a 15-year high.

In 2008, according to the Bureau of Labor Statistics, nearly 1.9 million jobs have been slashed -- about 1.2 million of them gone just from September through November.

Many of those jobs are in the financial sector.

Bank of America recently announced that that it would cut as many as 35,000 jobs. And only days before that, Citigroup said it was shedding 52,000 jobs and eliminating "supplemental severance payments" that would have provided an additional financial cushion for employees who had worked there for a decade or longer.

Instead, according to Citigroup, all employees will receive a basic severance package -- two weeks of base pay per year, up to a maximum of 52 weeks -- to help soften the blow of job loss.

But the recent economic implosion may cause more employers to adjust those basic severance practices, according to experts.

Lori Wisper, a senior consultant at Lincolnshire, Ill.-based Hewitt Associates, says she suspects the coming year will see more of both layoffs and reductions in severance packages.

In August, Hewitt surveyed about 100 companies about their severance practices, including base formulas, benefits and outplacement services.

That was before the economy caved, however, so Hewitt has reissued the survey, including questions that specifically ask whether employers are planning to reduce severance pay and benefits.

The results of the survey are due in mid-January, but Wisper says she already suspects that some companies will say they're considering reducing some aspect of their basic severance policies, although the changes may depend on the industry.

"In industries where they're really hurting, I would expect to see some changes," she says. "In situations where the scale is almost astounding, like Citigroup, it's going to be driven by bottom-line-type thinking," in which planners request additional funds from the compensation committee in order to absorb the cost of the layoff, similar to any financial decision.

In industries that have not been as heavily beaten, Wisper says, layoffs may be in order to weather the storm, but those employers are likely to maintain their usual layoff practices.

For some companies, what's considered a "usual" severance policy is somewhat like oral tradition; many companies do not put a severance policy in writing.

Wisper says, in her career of more than 18 years at various corporations outside of Hewitt, "I never saw a written severance package that spelled out exactly what people get."

Unless it's part of a collective-bargaining agreement, an unwritten severance policy is self-preservation; the lack of a stated policy allows an employer to make alterations, if necessary, she says.

Craig Annunziata, managing partner in the Chicago office of Fisher & Phillips, says every employer should be familiar with its severance policy, whether it's written or not.

"I think many times, these policies are buried in a handbook or somewhere else," he says.

For written policies, employers should make certain a disclaimer is included, noting that the policy can be changed at any time.

Or, dispensed with entirely.

"I'm contemplating drafting [a policy] for [a client] saying, 'we have eliminated all severance packages as of this date, and none will be going forward,' " he says.

Despite its harsh tone, Annunziata says, doing so would allow the company to make exceptions on a case-by-case basis, without a policy choking the employer by offering it little discretion in the case of a large layoff.

On the other hand, one of Annunziata's clients, a global shipping firm, is investigating the possibility of offering a buyout to some employees -- doubling the number of weeks' pay in their severance policy. In the event the employer receives too many takers, he says, the company would likely add a clause that the offer could be rescinded at any time.

Those employers who do provide severance should always receive signed releases from workers, he says.

"I tell employers, "Don't ever pay an employee money [for severance] unless you get a release -- a return -- for it,' " he says.

Getting signed releases is part of what Robert Jones, founder and CEO of Innovative Compensation and Benefits Concepts, a consultancy based in Bryn Mawr, Pa., calls "smart severance."

In his view, every organization should be reviewing, planning and monitoring severance practices, particularly those employers potentially facing a reduction in force within the year.

"The most important thing is to plan early and make sure all the legal bases are covered, and you've identified the right employees, if that's possible," he says. "Companies need to think about regulations which apply to their severance and reduction-in-force plans."

Even if a company's severance policy is not written, Jones says, a court could perceive it as a mandated policy if previous severance actions show a pattern.

December 29, 2008

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