Do you give severance pay to terminated employees? This is a sometimes contentious question for employers. How do you put together a severance pay plan that meets your needs and also stays within the bounds of legal requirements for such plans?

In a BLR webinar titled "I Quit/You're Fired: Best Practices for Administering Final Pay and Severance Payments," Terry Price outlined some guidance for putting together severance pay plans.

6 Severance Pay Pointers

For the most part, severance plans are governed by the Employee Retirement Income Security Act (ERISA). Price pointed out that "ERISA requires that all plans that they cover be put in writing." However, what that does not mean is that if you don't put your severance plan in writing that it is not a severance plan. What it means is that if you have a plan and you don't put it in writing, you have violated the first fiduciary duty of an ERISA plan.

Here are six things you should consider if you have a severance plan:

• Always consider the extent of the plan. In other words, who is covered? Many companies want their severance plans separated by employee groups. You are required to provide a summary plan description (SPD); this is one of the reasons for a separation – employers don't want the various levels of employees to see the plans available to other levels. You should also consider scope, duration, and permanency of the plan.
• Reserve the right to amend it and/or terminate it. You should outline this in the plan and follow the procedure for doing so. Do so in a timely manner.
• Retain the right to exercise discretion in the determinations you make under the plan. If you say an employee has to be in a specific classification, for example, you want to have the discretion to determine which employees qualify.
• Don’t forget the DOL, IRS, and EEOC rules that affect the payout amount, duration and payment conditions. DOL has rules, for example, that distinguish a severance plan from a pension plan. Another example of these rules is one from the EEOC that says you can't condition a right to severance pay on employee retirement; it shouldn't be tied in this way. Price noted: "the EEOC also has rules which talk about what you can get in return for an employee receiving severance pay. In other words, normally when employees receive severance pay, it is in exchange for them giving up all of their employment-related claims – the ones they know about, and the ones they don't know about."
• Specify what happens in unusual cases. For example, what happens if you have a severance plan but decide to re-hire an employee before severance payments have been completed? There are many other examples, but you should be wary of special circumstances and delineate as much as possible how they will be handled.
• Don’t run afoul of ERISA.

Do you issue severance pay plan for terminated employees? Following these tips will start you down the right path to ensuring the plan is compliant with legal requirements.

The above information is excerpted in part from a BLR webinar titled "I Quit/You're Fired: Best Practices for Administering Final Pay and Severance Payments," with expert Terry Price. For more information on final pay law, order the webinar recording. To register for a future webinar, visit http://catalog.blr.com/audio.

Attorney Terry Price, a partner in the Birmingham, Alabama, office of Ford & Harrison, LLP, has practiced employment law for more than 30 years. He assists employers in the development and day-to-day management of EEO, employee benefits, workplace safety and health, and management training programs.