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When your small business is running smoothly and your top employees are performing exceptionally well, severance pay can be the last thing on your mind. But, there will come a time when you will need to think about severance pay and if you don’t know how to offer the best severance deal, your small business could end up losing money. Here are 3 things to keep in mind before you draft a severance package for your company.
As a small business owner, if you haven’t considered a severance package well in advance, when it is time to layoff an employee you will be badly hit with the size of the severance package. It is in your business’s best interest to draft a detailed severance package by taking into account a variety of factors. Some of the factors that will influence the amount offered in the severance package are:
Having a well-drafted written employment agreement signed when you hire new employees can help you to achieve lower costs of severance pay and to also attain cost-certainty. This is crucial as not having a predetermined agreement allows the employee to negotiate and increases the scope for leeway which will cost you more money.
When drafting the employment agreement, it is critical to consult professional and legal counsel for help. Use the employment agreement to secure other benefits such as confidentiality clauses as well as retirement and other benefits. With a properly drafted employment agreement the severance pay can be limited to roughly one week per year of service for an employee who has worked for more than 5 years at your company. Without the agreement, however, this number could shoot up drastically as it could be based on one month per year of service which is a lot, especially if you are terminating more than one employee. Ensure you have a well-written employee agreement and review it periodically to ensure that the language used continues to be enforceable in the present as well as for the future.
Termination pay is the amount offered to an employee when a notice of termination has been given. This amount will be significantly less than a severance pay but is dependent on the notice period mentioned in the employee agreement. Not all employees are eligible for severance pay. Only those who have served your company for at least 5 years are. Termination pay, however, is granted to all employees irrespective of the time served by them.
Knowing these 3 crucial points will help you save a lot of money for your business and still permit you to offer the best severance deal to your loyal employees. Be sure to take professional help from your trusted accountants as well as legal counsel while drafting a severance package for your company.