Faced with an increasing need to cut back and restructure work forces, corporations are making severance policies for white-collar workers more formal.
A new study of nearly 2,000 companies by Right Associates, a Philadelphia-based consulting firm, shows a dramatic increase in the number of companies that have adopted formal severance policies for salaried workers, from technicians to key executives, as they "continually reshape their work forces."
Although 85 percent of the companies said they had a severance policy, only 61 percent said it was a formal policy known to their employees, according to the survey.
Eighty percent of the companies with 5,000 or more employees reported they had formal severance policies. In companies with 1,000 to 5,000 employees, that portion dropped to 60 percent. Only 47 percent of the companies with 500 to 1,000 employees had formal severance policies.
Virginia Lord, a senior vice president for Right Associates, said she was surprised that larger companies are more apt to adopt more formal severance programs. She said she was also surprised by rather wide disparities in the generosity of companies from one industry to another. She said there has been a significant increase in the number of companies with formal severance policies over the last six or seven years.
Lord said while most companies had a policy, either formally or informally, of giving departing managers one week of pay for each year of service, companies in some industries such as construction and real estate had no specified limit on the severance payout.
The survey showed top executives still tend to do better than lower-level salaried workers when it comes to severance. Key executives, as the survey calls them, were often allowed to negotiate their own deals when leaving.
One factor in the push to formalize severance procedures and benefits, according to Lord, is the threat of lawsuits. She said the Older Workers Protection Act of 1990, which was just signed by President Bush, "helped employers recognize the need for a formal policy to avoid legal suits."
The new law, along with the earlier Age Discrimination in Employment Act, has triggered an increase in the threat of lawsuits from dismissed employees, Lord said. The survey showed nearly 30 percent of the companies with formal plans and 20 percent of those with informal severance policies had been sued by former employees.
Lord said the Older Worker Protection Act allows what some benefits consultants refer to as "bias remorse." Under the law, employees have three weeks to consider a severance or buyout offer before being asked to sign a waiver in which they give up their future right to sue the company in exchange for the benefits. But just like the fair credit law for financial loans, this one gives people a chance to change their minds. Employees have seven calendar days from the time they sign a severance agreement to reverse themselves.
This makes the process much more legalistic and spreads the severance process out over a full month before employers can be certain they won't be sued.
Right Associates offered another reason for having a formal, equitable severance program in these days of work force turmoil: It helps you keep the workers you want to keep.
"Well-conceived severance policies help maintain the morale of current employees, sustain the good will of departing employees and promote the recruitment of skilled new hires," according to the survey report.
The survey showed a trend toward flexibility in severance benefits, with many companies offering options for such things as a continuation of health benefits or life insurance or an offer of "outplacement services" to help exiting employees find new jobs.
While it generally saves an employer money when a job is cut, even with a sizable buyout, she said continued medical benefits can be expensive for the employer even though the premium costs are often borne by the departing employee. "Laid-off people tend to use health benefits more out of need or convenience," Lord said, but the cost of these services is calculated as part of the experience rating insurance companies use to figure employer premiums.
Another employer cost is the calculation of unemployment compensation premiums for employers. The longer a former employee takes to find a new job, the more the old employer is apt to pay in premiums. Like medical insurance, employment compensation premiums are based on experience ratings, Lord said.
That, she said, is why many companies are pushing the idea of outplacement services. The more quickly a former employee finds a job, the cheaper it is for the former employer.