Benefits For Fired Employees

Under federal and state laws, employers have certain legal obligations to the employees they fire with respect to continuing health coverage, unemployment insurance benefits, and vested retirement benefits. Apart from these benefits, employers generally have no legal obligation to provide severance payments or other benefits to the employees they fire. However, many employers provide severance payments or benefits as a matter of company policy or pursuant to a negotiated separation agreement with a fired employee.

Be careful in discussing with employees the benefits, if any, to which they may be entitled upon leaving your business. More than a few employers have been sued for benefits they didn't intend to provide on the basis of some well-meaning comment about benefits that might be available to terminated employees. Refrain from discussing benefits until you know for sure what your obligations will be under applicable law and any policies you adopt.

The following are the benefits that you may have the legal obligation to provide if you fire an employee:

Continuation of health benefits. Employers with 20 or more employees who maintain group health plans are required by federal law to offer most fired employees who are participants in the plan, as well as their spouses and dependent children, the opportunity to continue to receive health insurance benefits at the employee’s own expense. Some states have comparable laws that may apply to employers not subject to the federal law.
Unemployment insurance benefits. Employers must notify fired employees of their possible eligibility for unemployment insurance benefits.
Vested retirement benefits. Fired employees remain eligible to receive any pension or profit sharing benefits with respect to which they have vested under the terms of the plan.
Be very careful when you consider firing an employee whose benefits under a retirement plan are about to become vested. Federal law bars firing solely to prevent an employee from qualifying for benefits under most pension, welfare, and deferred compensation plans. If you do, the employee may sue to recover the benefits that were about to vest. The federal government may also assess penalties and your retirement plan conceivably could lose tax-favored status. Thoroughly document the reasons for the firing to avoid any appearance that the firing was used to avoid having to pay the employee benefits.
Vacation pay. Some states specifically require employers to pay terminated employees for earned but unused vacation time.
Severance policies. You may decide to voluntarily provide for severance pay and other benefits as a matter of policy, or you may choose to negotiate severance agreements as the need arises. If you adopt a severance pay policy, you're subject to the recordkeeping and notice requirements of ERISA, which is a sufficient reason to avoid a preset plan and go with a case-by-case severance approach.
If you choose to have a written plan, clearly define the circumstances under which you'll provide payments and benefits, and the manner in which you'll determine the amount and the method of payment. Specifically reserve the right to withdraw the plan or to change it at any time. Consider requiring employees who accept a severance package to sign a release that protects you and your business from future employment-related lawsuits and claims.