Why Should Severance be Outsourced? Part 3: Economic Gains

Posted by Lana Mellis on Jun 1, 2017 11:03:00 AM

Severance is Costly

In times of trouble, the cost of severing an employee seems minor compared to what is often a company-wide critical financial situation. The cost of severing 100 employees could easily be over one million dollars, and 500 employees could get into the ten of millions.

Why a company chooses to give out a fixed-sum severance to get the employee out the door is understandable. Legal risk mitigation, immediate cost savings in the form of unpaid compensation and benefits, and smooth employee departure. But why a company chooses to offer a standard quick-fix severance plan rather than an alternative, flexible, cost-saving program which offers similar benefits as a fixed-sum program makes far less sense.

A Supplemental Unemployment Benefit Plan is an example of a flexible separation benefits plan which, while providing terminated employees with equal benefits as the "quick-fix" fixed-sum severance, can offer an employer immediate savings upwards of 25%. First is a tax savings. On a million-dollar severance payout, about $75,000. Second, and more important, a weekly offset to the employer-paid benefit in the amount of the weekly benefit awarded to a departed employee in State Unemployment Benefits. Often for a layoff of full-time employees, this approximates one quarter of a company's total severance payout, in our example, about $250,000. A third and primarily economy-driven savings lies in managing the duration of unemployment and ceasing benefit payments when a person returns to work, offering a company savings ranging recently near five percent. Another $50,000. Should a $375,000 savings, about 37%, be considered minor, or so quickly overlooked by a company in fiscal crisis? Far too often in the recent past the answer has been yes, and many companies are starting to realize how significant a mistake this oversight may have been.

Severance in its present form could be thought of as an "out of sight, out of mind" solution to downsizing for immediate spending reduction. Outsourcing separation benefit management to a firm specializing in managing such programs not only provides legal advantages and the smooth employee exit employers want after a layoff, but also assures a company the employees are cared for while out of sight. And a SUB Plan ensures those cost savings. 

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