Although employers are not required to offer severance benefits to their employees, severance policies are a common feature of employer-provided benefit packages. Severance benefits usually take the form of cash payments to an employee whose employment is involuntarily terminated because of circumstances beyond the employee's control. Despite their relative simplicity when compared to traditional health or retirement benefit plans, severance plans are one of the most misunderstood and litigation-prone types of employee benefit arrangements.

Plans or arrangements that provide severance benefits to employees may be employee benefit plans subject to the Employee Retirement Income Security Act of 1974 (ERISA). Depending on its structure, a severance plan may be:

As noted, severance arrangements are regularly the topic of litigated disputes in the federal courts. For recent examples, see Legal Updates:

Employers should also beware that the National Labor Relations Board's (NLRB's) General Counsel has been scrutinizing the terms of employment agreements, including severance agreements used for non-supervisory or non-managerial employees covered by the National Labor Relations Act (NLRA). The General Counsel has taken issue with broad releases of claims provisions that an employee reasonably could interpret as precluding the employee from making use of or assisting the NLRB's unfair labor practice charge filing or investigation processes. (For more information, see Article, The NLRB's Scrutiny of Severance Agreements in McLaren Macomb.)

Because of the compliance challenges and potential litigation exposure associated with severance arrangements, employers must carefully evaluate how they provide these benefits. This Severance Benefits, Plans, and Agreements Toolkit includes several continuously maintained resources designed to help employers evaluate whether to provide severance benefits to their employees and, for those that do, how best to structure the arrangement.