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Pay Report

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Pro: Should firms be required by law to provide six months of severance pay to long-term employees who are laid off due to outsourcing or corporate restructuring?
Mandated severance pay in America is an issue that is often disagreed upon and often talked about because it involves businesses, employees, consumers and the government. Each stakeholder may have differing views about mandated severance pay, government intervention, and who would benefit most from a law requiring companies to offer long-term employees a minimum of six months’ severance pay when laid-off or having their job terminated. Severance pay is compensation that an employer provides to an employee who has been laid off, whose job has been eliminated, who through mutual agreement has decided to leave the company or who has parted ways with the company for other reasons. In addition to pay, severance packages can include extended benefits, such as health insurance and outplacement assistance to help the employee secure a new position. Severance packages differ from unemployment benefits. Unemployment benefits are paid by the government, while severance pay comes from each specific employee’s company. Severance pay puts the responsibility of benefits on the firms, making them more socially responsible and taking a burden off of the states and the government, a burden that many states are feeling especially the last couple years coming off of a recession.
We will be arguing that businesses should be required by law to provide six months of severance pay to long-term employees who are laid off due to outsourcing or corporate restructuring. In this paper, we will discuss why the United States of America should adopt laws requiring companies to offer severance pay to employees who have been laid off or lost their jobs unfairly. A few of our reasons for arguing for mandated severance pay include our call for social responsibility by companies to long-term employees, the benefits the government would feel from having to pay less unemployment benefits, and the rise of countries like Germany, which has laws in place to protect employees from unfairly losing their jobs with no severance packages to help keep them on their feet.
In one article, we found a direct historical explanation of when severance pay has been mandated, the reasons for it, and the times when it has been offered voluntarily. “The available literature on this topic suggests three main historical determinants of severance mandates across the world: (i) the creation of broader labor codes, (ii) early industrial restructuring and spells of high-level unemployment in the interwar period, and (iii) the expansion of the welfare state after WW II. These determinants are at times intermingled with two main reasons why firms choose to voluntarily provide severances pay: one-off payments during industrial restructuring to allow for quick action and to avoid political fall-out, and seniority-related payments – corporate pensions and severance – that balance the interest of firms and workers in knowledge intensive firms.” (Holzmann 2011) With high welfare and unemployment, and a call to action for labor codes to be updated, the US seems like the perfect economy for mandated severance pay. While statistics show that mandated severance pay has not always been a huge success, and can also be very costly to the economy, the US needs to do something about this problem because companies are starting to outsource every job, the US does not produce as much anymore as a country, and the country is in debt up to its neck.
For our first point, we refer to the stakeholder model, which calls for a moral responsibility to society. This, of course, includes a company’s responsibility to its employees. When an employee is laid-off or their job is outsourced, it is not the employee’s fault. The laid-off employee deserves to be compensated for the value he has added to the company through his years of service. Employees should receive a minimum of six months’ severance pay, and this can be adjusted based on how long an employee worked at the company. One example of this system working is when the Golden Gate and Bay Bridges were being built; the ferry boat companies lost a lot of service. Before the bridges were built, the only way to cross the bay was on the ferry. The ferry workers went on strike and demanded a severance package. They were asking for one month of pay for every one year of service. The president of the Southern Pacific Railroad Company had only one offer for them. It was the exact offer the workers were asking for. They accepted. (Holzmann 2011)
We feel that severance packages that are fair to both sides will benefit many stakeholders. It would keep employees from becoming complacent at work because the harder they work, the more benefits they would earn. What I mean by this is that employees, who have been at a company longer, may receive a better, longer-lasting severance package than those who have been on staff for a short period of time. Whether the difference comes from the level of pay they are receiving when their job is terminated or based on the amount of equity that a 20-year employee could have brought the company as opposed to an employee of 5 years. We would set the bar at about five years to be considered a long-term employee. However, if companies start trying to get around this new law by letting employees go after four and a half years, employees should be allowed to go to court to fairly dispute their side of the matter.
In the stakeholder model, companies owe their employees for the success they have achieved. They should reward loyal employees in these modern times of growing outsourcing and technological advances, which has lead to less people doing more work. With that said, at the current moment and with the current state of the economy, there is no law requiring companies to issue severance pay to any employee. Some industries find it common for employers and potential employees to negotiate severance packages at the time of getting hired, while other employees in many industries have no power to negotiate anything. According to an article by Susan Heathfield, “The Fair Labor Standards Act (FLSA) requires that an employer pay an employee whose employment has been terminated their regular wages through their completion date and for any time that the employee has accrued… But, severance pay is totally up to the goodwill of the employer unless the employer is obligated to pay by an employment contract or by a severance policy stated in the employee handbook or elsewhere in writing.” (Heathfield 2013) The Fair Labor Standards Act was created to determine minimum wage and make sure employees get paid fairly. It does not protect employees from unfair dismissals, and does not address the issue of severance pay. We are hoping that a new law can be put in place to help protect long-term employees from unfair lay-offs caused by outsourcing and other more modern problems in the world of business.
When forced into conducting layoffs and reductions in workforce, companies can use their severance packages to help retain a positive image by showing its employees they care about their loyalty. A company that cares about its employees and treats them right even in times of hardship will maintain a positive image to the rest of the world. This will benefit the companies and the employees. In addition, hard-working, motivated employees will result in better output, services and products, resulting in happier customers. Another quote from a group of experts writing for the World Bank and its examination of severance pay across the world comes to mind: “A second set of explanations for the existence of severance payments sees them as instruments for managing human resources in an enterprise. In a short-term perspective, severance pay reacts to the need for enterprise restructuring by providing compensation that make (mass) dismissals socially and politically more palatable. According to the historic evidence, such considerations were clearly present at the time of main technological changes since the late 19th century and they continue to today. Under such circumstances, severance pay programs are motivated by human resources management concerns such as preserving morale of remaining workers and avoiding potential damage caused by departing workers if they are not appropriately compensated. Under the human resource rationale, severance pay becomes an efficiency wage instrument keeping workers within the firm and nurturing productive worker relationship, for example by avoiding losses of firm-specific knowledge and skills and the transaction costs associated with frequent hiring.” (Holzmann 2011) We agree with this explanation of why severance pay can be beneficial. It can be especially beneficial when a firm must conduct lay-offs to keep morale high in the office and to let employees know the company cares about them and will not leave them high and dry.
The remaining employees of the company involved will feel that their employer cares about their welfare, and not just the success of the company. If companies do not offer severance pay, the employees of the company may become disloyal, thinking they have to watch their back at all times or look for a better job, in case theirs could be easily terminated like the last co-worker they have seen let go. Especially in this time of growing lawsuits in America, severance pay is necessary. Mandated severance pay will help limit the amount of lawsuits for unlawful job terminations. According to Mark Fox, a labor and employment attorney, who has specialized in this area of law for over a decade, inquiries about wrongful termination suits have risen drastically over the last two years. He also says it has everything to do with the downturn in the economy. “Employers are obviously cutting back on staff and terminating employees,” he said. “I think in a better economy, yes, [people] would not be pursuing [such lawsuits] as much. I also believe employers would not be taking advantage of employees as much as they are.” (Lee 2011) Another lawyer said his caseload has gone way up as well but he only proceeds with one-third of possible cases. To me, this shows an obvious problem. More people are calling in about wrongful termination suits, companies are caring less, and these people are not seeing the proper results. Mandated severance pay could help solve this problem. We hope that it would cause employers to care more and treat more employees more fairly, as well as clearing the courts for more important issues, saving the states and the courts money in the long run. Many companies who do offer severance pay have their employees sign a release of claims document, which waives the employees’ right to filing suit. (Heathfield 2013) We feel this “release of claims” policy is a fair and feasible compromise to offering severance pay.
Finally, companies offering severance pay will help the economy by easing the transition from unemployment to employment for laid-off workers. At the moment, different states have different laws pertaining to unemployment benefits and combining them with severance packages. Generally, there are two different ways to receive severance pay, through installments or in one lump sum. The states differ on how unemployment is dealt out when a person is already receiving severance pay. Some states allow a person to collect a smaller amount of money from unemployment insurance if a person is receiving severance pay. Other states laws state that a person can receive unemployment only after they have collected their entire severance package. In these states, an employee would prefer to be paid in a lump sum so they can start collecting unemployment. Furthermore, in many states, once severance pay is collected, if the person is employed again, they are not eligible to collect unemployment anymore. We feel that severance pay can help ease the weight of this ongoing problem of spending by the US government.
Our second point in arguing for mandated severance pay is that it is a valid substitute for the government’s unemployment benefits. In 2012, the US government spent $90.43 billion in unemployment benefit outlays. This is an immense amount of money to go to any government program, and is a cause for the majority of the US states to be in major debt coming off of the most current recession. As noted earlier, many times when employees receive severance pay, they forfeit their right to unemployment benefits. If the government was able to only focus unemployment benefits for those people who have not earned long-term employment, state budgets could be saved. The longer unemployment draws funds from the Unemployment Insurance Program, the quicker the funds run out. Requiring severance pay helps take the load off the state. We feel that the weight of this economic problem should be shared by the companies in the US that are making plenty of money off of its consumers, and gaining value from its loyal, productive employees. If companies are required to offer severance pay, it might make them think twice about outsourcing jobs, or laying-off workers to save some money. It would be a way to ensure that the money these companies make goes back into the US economy. In addition, instead of the country or the state being responsible for paying laid-off workers, it would be the firm’s responsibility. The state of California should not have to pay an unemployed worker simply because a company decided to outsource that person’s job to Malaysia. If a company is making money in the state of California and has been for a long time, why shouldn’t they be responsible for paying for the unemployed worker they created.
There are a few markets that have mandated severance pay and have had success doing it. One example is Egypt. In 2012, their Redundancy payment plan called for workers to be entitled to one month’s wages for each of their first five years of service and one and a half months for each subsequent year. Egypt is just an example of how severance pay can work. Their economy is not in the best shape yet because it is still trying to bounce back from inflation, unemployment and a trade deficit as a result from large military investments years ago. However, the economy appears to be improving as a result of many fiscal reforms including mandated severance pay.
Another better example of an economy that is thriving and guarantees severance pay to long-term employees is Germany. Germany has passed laws that prevent companies from dismissing employees unlawfully without offering severance pay. The Protection Against Dismissal Act states that a dismissal is socially unjust and invalid if there is no suitable reason. If there is an unlawful dismissal, the employee is allowed to take their employer to court to fight for a severance package if necessary. Another law passed in Germany is The Works Constitution Act. This Act stipulates that companies must notify a works council before dismissing an employee. If they do not notify the works council, which is similar to a Union in the US, the dismissal of the employee is null and void and the employee keeps working there until the case is settled. These laws in Germany were passed to help enforce workers’ rights and help protect workers from unlawful treatment. It was argued that Germany does not guarantee severance pay. Simply because there is not a law in place that specifically states every worker is guaranteed severance pay when laid off does not mean that Germany has not taken leaps and bounds to protect its workers. The two laws mentioned above are meant to protect workers’ rights. In an article called “Severance Pay and the Shadow of the Law: Evidence for West Germany” by Laszlo Goerke and Markus Pannenberg, they say this about unlawful dismissals and how to follow up with severance pay when laid-off in Germany, “A dismissal is socially justified only (1) in cases of personal misconduct, (2) lack of individual capabilities (including sickness) or (3) due to business needs and compelling operational reasons. Moreover, in the third case the PaDA requires that firms select workers or employees– terms we will use interchangeably from now on – to be dismissed in accordance with social criteria such as age, tenure, alimony duties or individual disabilities.2 Until 2003, the regulations of the PaDA generally applied to all firms with more than a minimum number of five permanent employees.
After notification of his dismissal, a worker can file a suit at the competent labor court. The probability of filing a lawsuit in Germany seems to exceed 10% but fall short of 30%.4 In labor court, initially a conciliation procedure takes place within two weeks of the suit being filed. During its course the judge usually suggests a mutual agreement. If the conciliation fails, a court meeting will be scheduled. This usually takes place some months after the conciliation procedure and will eventually yield a judgment, unless the parties agree to a compromise beforehand. Each party bears its own costs of legal representation. Only if a judgment is passed, a comparatively small court fee will be imposed.
In general, an unlawful dismissal does not result in a reinstatement to the previous job.” (Goerke 2005) These rules, to us, seem fairer to workers than those in place in the US. To contrast the two economies, Germany is a manufacturing juggernaut and is in the middle of a boom in exports. They are enjoying a trade surplus. They experienced a significant drop in unemployment, even during the recession, as it dropped from 8.5% unemployment to 7.1%. Meanwhile, less than three million Germans were unemployed as of 2011. The workers feel more protected. Permanent workers can only be laid-off after lengthy negotiations, and often times, in Germany, when cases go to court, the workers often win and get compensated. (Goerke 2005) In contrast, over the same time period, unemployment in the US rose from 4.6% in 2007 to 9% in 2011. Better workers’ rights and a new policy on severance pay could also help keep jobs at home, here in the US, instead of outsourcing everything. This would help stimulate the economy through more cash flow being made and spent in the US. Something needs to be done to help drag the states out of debt, and mandated severance pay could be a start. It would take the responsibility of paying unemployed workers out of the states’ hands and into the companies. This makes perfect sense to us because the states are already in financial trouble. Meanwhile, the CEOs and fat cats that run these companies take jobs away, have a machine or foreign person do the job, and it is the state’s responsibility to bail out the newly unemployed workers. There are quite a few other countries that mandate severance pay. Some have been more successful than others. It is mandated in Puerto Rico, but only if an employee is fired without just cause. In Canada, the government mandates severance pay for long term employees, but it is barely enough to live on. The law states that employees are entitled to 5 days pay plus 2 days pay for every 12 months worked. A 5-year employee will only receive about 3 weeks pay, a 10-year employee, 5 weeks.
Germany is a desirable place to live and work, and has a trade surplus, something the US does not have. If the US passed a law mandating severance packages, it could help pull the country out of debt, and make it an even more desirable place to work. It would also help protect many of the people who attend San Francisco State, as severance packages are mostly aimed at white-collar workers.
To critique the con side of this argument, we would start by saying that they had some good examples and rose some good points. We disagree with the point of view that severance pay is not necessary and that it should not be mandated. Their main argument seemed to be based on the fact that people are allowed to negotiate their severance packages when they take a new job. First of all, it seems like a notion that everyone who will eventually deserve severance pay should be able to demand it at the beginning of new employment. However, if a 20-year old is starting a new job in a new career, it is likely that he would not have the leverage to demand a severance package if his job is terminated. However, 15 years down the road, if this employee who started as a 20 year old who has never worked sees his job getting outsourced, the company has no obligation to give him any kind of severance package. The way the law is now, that employee could only go get himself unemployment checks, if he was smart enough to sign up for that. The way things are now is unfair to long-term employees who work hard to add value to their company. Although, it is not in the spirit of debate, I almost agree with the defense’s argument about Egypt. We wanted to use Egypt as an example of countries that offer severance pay and are improving their economy. Egypt started from a rough place economically, and has a lot of work to do to reach the fiscal success of the US or Germany, but mandating severance pay could be a step in the right direction. Finally, I completely disagree with their argument about Germany, workers’ rights and severance pay. They claim that Germany does not have a law concerning severance pay. Maybe this is true. Maybe the German law books do not state that everyone will get severance pay. However, as we have pointed out many times in the debate, and this paper, Germany has laws in place that ensure workers have rights and are treated fairly and not unfairly dismissed. It is true that when a person believes their job has been wrongfully terminated in Germany, they are allowed, even encouraged to go to labor court to settle the dispute and work out a fair severance package. True, the same can be done in America. However, in America, the companies often get the last laugh. The companies are the big dog in the yard, the bully on the block. In Germany, the employee goes to court and receives a settlement. If the worker does not win his case, no funds are charged to him. In America, the firms will buy the smartest, sharpest lawyer to give the white-collar worker no chance in court.

Reference List:
Investopedia. (2013). Severance Pay. Retrieved March 16, 2013, from

Parker, P. (2012). Severance plans: The promise and the savings. Benefits Quarterly, 28(2), 21-27.
Jones, R. B., C.E.B.S. (2009). 12 important things employers should be doing with severance programs in light of the current economy. Benefits Quarterly, 25(2), 29-37.
Assaad, R. (1999). Matching severance payments with worker losses in the Egyptian public sector. The World Bank Economic Review, 13(1), 117-117.
Vodopivec, M., Madjar, L., & Dolenc, P. (2009). Empirical Analysis of the Severance Pay Non-Performance in Slovenia. Managing Global Transitions: International Research Journal, 7(4), 333-348.

Prestidge, Emily A. Texas Journal of Women & the Law. Spring 2004, Vol. 13 Issue 2, p343-363. 21p.

United States Department of Labor. UI Outlook. Retrieved May 7, 2013, from

Goerke, L., & Pannenberg, M. (2006, January 13). Severance Pay and the Shadow of the Law: Evidence for West Germany. Retrieved from

Holzmann, R., Pouget, Y., Vodopivec, M., & Weber, M. World Bank, Human Development Network. (2011). Severance pay programs around the world: History, rationale, status, and reforms (SP Discussion Paper No. 1111). Retrieved from The World Bank and IZA website:

Heathfield, S. (n.d.). Retrieved from

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