Total Articles: 5
Pros and Cons of Severance Agreements
Employers who pay out severance to their employees run certain risks that need to be considered beforehand. Some employers have learned the hard way that severance agreements aren't always the best course of action. Last year, the University of Oregon received bad press when it was discovered that former head coach Mike Bellotti received a substantial payout upon his departure.
New IRS Rule Governing Severance Payments Goes Into Effect.
In 2004, Congress enacted Internal Revenue Code (the "Code") § 409A to provide rules regarding the taxation of deferred compensation. Code § 409A applies to all types of “deferred compensation,” including certain severance pay arrangements. For these agreements to comply with § 409A, the time, form and triggering event for deferred compensation payments must be established at the outset. Once established, subsequent changes in the form or time of payment or payment triggers are heavily restricted. Non-compliant deferred compensation must be included in gross income immediately, even if not yet paid, and that compensation is subject to a special tax of at least 20% of the amount of compensation at issue, in addition to normal income taxes.
What Can Employer’s Learn From Conan O’Brien’s Severance Agreement?
It now appears the Conan and NBC saga is coming to the end. It is being reported that Conan will leave NBC with a boat load of cash and will be free to have a new show on another network in the Fall. The specific terms of the deal have not yet been released, but they will definitely be detailed in a contract between Conan and NBC. Such a contract, often called a severance agreement, is used in high risk terminations as a means of avoiding costly and distracting litigation.
Be Careful With Severance Plans.
The current financial crisis and economic downturn have caused many employers to implement lay-offs and reductions in force. In an effort to reduce the harsh economic impact of a sudden job loss, and in an effort to mitigate the negative employee relations issues that can result from downsizing, many employers offer affected employees separation pay or severance. Many of these arrangements are not formalized and simply consist of continuation of payroll for a specified period of time following termination of employment.
The Changing State of the Law regarding Releases (pdf).
Recent cases from different circuits illustrate the uncertain state of the law.
