Finance News & Insights

Severance agreement debacle: How one tiny error almost cost this firm millions

Here’s a cautionary tale about just how badly severance agreements can wind up if they’re not being reviewed closely enough.

An employee had been employed for 28 years when his employer was bought by another company.

After the sale, the employee was laid off and was offered a separation agreement that included, among other benefits, pay for 34 weeks.

The employee returned the signed agreement to the company, and that seemed to be that.

Entire severance … each week

Problem was, a single mistake in the language of the agreement changed everything.

That mistake: The HR director put the entire amount of severance the employee was supposed to receive during the entire 34-week period as the amount he would receive each week during the severance arrangement.

Because of error, the employee, who was receiving around $125,000 per year at the time of his lay off, was slated to receive $80,805.97 per week for the duration of the 34 week period. That would’ve given him around $2.7 million in all, more than he earned in the entirety of his 28 years with the company.

‘Fair based on my 28 years of service’

The company eventually discovered its mistake, and let the employee know he wouldn’t be receiving the full severance payment. This prompted the employee to sue the company, asking a court to enforce the $2.7M agreement.

Eventually, the company won out in court — despite the employee’s affidavit, which sated the $80K per week was “fair based on my 28 years of service” — and the agreement was amended to correct the error. But even though the company avoided a multi-million dollar severance agreement, it still had to invest time and money into both a trial and appeals court defense.

Had the company opted for a multiple level review of the agreement – instead of relying on one HR director – the entire mess could’ve likely been avoided.

Alternatives to severance

Granted, a generous severance package is probably the best way to give departing staffers some peace of mind when layoffs take place. But when that isn’t an option, there are other things you can do.

Here are some alternatives to severance pay, courtesy of Val Matta, VP of Business Development at CareerShift:

1. Outplacement services. Granted, this service, which is generally contracted by the employer does require some type of up-front investment. However, it generally doesn’t cost as much as a generous severance package and can go a long way toward getting former employees back on their feet.

Outplacement services can vary from basic job search management to alumni assistance — where displaced workers are paired up with other former employees who’ve moved into other jobs.

2. Health-benefit extensions. One of the most stressful things about losing a job is losing health benefits or having to pay expensive COBRA premiums. If you can extend the health insurance your company provides for a few additional months, it can give workers some much-needed security while they find new employment or find the right coverage through the Obamacare exchanges.

3. References or referrals. These are invaluable assets for former workers — plus they don’t cost your company a thing. One option is simply offering a reference to aid displaced workers in their job search. However, you can take it a step further, as well.

How? Look through your industry contacts to see if there’s anybody around that’s looking to hire.

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