Are You Obligated to Offer Severance if You're Letting an Employee Go?

The quick answer? Not necessarily. But you may want to do so anyway.

Inflation has been wreaking havoc on consumers since 2021, forcing many people to raid their savings and rack up credit card debt just to stay afloat. But inflation has also been hammering small businesses.

The U.S. Chamber of Commerce found that as of late 2022, inflation was the top challenge facing the small business community. And to cope with inflation, 37% of small businesses have reduced their staff to conserve funds.

If you're thinking of letting some employees go to cut back on costs, you may be wondering whether you're obliged to offer some amount of severance pay. The quick answer is that you probably do not have that obligation. The longer answer is that you may want to give some severance pay, even if you don't have to.

It's the right thing to do

Generally speaking, you're not required to provide severance pay to a laid-off worker if that obligation is not written into their contract. But if you have the financial means to give some amount of severance, then frankly, it's a nice thing to do.

Many workers these days live paycheck to paycheck without money in a savings account to fall back on. And while workers who lose a job through no fault of their own are generally entitled to unemployment benefits through their state, those generally don't come close to replacing missing paychecks in full. 

Offering up a few weeks of severance could make an already stressful situation for your workers just a bit more manageable. And you should especially consider offering severance pay if you're letting go of workers who have been with you for many years.

It's a matter of preserving your own reputation

Giving severance pay to terminated employees is not only a kind thing, but it might also serve your business well. Generally, in exchange for receiving severance, laid-off employees sign a document agreeing to not disparage their employers. And that's the sort of protection you might want.

Plus, if you give out severance, your workers might have no reason to say anything negative about you or your business, regardless of whether they're contractually obligated to stay quiet. And that could go a long way if your financial situation improves and you're looking to hire more workers in the future.

In fact, you never know when your budget might open back up, thereby allowing you to rehire workers you were forced to lay off. Those workers may be more inclined to come back to work for you after having gotten some severance pay upon their termination.

How much severance should you give?

That largely depends on what you can afford. A good rule of thumb is to offer one to two weeks of pay per year of employment, but that may not be in your budget. 

Look at your business bank account's records and see what you can swing. It's better to offer up a month of severance than none at all, even if you're dealing with an employee who's been with you for quite some time.

All told, most employers are not obligated to offer severance pay when they're forced to cut staff. But doing so might benefit you, and also, make a tough situation less terrifying for the workers you're letting go.