What Is Voluntary Resignation Severance Pay?

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In tough economic times, small businesses may need to reduce costs by cutting their workforce. One way to do this is to seek volunteers in departments where you believe you may be able to continue to operate with fewer employees, or, in the case of a very small company, to seek volunteers company-wide. In these cases, offering separation packages may encourage some employees to volunteer.

What is Severance Pay?

Severance pay is offered to workers who lose their jobs for reasons other than poor performance, such as job elimination or layoff. Severance packages may include cash as well as job-search assistance and extension of health benefits through a certain period of time. Employers are not legally required to offer severance, but providing a reasonable severance package may help you reduce your labor force without having to fire anyone.

What To Offer

No set policy exists for severance packages, but two weeks for every year of service is standard for involuntary severance packages. If you can afford to offer additional cash, this generosity could increase the incentive for volunteering. Consider whether you will offer only the option of a lump sum, which requires little administration but may cause tax problems if it substantially increases the employee's income for the year, or the option of receiving it out over time. If you are offering early retirement packages, consider whether you can bridge the gap between the severance date and the date the employee can begin collecting retirement benefits. Because workers older than 50 may have conditions that would make individual health insurance expensive, an important incentive would be to allow them to continue in the company's health insurance plan until they are eligible for Medicare at age 65.

Severance Agreement

When employees accept a voluntary offer, they should be asked to sign an agreement. The agreement lists all the severance benefits they will receive in exchange for their resignation. The agreement also will typically include a clause that the severance plus any pay for unused vacation days constitutes a final settlement with the company. The agreement also states that the employee waives any right to sue for any claims that might arise from their termination including those pursuant to the Age Discrimination in Employment Act, Title VII of the Civil Rights Act, the Americans with Disabilities Act and any applicable state laws.


If your severance policy provides more than just a one-time, lump-sum payment to a group of employees and requires an ongoing administrative scheme, it is most likely governed by ERISA. ERISA requires that the plan be written and detailed in a summary plan description, that it be subject to a formal claims procedure and that the employer file a Form 5550. On the positive side, ERISA's provisions pre-empt those of states, which generally are more difficult and expensive for small businesses to comply with.

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