ASE’s last Michigan Policies and Practices Survey reports that on average over half of Michigan employers (55%) responding do not provide severance pay. Of those that do, many normally provide one or two weeks of pay per year of service as that benefit. However, over 50% of those that provide severance make the severance payout at management’s discretion.

What ASE sees (or really doesn’t see) is companies having a formal policy detailing severance for individual separations. The reason for not formally publishing a severance policy is rather than just giving the pay or benefit away the employer may want to use severance pay and a separation agreement to get various promises from the departing employee or reserve the right to not pay out severance in a particular separation event.

To secure an employee’s agreement not to pursue legal action against the employer, refrain from making negative remarks, or discuss the severance package with others, employers often include these conditions in a separation agreement. The agreement may also outline additional provisions such as non-solicitation, non-disclosure, or other terms governing the separation.

To get a departing employee’s assent to the other terms described above an employer has to offer more than what the employee is entitled to or promised as a matter of policy. If the employer already promises severance pay, they would have to offer more than what the employee is already promised or they would not get adequate consideration for the new agreement the employer wants.

Offer, acceptance, and importantly consideration to get additional promises to give up those rights are what the parties must agree to in order to reach an enforceable separation agreement.

Other key elements of an enforceable release agreement include that it must be entered into knowingly and voluntarily. The agreement should be written in clear, plain language and clearly outline what the employee is agreeing to, waiving, and releasing the employer from.

The employee should also be given a reasonable time to consider the agreement. Many such agreements provide 21 days for consideration before a decision on the separation agreement is required and for Age Discrimination in Employment Act (ADEA) compliance purposes a seven (7) day recission period where the employee may back out of the agreement should they wish to reconsider.

Employers that have a formal severance policy for individual separation would have to offer additional monies or benefits as consideration to get to a legitimate separation agreement including other terms and/or releases.

Another reason an employer may avoid formalizing a severance policy for individual releases is that once it’s stated as a formal policy, it could be considered a fringe benefit under the Michigan Payment of Wages and Fringe Benefits Act. Unless the policy includes clear exceptions, the employer could be obligated to pay severance as written – regardless of the circumstances. This can put the employer at a disadvantage if the separation is due to misconduct or poor performance. Why pay extra in those cases?

Employers can have administrative guidelines around their separation and severance program that management can reference but are not officially promised by way of a formal policy. This would allow for a separation agreement that provides for releases and terms specific to what the employer needs from the employee.

Of course, it is always recommended the separation agreement be reviewed by qualified legal counsel.

Having a severance program can make sense for many employee relations reasons, including maintaining goodwill and protecting the company’s reputation to support future talent attraction and development. However, it’s generally not advisable to publish the severance benefit schedule or methodology. Keeping this information confidential allows room for negotiation and ensures that any agreement includes terms favorable to the employer, providing pay and benefits (consideration) that have not already been promised.

Source: CCH HR Answers Now. Can an Employee Be Required to Sign an Agreement Not to Sue as a Condition of Receiving Severance Benefits?