POST TERMINATION PAY
IS IT SEVERANCE PAY OR WAGES IN LIEU OF NOTICE?
Post-termination or severance pay is often granted to employees upon termination of employment. Payment of post-termination pay is not required by law. However, some employers obligate themselves contractually or as specified in a company policy to pay severance when employees are terminated. Severance pay is usually based on an employee’s length of service with the company but may not necessarily be based upon such. An employer who elects to pay post-termination pay can pay the employee in installments or in a lump sum. Texas allows either method. Employers who grant post-termination pay think it helps maintain consistency and equal treatment of employees and promotes good public relations both internally and externally.
Most employers designate any post-employment wages paid to ex-employees as “severance pay”, but for purposes of unemployment compensation, it is important to determine whether the payments are actually “severance pay” or are “wages in lieu of notice.” Section 207.049(1) of the Texas Unemployment Compensation Act (the “Act”) states that a claimant will be disqualified from receiving unemployment benefits for any benefit period in which he is receiving wages in lieu of notice. The Act does not, however, disqualify an individual from receiving benefits who is receiving severance pay.
Although the Act does not define wages in lieu of notice or severance pay, the courts have generally defined severance pay to be a payment the employer has obligated itself to make, either verbally or in writing, which is based upon a length of service formula. For example, an employer may have a company policy that a terminating employee is entitled to one week’s wages for every year of service. This is severance pay and the employee will not be disqualified from receiving unemployment benefits while he or she is receiving severance pay.
Wages in lieu of notice are additional wages, which the employer is not obligated to pay. They are paid only because the employer has chosen to give the employee no notice of termination. The amount of wages is not based upon longevity or length of service. For example, an employer may call an employee in for termination and offer him a certain number of week’s wages to assist him during the time he is seeking new employment. This is considered wages in lieu of notice.
Any time an employer is paying wages in lieu of notice, that information could be provided to the Texas Workforce Commission local office on any response to an employee’s claim for benefits. Keep in mind that payment of wages in lieu of notice does not stop receipt of unemployment benefits, but payments will be delayed until the wages in lieu of notice period has expired. This often results in a substantial savings to an employer because many people will have found another job by the time they are eligible for benefits.
One further note: under the federal law known as ERISA, a policy or practice of paying severance pay or wages in lieu of notice can bring an employer under the requirement of treating the policy or practice as a “welfare benefit” under ERISA and reporting it on the IRS report form for ERISA, Form 5500. ERISA is a very complicated law, and employers that make such post-termination payments should consult a qualified ERISA attorney for guidance.
No information in this article is intended to constitute legal advice. For specific legal advice, please contact an attorney