Severance: Trending toward a balance

Unemployment Law and a SUB Plan

2011-12-13T13:31:00.002-05:00

According to CNN, "Jobless Americans have collected $434 billion in unemployment benefits over the past four years." Furthermore, 17.6 million Americans have reportedly utilized some facet of the Unemployment Benefit system since 2008.

Separation benefits are one form of company-provided benefits not regulated by U.S. government. However, could, or should, for that matter, a SUB [Supplemental Unemployment Benefit] Plan become an employment law? Think of how beneficial having such a system in place would be to our current economy. Two issues currently on the political financial table are either continuing or ending income tax breaks and either continuing or ending federal unemployment benefit extensions. A SUB Plan....income tax savings? Check. Efficient use of unemployment benefits? Check. While providing unemployed Americans with money to support their periods of unemployment? Seems an excellent idea.

Another hotspot right now is the myriad of grievances presented by the many "Occupy Wall Street" movements, including are recent corporate bailouts by the government followed by ongoing, seemingly endless layoffs, growing the proverbial 99%.

Consider the 434 billion dollars distributed by both State of Federal governments to those people who lost jobs during the Great Recession. Logically, under a SUB Plan structure, every dollar of that 434 billion paid to the unemployed would have been spent by the governments regardless. However, that 434 billion dollars would at the same time have been saved by whichever organizations were laying off those people collecting these exorbitant amounts of money. Because a SUB Plan allows a company to offset weekly Unemployment benefits from the weekly separation benefit payments, allowing terminated employees to receive amounts equal to the pre-displaced wage during the unemployment period, there is the probability that this $434 billion would have been saved by companies in this country over the past four years and the economy would be in a far better place and the unemployment rate far lower.

Stimulating the economy requires spending by the people in that economy. This includes getting some of the unemployed back to work. Hiring people requires a company have money to spend on headcount. Imagine if more companies in this country had utilized a SUB Plan. Funds delivered in the form of unemployment benefits would not only go to the people who needed them, but also save money for the companies doing the layoffs. Logically this would provide a company a greater cash flow, more money, fewer required layoffs, and faster recovery.

Putting Workers Back on The Job

2011-09-19T13:52:00.001-04:00

The new jobs bill.

Preceding the announcement by Wall Street of the impending layoffs of nearly 50,000 workers, the jobs bill seems to have come at just the right time. The unemployment rate in the United States continues to hover between nine and ten percent. Coupled with the nonexistent job growth in August, this indicates the urgency of the new jobs initiative. Our stalled economy will continue to force companies into more headcount reductions. And consequentially into spending huge sums on severance packages - a mistake from which too many organizations, including the Wall Street firms again reducing headcounts, did not learn after significant initial layoffs in 2008 and 2009.

For fear of employee backlash, Human Resource professionals in many major corporations are loathe to revisit, much less modify, severance plans despite significant overspending when separating employees. Although there exist no federal mandates in the United States requiring severance be given to departing employees, companies feel obligated to hand out money to employees whose jobs disappear. The role of severance, once meant to bridge the financial gap between job loss and reemployment, is now to appease potentially angry people by giving them money.

Getting back to basics. Putting workers back on the job. Requiring accountability not only from workers but also from the unemployed seeking reemployment. Reversing the idea that severance is an entitlement and reminding human resource professionals that severance is a benefit, something that should change and evolve with an organization's evolving culture. Our constantly changing economic and employment landscape demand organizations examine what it means to provide a benefit to an employee. Employee backlash over a changed separation benefits package rarely occurs because it is not the law that an employer give out severance awards. Employers must understand that failure to examine and modify separation benefit packages does little to help support the goal of cost cutting at a time when it matters the most.

The jobs bill is only the first step in fixing how businesses spend money on employees. Putting in place benefits programs that streamline spending while supporting the goals of the employers and the employee comes next. Utilizing funding sources from the government to support separation benefit payments and tailoring each benefit to the employee’s needs while out of work. Alternate separation benefits plans are designed to allow companies to get this done. Now if Congress can agree for five minutes and pass the jobs bill, businesses may well be on the way to recovery.

Debt Ceiling: No Strings Attached?

2011-07-25T12:39:00.004-04:00

The ongoing debt ceiling debates shed light on our country’s severely overstretched Unemployment Benefits programs. The number of initial unemployment claims filed weekly continues to rise, proving payrolls are headed in the opposite way than economists predict and hope. Where is this so-called economic recovery?

Raising the debt ceiling will most certainly come with strings attached. If those strings don’t include raising taxes, it’s highly probable one of those strings lists a handful of spending cuts to Federal programs such as education or health programs, another targeting loans to businesses around the country. With American businesses already offshoring the country's jobs to nations where labor is cheap, if they are forced to operate on even less cash, the effect on the unemployment rate may be, to quote Federal Reserve Chairman Ben Bernanke, “catastrophic.”

The unemployment rate has been hovering slightly above or below 9% for months now. Nearly half of the states in the country have been forced to borrow money from the Federal Government to continue to pay their unemployment assistance “payrolls.” With the worsening financial crisis, companies must either stop the layoffs, or incent laid-off workers to seek new employment quickly rather than expecting the government to bankroll their lifestyles. With more Americans working, fewer depend on State Unemployment payrolls and more dollars are paid in income taxes to the Fed, contributing to the government’s liquidity.

Keeping Americans working is simply a matter of spending less on certain programs to save money. If a company is forced to displace five workers, if that company funds severance for those five workers using available State Unemployment Benefits, that company may save enough money to maintain the jobs of two other workers on the chopping block. On a grander scale, as we see now that most major corporations around the country have and are once again facing layoffs, using such a program could equal significant dollars saved by States and taken in by the Feds. More importantly, fewer Americans out of work.

Once the government reaches a decision on the debt ceiling, getting Americans back to work should be its primary concentration. There is no way to predict how the strings attached to the debt ceiling decision will affect nationwide corporations. Until the government can come to a spending and revenue decision (and to think that if the NFL can do it, so might our country’s elected officials…), organizations must take a role in controlling the unemployment rate to support the country and avoid further “catastrophe.”

A More Efficient Separation Benefit

2011-06-14T12:07:00.001-04:00

May’s jobs report indicates employers are still not looking to hire. Dire news for an economy hoped to be on its way toward recovery. The May BLS paper also reports there are 4.6 unemployed workers for every job opening in the country. That’s a pretty radical number. And it means only about 25% of the unemployed persons in the country can even get jobs in the current market. Layoffs are reportedly slowing, but is this because the workforce been so trimmed that there are not many people left to lay off? With such a microscopic number of jobs available to the unemployed public, does the BLS think a slowing number of layoffs is a good measure?

In an excruciatingly slow job market such as ours today, a laid off worker faces several challenges. In addition to the simple lack of open jobs and the endless black hole of the internet job search, a laid off worker has financial challenges to anticipate. Those who are lucky get laid off with a generous severance package and job search support. The unlucky and sometimes more in need, however, are those laid off with scant or no separation benefits. Workers in lower job tiers whose only guaranteed income comes in the form of a few weeks of severance are forced to support themselves using these meager amounts during what is, on average, a long period of unemployment. While State Unemployment Benefits do typically last a considerable while longer than severance funds, State UI is hardly a replacement for a full weekly salary.

Consider a terminated employee given eight weeks of severance located in a state that does not allow this employee to collect severance and State Unemployment Benefits at the same time. This employee exhausts his eight weeks of severance and while he remains unemployed and continues to look for a job, he will apply for and collect State Unemployment, an amount usually equal to a bit more than half of his former weekly wage, for several more weeks until he becomes reemployed.

Consider another terminated employee in the same state, this employee terminated from a company who pays Separation Benefits through a SUB Plan rather than as severance wages. Because this company utilizes a SUB Plan and integrates State UI Benefits into its separation benefit, the company can save upwards of 25% of its benefit costs. As is often seen, this company may take advantage of these savings to initially offer the employee some additional weeks of benefit. While these additional weeks of might not be enough to carry this particular employee through the entire period of unemployment, it could be a full month’s worth of living expenses, mortgage, gasoline and car insurance. For those employees with less tenure or seniority whose benefits are typically smaller numbers of weeks than high-tenured employees, these extra weeks could become a lifeline.

The uncertainties related to unemployment in a job market where only 25% of job searchers can be successful are many. Paying a separation benefit using a SUB Plan vehicle lessens those uncertainties by providing a few more weeks of income, at the same or even reduced cost to the employer, as a shorter severance benefit. The staggering unemployment numbers leave it to the imagination to comprehend how a huge chunk of our population must be feeling without income. A more efficient SUB Plan can ease these uncertainties for those with lesser incomes and support the transition through the unemployment period with more weeks of benefit at no extra employer cost.

$72,600,000

2011-05-09T15:58:00.004-04:00

The release of the Bureau of Labor Statistics' monthly Job report on Friday did little to ease the minds of the Unemployed, as the growth of the Unemployment rate to 9% served as a reminder that the economy has a long way to go before it's healthy again.

One of the more interesting statistics in a seemingly contradictory report is the growth in the number of short-term unemployed. Those reporting being unemployed in April for between one and five weeks grew by 242,0000. Assuming each of these 242,000 unemployed persons collected State Unemployment Benefits for each of these five weeks, 1,210,000 State Unemployment Benefit payments were made for the period of time discussed in this report by the BLS.

Companies looking to save money by performing force reductions are likely successful in the short-term. With productivity and employee morale often decreasing in parallel during large force reductions, one might wonder if there is a better approach to achieving immediate cost savings?

For argument's sake, assume the average State Unemployment Payment is $300 per week, about $1500 for an individual over the course of five weeks of unemployment. In April, 242,000 people collectively collected $72,600,000. Presumably more, as these people were laid off and, as is typical, collected severance.

72 million dollars. 72 million dollars of money freely available for companies to integrate into their separation benefit programs. 72 millions dollars companies could have used as an offset to the traditional severance awards. If businesses in the United States had paid separation benefits through a SUB Plan vehicle, in the first five weeks of the unemployment periods of the 242,000 people reported about in April, they could have saved 72 million dollars.

The use of a SUB Plan allows immediate cost savings. As our economy recovers, saving money is what companies need to do. Implementation of a SUB Plan program to save such vast amounts of money is the simple answer.

2011-03-23T12:32:00.010-04:00

The unrest throughout the Middle East. The earthquake and nuclear disaster in Japan. The Dow jumping and falling more than 200 points in one day. Historically, these types of events are predictive of many immediate and long-term changes in the economy. However, one measure very susceptible and highly predictable following such types of events is the United States Unemployment Rate. And typically, we see it rise.

The United States Bureau of Labor Statistics reported on March 4 a .1% decline in the February Unemployment Rate. At the same time, oil production in Libya nearly halted, forcing the price of oil to $106/barrel. A rule of thumb is that for each $10 dollar increase in the cost of a barrel of oil, the price of gas as the pump will rise $0.24 over the short-term, with increases remaining steady and continuous over the long-term. With an increase in gas prices come increases in transportation costs and food prices. Change in the Unemployment Rate in the United States predictably shadows the change in oil prices.

With the crisis in Libya escalating, we know gas prices will remain high over the long-term, and can predict that the Unemployment Rate will therefore grow.

Consider that some of America's major employers include car manufacturers. Cessation of production in Japan by Toyota, Nissan and Honda has affected not only what built vehicles the United States can import, but also the import of critical vehicle parts. Decreased production of Japanese cars in America requiring parts now unavailable from Japan will require fewer workers. While this may bode well for the U.S. car industry, international automotive industries are large employers here, so these forced cuts in production can only act as additional contributors to the Unemployment Rate.

We saw the Dow drop and again increase in the wake of the events in Japan. We can expect, even by glancing not too far back in history, that this will also help the Unemployment Rate to grow. When would be a better time to restructure a severance program than when layoffs are looming in the not too distant future?

Outsourced alternative severance management programs have proven to save companies both time and cost. The Unemployment Rate will, unfortunately and most certainly, rise to some degree as gas prices continue to increase. Too often, organizations fear changing separation benefits plans when layoffs are imminent and/or immediate. Restructuring separation benefits at a time when layoffs are low yet probably six to twelve months down the road is a financial safeguard. Outsourced severance plan providers can quickly and seamlessly redesign severance programs to integrate alternative funding sources and efficiently transition impacted employees through the unemployment period.

Gas prices have now risen to above where they were mid 2008. 2009 gave us one of the worst recessions in decades. Layoffs happened. If organizations can predict this will happen again, restructuring severance should happen now, before layoffs are announced and monies wasted yet again.

Modernize Severance

2011-02-18T15:32:00.002-05:00

A February 11 report from the Bureau of Labor Statistics indicates 2010 closed with a slight decrease in the unemployment rate and a record low number of annual layoffs. As stated in the report, compared to 2009, the number of mass layoff events in 2010 decreased by 39 percent, the first over-the-year decline since 2005. Yet 1,213,638 workers were affected by involuntary terminations in 2010. This is still a significant number of people.

A quick Googling of benefit plan changes in 2011 shows the huge number of employers and various benefits providers that have made changes to one benefit or another (or many) in 2011. It is a standard practice across businesses today to update benefits on a regular basis, keeping up with the times to offer modern yet competitive benefits to suit employees' needs and retain/attract key talent. An old-school medical benefit, for example one without modern options such as a flexible spending plan or pre-tax health savings account, would do many employees less good today in the world of fast-changing technology and medical practices. A 401(k) plan design left unchanged since 1985 could do little to address the needs to the modern retiree.

How is it that severance practices are stuck in the olden days?

The BLS' February 11 report gives hope that layoffs are slowing down. A hopeful indicator of what is to happen over the next year or two or five. Of the 1.2 million people laid off in 2010, however, statistics would show that a significant percent received severance packages. And IRS data indicates that many of these severance packages were of the 'old-school severance' type. 2011 is an excellent opportunity for employers to modernize their separation benefit practices, taking advantage of a time when fewer and fewer involuntary terminations are expected to occur.

A modern separation benefit will do more than merely meet the modern needs of an employee, such as provide income during the period of employment. A modern separation benefit will also save money for an employer, perhaps giving businesses the opportunity to decrease layoffs moving forward through 2011. A modern separation benefit package will seek to fund separation benefits from available government sources, freeing up a company's immediate cash flow. A modern separation benefit does just what other benefits are already doing for an organization - meeting the needs of an employee in the most cash-savvy way. Modern, strategic, and smart.

The State of the Union

2011-01-26T12:55:00.005-05:00

President Obama's State of the Union address served as a poignant reminder of the myriad of changes the country hopes to make as we move toward economic recovery. One of his more interesting themes was the spirit of innovation and reinvention amongst Americans and American businesses. Using the example of the Allen brothers' roofing company, a small business that, prior to being innovative, suffered when its factory went unused during the recession, the President showed just how well innovation and reinvention (change!) can help a business, (government) to survive and succeed a recession. "Fix what needs fixing" to move forward, because the country "can't win the future with a government of the past."

The same principles of innovation and reinvention should be applied to companies of all sizes in all industries throughout the U.S., not merely small, family-owned businesses. Many, many organizations laid off huge numbers of employees under severance programs and processes designed for a workforce of the past, knowing all the while these programs were costing billions of dollars. At the same time, other organizations choose to approach employee separations utilizing benefit programs with innovative, forward-looking principles, such as a Supplemental Unemployment Benefit Plan, a type of separation benefit plan aligned with a more modern workforce. These organizations saved real cost while still providing benefits to support those put out of work due to the recession. They took what wasn't working, changed it, and made it through the recession with a little less severance spend on their balance sheets.

Make changes to move forward into the future. In recent decades, this concept has affected most classes of benefits offered to most workers throughout the country. Why are the severance trends stuck in the past? Companies, like the government, cannot win with policies of the past. Companies should accept the trends of the recession - that money must be saved, benefits must meet actual needs of the employee, and innovative approaches must be taken while working toward the future - and reexamine old-fashioned and ineffective severance plans.

Workforce Strategizing for 2011

2011-01-12T09:17:00.007-05:00

As the economy remains in the gutter, business leaders must ask themselves how to approach workforce management in 2011. Huge layoffs in past years have left companies with skeleton crews, and temporary staff recruited to assist over-taxed employees give businesses the advantage of not having to pay costly benefits. Is this the best approach to staff management in the new year? Are there more advantageous Human Resource strategies companies can adopt to effectively keep costs down yet keep workers happy and sane?

Temporary staff and skeleton crews may, and have actually proven to be, effective in the short-term where costs are involved. But as a long-term strategy? Probably not. A strategy should give a company a significant market advantage, and components of a successful strategy are typically those ideas which have proven to be successful over time.

In the past sixty years, the unemployment rate in the United States has only two other times (briefly in 1975; for a duration from early 1982 to mid-1983) reached above 9.0% (U.S. Bureau of Labor Statistics, January, 2011). During neither of these two times, however, did the utilization of temporary staff reach the proportions of that [seen] throughout the workforce now. As reported by the Bureau of Labor Statistics, employment in temporary help services continue to trend up as temporary help positions have increased by 500,000 since September of 2009.

A strategy such as this is nothing the workforce has ever seen before. Can it prove to be timeless and successful or will it fail companies over the long-term? Companies with workforce management solutions, such as offering quality benefits to full-time employees, tend to be more successful in distressed financial times when employees are more engaged. A better 2011 strategy may be to re-hire some of those positions and guarantee benefits, including separation benefits, which will, over time, cost a company less.

Adopting a strategy to gain a competitive advantage by keeping employees happy might, during these still distressed times, provide a business with that necessary competitive edge. A balanced benefits package can do much to keep employees fully engaged. Rather than a guilt-driven and expensive severance package, the adoption of a Supplemental Unemployment Benefit Plan - a plan which enables a company to provide appreciated separation benefits while still delivering significant short- and long-term savings - can be a component of an attractive benefits package. An employee who knows he will be taken care of while employed and in the case of a reduction in force will likely still be willing to fight for a company's success.

2010-12-02T13:02:00.007-05:00

The U.S. Congressional Budget Office stated in a late November 2010 report that more than half of people receiving regular State Unemployment Benefits in 2009 exhausted the full duration of their benefit periods. Federally-funded unemployment benefit extension programs provide additional benefit weeks to individuals whose state benefits have expired and can provide up to an additional 53 weeks of benefit to unemployed persons.

December 1 marked the expiration of the funding of these additional benefits by the Federal Government. While many people think these funds are a necessity, the previously discussed idea of “unemployment subsidies” provides some evidence as to why yet another extension is not necessarily a good idea. The CBO suggests extending the benefit yet again will infuse the economy with money. However, it is more reasonable to believe that getting unemployed workers back into the workforce will have more numerous positive effects on the economy. Not only will these workers no longer need subsidies from the government to eat, but as individuals reenter the workforce, more money is put into their hands than would be in the form of an unemployment benefit, and therefore greater amounts of money fed into the economy.

Another consideration is the position that “there are no jobs”. The U.S. DOL's Employment and Training Administration reports there are five people unemployed for every one open position. For the 14 million people out of work, that would mean there are roughly 2.8 million jobs. Getting working income into the hands of 2.8 million people would be far more beneficial to the economy than another miniscule unemployment subsidy extended by the government, which would actually be just about enough money to keep these 2.8 million fed and therefore not working.

Subsidizing Unemployment

2010-10-28T12:34:00.001-04:00

The 2010 Nobel Prize in Economic Sciences, awarded to Christopher Pissarides, Peter Diamond and Dale Mortensen for their work on Search Theory, has put the spotlight back on unemployment. Search Theory, when applied to the labor market, defines job search behaviors – those of the jobless worker who will consider ideal only a new job with a higher wage, equal or higher seniority level, most pleasant working conditions and desirable benefits.

Search theory also, however, describes a worker’s strategy when choosing between different available options, often choosing the one option with the most desirable combination of qualities.

In the United States, the Unemployment Rate remains considerably high at 9.6%. Employers continue to hire and seek talent. At the same time, State Unemployment Bureaus continue to extended jobless benefit durations to those out of work, some states providing benefits for more than two years.

Search theory has failed to factor in the reality that this country’s unemployed workers are, in short, enjoying subsidized unemployment periods to hunt for the ideal position. Is the typical worker unemployed for 39-52 weeks choosing between options or merely turning down anything absolutely “ideal”? If one of the unemployed’s options is to accept severance and a state check rather than heading out to work (which does sound quite ideal), rewarding this behavior with an unemployment subsidy does little to encourage choosing the option of new employment.

Severance packages offered to terminated employees in periods of high unemployment can be somewhat generous, as employers express concern that workers will remain jobless and without salaries for long periods of time. These beliefs, no doubt spurred on by State Labor Bureau statistics about unemployment durations, provide for terminated employees to be overpaid, and often double-paid when that individual goes back to work. Should terminated workers be encouraged to perform job-searching activities? Alternative separation benefits programs can do just that – getting the employees back to work and off the state’s payroll. Reflecting a true unemployment rate, not one created by state subsidies given to those who choose the far more comfortable option of not working.

2010-09-13T16:49:00.001-04:00

The unemployment rate throughout most of the country remains consistently high at over 9.0%; this has been the case now for several months. Despite this, jobs continue to open and fill within most industries, and more and more companies continue to seek talent during the recession in an effort to recruit quality employees.

If this is true, the question remains...how can the unemployment remain so consistently high? The answer is a simple one. While the once lush job market is no longer, jobs are, in fact, being filled in many companies at the same time as layoffs continue in others within the same industies. And because this, too, is true, then one might ask...How much is being spent on severance for these employees who will be able to find new jobs quite quickly?

The Bureau of Labor statistics reported that in July, the number of unemployed persons remained unchanged at 14.6 million, yet during the same month there was a composite job loss of approximately 230,000. Significant numbers of these newly unemployed persons came from the financial sector, an industry known for its generous severance and highly employable employee. Presumably, with the unemployment rate remaining unchanged, these individuals found work relatively quickly, leaving them with a nice chunk of cash in the form of a parting bonus and a brand new job with income.

Job turnover in other industries proves not stagnant, as well. Construction in some areas has grown, waned in others. Healthcare industries continue to grow, offering positions for the medically trained and others to run administrations. While the government separated a good amount of people in July, those people must have returned to the workforce somewhere to keep the rate unchanged. The point here? People are going back to work, and sooner than employers believe they will.

Utilization of a separation benefits program paralleling benefits offered by State Unemployment agencies, designed wholly to assist the unemployed during the search for a new job, is an option which can allow a company to save a whole lot of money on severance. Subsidizing a leisure period, or perhaps a new boat, with a big severance package is not a step in the right direction toward a company's fiscal recovery. Alternative severance and separation benefits programs are available and highly flexible to meet the needs of employees and save money for employers. While companies may be hesitant to change a severance plan in a tumultuous time, is wasting more and more money due to timidity a good choice?

On to the Next One...

2010-08-09T15:34:00.006-04:00

Imagine a typical nonperforming employee. Often somewhat dissatisfied and disengaged, spending a bit of time on job search engines, talking with recruiters, sending out the resume, chatting with others and decreasing workplace productivity, not performing job functions adequately. Because this employee has potential, and the performance is not a disaster, the poor behavior is tolerated for a long period of time. When this employee is finally terminated, often to the relief of colleagues, and offered a “go away” package, a new job opportunity may be waiting right around the corner. Out the door, on to the next one, an eight-week termination bonus in the bank.

“Severance” is typically thought of as a fixed dollar amount, based on tenure and salary, provided to employees who are involuntarily separated. An amount paid to support individuals financially while unemployed and to mitigate the risk of potential wrongful termination suits.

Severance is often used to smooth the departure of employees asked to leave because they don’t fit or are underperforming. Monetary separation awards offered to employees terminated in a force reduction may be distributed under a Supplemental Unemployment Benefit (SUB) Plan, because such employees may apply for and receive State Unemployment Benefits from their state of employ. Separation benefits offered under a SUB Plan protect the income of terminated and unemployed employees far more efficiently than traditional severance.

Use of a SUB Plan in a force reduction situation has proven to deliver companies substantial savings. Monetary separation benefits offered by a company to employees severed due to nonperformance are not eligible to receive payments under a SUB Plan, as IRS regulations on SUB Plans limit recipients to those terminated due to a reduction in force. Yet just because an individual is ineligible for SUB pay does not mean that a similar plan cannot be used to achieve similar savings. Should a company want to provide richer benefits to underperforming employees than those whose positions were involuntarily eliminated?

In all but 23 states, the unemployed may collect State UI and severance simultaneously. A company can therefore require that fired individuals file for State UI and use that amount as an offset to the company-paid portion. In addition, by managing the duration of the actual period of unemployment, a company may monitor when a fired person returns to work and realize further savings by stopping benefit payments when that person starts a new job.

Reducing severance costs is such an easy way for a company to save immediate and significant expense. Packages awarded for lack of fit terminations are a regular part of the modern business cycle. Nonperforming employees often find new jobs before being terminated from old ones – why would it be anything other than bad business to continue to pay severance to once unhappy employees who have moved into new and, presumably, paying positions?

Outsourcing Part 5. Strategy

2010-07-19T10:33:00.011-04:00

STRATEGY.

A key word as companies work their way out of the recession and through what, unfortunately for many, was disaster.

Organizations throughout the country currently face the critical issue of how to implement strategies to protect against identical mistakes and similar losses in the future. The Great Recession forced a good number of companies to contribute to the staggering unemployment rate throughout most regions of the United States. Subsequently, these organizations have had to operate using skeleton crews, creating internal discord among those stretched to capacity while former coworkers face time off with a big paycheck. These cutbacks also cost billions of dollars in severance awards.

A strategy is necessary to ensure this does not happen again, as neither big companies nor the economy can handle repeated blows. A strategy designed to protect against such costs and losses in the future would require consideration from internal teams including workforce management and finance. A solution to these issues which has proven to be a successful tool in managing current separation benefits and building a plan for those required in the future. Strategy: a SUB Plan.

Moving forward, the best recovery and ongoing management strategy is one that is clear-cut, one that is easily manageable and addresses a business process always a part of doing business. A SUB Plan offers a company a huge strategic advantage as it easily addresses the issues of employee morale and company cost. Example. Rather than severing 100 people and overspending on severance, a company can choose to reduce that number, and by utilizing a SUB Plan to integrate funding from other sources, use savings to retain more employees and maintain operating efficiencies. A strategically outsourced SUB Plan will reduce the administrative burdens involved with designing the necessary separation benefits program while a vendor's infrastructure offers regulatory guidance to ensure ongoing adherence to often changing unemployment law.

The disastrous effects of the recession are still affecting many organizations, and many have finally opted to reexamine separation benefits packages, a practice too often left unexamined until after billions of dollars are unnecessarily spent. Examining a SUB Plan is something all companies should do. Leaving a fairly obvious strategy unexamined is senseless. If companies choose to pay traditional severance, however, perhaps that may be a reason why so many failed miserably over the past three years.

The Top 5: Why Should Severance be Outsourced? Part 4.

2010-06-30T01:19:00.003-04:00

The mere thought of severance is often enough to frustrate any HR professional - not only because its underlying meaning points to organizational difficulty, but also because the administrative challenges posed by the process place more burden on an already-struggling Human Resources team. In the case of a reduction in force, maintaining employee goodwill is typically one of a company's concerns - how a termination is handled is a significant determinant of that outcome.

What an employer faces in a typical severance situation is a quick, fixed-sum payout made upon termination. Other types of separation benefits programs, such as Supplemental Unemployment Benefit Plans, while allowing an employer to save significant costs, require ongoing contact with, and record-keeping for, each terminated employee. When managed internally, these processes increase an the administrative burden faced by an HR team already managing an often sensitive severance program. Clearly this is why employers choose to approach severance with an "out of sight, out of mind" attitude. A quick fix may seem like the best solution during challenging times, yet typically results in both high costs and negative workforce relations.

HR outsourcing has become a common practice in recent years, as organizations recognize the depth of expertise boutique firms and HR service providers have in specific employee-related issues. Outsourcing allows employers to place focus on business issues and avoid the bog of time-consuming programs such as payroll, benefits administration, and employee call centers. Because severance is often handled like bad medicine – quickly, at the last minute, with distaste, and without deliberation - outsourcing its administration hasn't yet occurred in the way it has with other benefits.

Challenged companies are often forced to make quick cuts and large payouts, significantly increasing Human Resources and internal workforce management teams' workload until those employees are out the door and off the payroll. Outsourcing the administration of severance to a speciality firm can reduce that workload, and, if well-handled, still maintain the necessary employee goodwill. More important, however, is the high level of expertise and program flexibility offered to a company by a firm specializing primarily in separation benefits management. Options which can enhance the separation benefit offered to terminated employees while significantly reducing the monetary cost of that benefit. Reduced burden and reduced cost? Two quite good reasons to outsource separation benefits. Why an organization would choose not to sensibly utilize either advantage may point to why many lost billions during the 'Great Recession'.

Our next discussion examines why outsourcing severance is a highly effective strategy for ongoing economic recovery. While strategizing workforce management and acquiring talent to fill gaps created during the recent huge layoffs, companies must plan to strategize avoiding huge future losses by making the same mistakes with severance when our cyclical economy turns again.

The Top 5: Why Should Severance be Outsourced? Part 3.

2010-06-15T10:34:00.008-04:00

Severance Costs. 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? Eight-week benefits with taxes on top...could easily be over one million dollars. 500 employees? Into the tens of millions, an amount no rational person can consider minor.

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.

We’ll next take a closer look at the “out of sight, out of mind” idea of severance, and how a severance provider can help to better manage the administrative burden severance creates.

The Top 5: Why Should Severance be Outsourced? Part 2.

2010-06-07T13:55:00.005-04:00

The first in our current "Top 5" list named Regulatory Expertise as a primary reason for a company to outsource its severance programming. High levels of expertise make available a breadth of severance program alternatives and valuable risk management tools, both highly advantageous to any sort of organization.

The second reason a company should outsource severance is partner firm infrastructure. A challenged or changing company will not often have available resources to dedicate to change – whether that change be the design of a new severance program offering alternative benefits to employees or the implementation of a nationwide regulatory tracking system to ensure up-to-date program compliance. Partnering with a firm specializing in severance management, from plan design to employee care, allows a company to decrease the internal administrative burden involved with severance and change while ensuring quality program administration.

A recent survey indicates just over half of companies in the United States maintain formal, written severance policies, and about 30% of companies in the country plan to make changes to any current severance plans. Yet doing so often requires more than a mere policy change, often including such things as systems updates, integration of new practices into a company’s culture, and new process and employee monitoring. Many companies include severance plan provisions to cease benefit payment upon reemployment, yet because these companies have neither the infrastructure to monitor employment status of terminated employees nor the time required to follow up with employees who refuse to freely report employment status, payment cessation rarely occurs and additional dollars needlessly spent. A standard offering by a boutique severance management firm is the ability to track reemployment of a company's former employees, saving a company significant cost and time.

When might the payoff outweigh the time and cost of changing a severance plan? With a partner firm, typically immediately, as processes already in place to manage all functional aspects of severance allow a seamless transition from one program to another. Out next topic addresses costs directly, those involved with a standard severance offering and those associated with alternative separation benefits plans.

The Top 5: Why Should Severance be Outsourced? Part 1.

2010-05-27T10:30:00.006-04:00

The severance plan model, oft dismissed as the benefit is used en masse typically only during turbulent times, remains untouched and archaic even today – strange, since the collective cost of the benefit over the past 24 months may well have surpassed the multi-billion mark. Companies are slowly recognizing the need to update this model, yet seem hesitant to do so.

A way for companies to revisit and update their severance plan models without overburdening a stretched HR staff is to outsource severance programming. While this offers a company a huge array of benefits, this five-part series is a discussion of five primary reasons why outsourcing severance makes sense for a modern business in our recovering economy.

Perhaps one of the more important of these five reasons is the significant expertise a boutique severance management firm maintains over a company's internal Human Resource group – a group very often consumed with hiring, medical benefits, payroll, etc. In a country where each of the 50 states follows a different set of regulations governing separation pay and unemployment benefits, and where potential durations of available State Unemployment benefits in some states dwarf those in others, expertise is necessary. In-depth State regulatory knowledge consistently tracked by a firm specializing in severance management reduces the potential risk a company faces, not only from employees who want to be treated equally as those in other states whose benefits are different due to different rules, but also from state governments, who can crack down on an employer if their often strange rules are not followed precisely.

A boutique firm also has the ability to offer companies alternatives to separation benefit design not already widely in practice. This is in part enabled by the aforementioned regulatory expertise. Furthermore, due to the objectivity of an outside firm and to such a firm’s recognition of practices used by comparable companies throughout various industries, a severance management partner will often allow a company to structure a new plan more equitable than an older, outdated one which follows the old overused and overlooked severance model.

Our next topic, partner infrastructure, discusses another huge reason why severance outsourcing should become an HR trend.

2010-05-20T09:02:00.002-04:00

TSI spent the week with World@Work and a gathering of some of the biggest names in Employee Benefits at World@Work's 2010 Annual Conference. It seems more and more businesses have caught on to the severance redesign trend. Far too many HR executives expressed concern over their own inequitable layoffs of the Great Recession and many have come to understand their separation benefit plans, like most of their other benefits, need a major revamp.

One of the key concerns TSI recognized among a good percentage of the W@W group was that during the height of the crisis, separation packages were slashed. Some employees were turned out with nothing, other with tiny severance, still others with those big ones still making the news. These inequities can not only be addressed with a SUB Plan, but available monies stretched to provide support to employees who otherwise walk out empty-handed.

Looking at the structure of severance during this recovery period is finally starting to become an attractive idea. Having a scaffold in place in case the economy takes another trip has become the new trend, one key executives realize is necessary to protect the bottom line in the future.

What's the Point of Separation Pay?

2010-05-03T15:02:00.002-04:00

The New York Times recently reported a surge in company hiring and cross-industry job postings. Somewhat good news for the unemployed, yet with so many people in the job market, companies may acquire talent far overqualified for open positions at very low costs. Grim, yes. Hiring in the near future might allow companies to offer fewer perks to those coming in primarily because unemployed workers need new jobs.

But what about the employee who remained after the huge layoff? Those who became parts of skeleton survival crews are also free to take advantage of this hiring spree, a fact of which more companies are slowly becoming aware. How might companies retain these employees? Benefits, and one quite salient to workers who survived recent layoffs, separation pay. Separation benefits were a nonentity to some who lost jobs in 2008 and 2009. Conversely, others received huge severance packages, insulting those employees left to pick up the extra work left by their laid-off colleagues.

SUB Pay allows an employer to ensure meaningful separation benefits to employees, even in times of crisis, by slashing the employer's benefit cost. SUB Pay also meets the typical severance-related needs of an employer, mitigation against legal retribution, and, as is critical right now as employee options open up, maintenance of employee morale. Separation pay is, in fact, a benefit, and the forthcoming turnaround should prompt companies to examine strategies which use its promise not merely to recruit new workers, but properly to retain critical and valuable employees in the case of another recession period.

Recession or Recovery?

2010-04-13T12:55:00.004-04:00

The National Bureau of Economics on Friday decided the country is still in Recession. The Bureau of Labor Statistics reported a majority of February's state and local unemployment rates to be higher than those a year ago. However, evidence that the Labor Force (people working PLUS people looking for work) is growing indicates Americans are currently showing increased confidence in the U.S. Economy.

It might be assumed that many workers terminated due to restructure and job elimination have ridden out their severance and State Unemployment Benefit packages and have decided to reenter the workforce. March reports indicated only minor gains in payroll employment across most industries, with employment in financial and information sectors still decreasing.

With such a high unemployment rate still pervading the country, "Recovery" does seem a bit of an optimistic term to characterize our economy. The NBER might well be right. Regardless, however economists do choose to characterize it, resource management programs such as Supplemental Unemployment Benefit Plans which better utilized funds available to companies during times of restructuring could have allowed for the unemployment rate to grow less astronomically, and perhaps the NBER would be now voting for "Recovery" as its proper current name.

FICA Tax Refunds for Quality Stores? Not so fast...

2010-03-19T15:21:00.001-04:00

A recent Michigan district court decision (United States v. Quality Stores) suggests Quality Stores, Inc. may be entitled to IRS refunds for FICA taxes paid on severance.

Good news for employers who suffered huge severance payouts and related taxes during the recent recession? Not quite. Employers should realize that this decision will most likely be appealed to higher courts as the separation benefits paid by Quality Stores were not paid under a SUB Plan, a structure required by the IRS to achieve FICA tax exemptions on separation benefit payments.

Employers seeking FICA tax exemptions on severance payments must pay these benefits through a SUB Plan. The probability of the IRS refunding billions of tax dollars paid on non-SUB Plan severance awards is slim to none. Jumping the gun to file FICA tax recovery claims will bring about far less favorable results than a risk management initiative such as adoption of a SUB Plan. Foreseeable savings plan for the future vs. spending to recover past mistakes? An easy decision to make in that court.

Jobs Bill and SUB Plans = Payroll Tax Advantage

2010-02-22T19:57:00.007-05:00

With the new Jobs Bill quickly advancing through the Senate, companies may anticipate payroll tax benefits for new employees hired through the end of 2010 through the "Hire Now Tax Cut" component of the bill.

Labor statisticians anticipate an employment rate hovering near 10% through the end of 2010. The government's proposed jobs bill, designed to spur hiring, should lower this rate somewhat while simultaneously allowing companies to recover through rehiring.

Involvement with a program providing tax advantages is always a good business recovery strategy. Yet if a payroll tax advantage is the main draw for companies to hire in this still stagnant economy, mightn't it be sensible for interested business to examine other avenues and adopt additional programs through which payroll tax savings may also be achieved? And achieved in a far more immediate timeframe? The cyclical nature of employment will still require layoffs even as companies rebound, and significant payroll tax advantages are allowable using SUB Plans during these layoffs.

Which, with a hovering unemployment rate, does seem a far more sensible business recovery strategy.

The SUI Tax Hike - Not Really a Bad Thing

2010-02-09T10:41:00.003-05:00

The National Association of State Workforce Agencies has just announced increases across 35 states in the amounts of tax money employers will be subject to pay for State Unemployment Insurance (SUI). For many companies, this will be a significant sum of money, as the reported median increase will apparently be 27.5%.

It can be assumed that most companies won’t see this increase as a positive thing. However, these increased taxes will help to replenish many of the States’ Unemployment Insurance funds, so when another recession occurs, there will be fewer states forced to borrow from the Federal government. With the BLS reporting a national unemployment rate of 9.7%, many states’ funds continue to drain – this SUI tax hike is merely a necessity right now.

When else would be a better time for a company to adopt a program which will best utilizes these monies paid to the States’ Unemployment systems? SUI taxes ensure each employee will have access to state-provided funds in the case of a layoff. When a company lays a person off with a severance, use of funds previously paid by the company to the State in the form of SUI taxes ensures the company does not double pay for each individual employee.

Any sensible company that has weathered “The Great Recession,” unscathed or not, will view this tax hike as an opportunity. An opportunity to implement a plan to protect against risks that will present themselves when recession hits again. Those companies who strategize and adopt plans to balance employee and employer needs will be the ones who recover the fastest.

A 2010 Strategy: Severance Outsourcing

2010-01-25T09:00:00.003-05:00

Both Sunday's announcement by Walmart to cut 10,000 Sam's Club jobs and the Department of Labor's latest report of the still growing state unemployment rates are evidence that our economy is far from turning around.

As companies continue to scale down, the resources they maintain are forced to assume greater responsibility for ongoing business functions. Also very important as companies continue to shrink is the regulatory compliance of these ongoing functions, primarily within Human Resources, an area often posing significant risk to employers during periods of large force reductions.

Severance management is a Human Resource function which, when outsourced, can significantly relieve a business of the necessary yet burdensome administration involved with both big cutback and minor reorganizations. Providing meaningful benefits and quality care to terminated employees can be difficult for a changing business. Outsourcing program design and payment processing frees a company's internal resources to concentrate on more pressing business issues, and more importantly, providing terminated employees with expert support and constant contact has proven to reduce the risk for a termed employee to bring forth litigation or other less desirable behaviors upon the former employer.

Outsourcing HR functions has become a best practice. An outsourcing partnership with a severance management expert can provide a struggling business with relief at a time when relief is welcome.

Benefits for Main Street

2010-01-11T10:13:00.007-05:00

A $154B bill is headed for volley on the Senate floor, earmarked for new construction and education spending, where the government hopes to create new jobs and prevent further job losses. Half of this bill's funding is slated to extend programs for 'Main Street' poor and unemployed through June. Being that the latest report from the Labor Department details December's 85,000 nationwide job cuts, this bill highlights not only the massive destimulation of the economy but is also evidence for improved jobless benefits for the seven plus million Americans forced into unemployment since December of 2007.

Jobless benefits provided by both a worker’s state and former employer can range from a pittance to a mountain of money. In our no-hire economy, many on the less fortunate end of this spectrum now face expired state benefits and exhausted severance. President Obama has just signed into law a two-month unemployment benefits extension, evidence that state benefits are, in fact, expiring throughout the country, forcing a great number of Americans into dire financial straits.

Not government-regulated, company-paid severance benefits for some were nonexistent and for others an abroad vacation and renovated kitchen. If more efficiently designed to parallel government funding, separation benefit plans can effectively extend benefit payouts received by each worker and better balance layoff packages with the financial needs of the company. By utilizing funding such as Obama’s unemployment extension to expand the pool of available severance funds, enhanced benefits can be made available for all beneficiaries. In such a risky economy, providing jobless benefits is practically (and should be) a necessity…lessening risks faced by terminated workers by better balancing the funding of these benefits should be a requirement.

In Recovery? Not Quite Yet

2010-01-04T13:14:00.013-05:00

Early in 2009, economists projected the unemployment rate would exceed 10% by year-end. By midyear, these economists finally agreed the country was in a recession state. In October, the unemployment rate met expectations as it hit 10.2%, and several states reported rates ranging from 12-16%. The year closed with an unexpected slight decrease in the number of newly unemployed workers filing for state unemployment benefits, and some recent economic indicators suggest the national unemployment rate has now finally hit its peak and the country is creeping toward recovery.

This might seem like good news for the nation. Today, however, the Bureau of Labor Statistics reported nearly 20 of the country's major metropolitan areas have unemployment rates higher than 15%, and 125 report rates higher than 10%.

Another interesting report came on December 31, when the Labor Department reported a decrease in the rate of new unemployment benefit claims filed in the final weeks of 2009. And while the rate of new unemployment claims during these weeks was lower than anticipated, it might seem safe to assume that layoffs tend not to occur at a particularly swift rate when a good percentage of the workforce vacations or celebrates holidays.

It seems premature to assume economic recovery has begun. The housing market has reportedly picked up, although the homes selling are those foreclosed upon as banks finally begin to regain their footing. Holiday retail sales proved disappointing, and domestic automobile manufacturers are still experiencing declining profits. Economists are no longer predicting growth in the unemployment rate, but rather are suggesting there is potential for a "double-dip recession", or another economic downturn immediately following a brief period of growth.

We can expect more layoffs. We should expect this. And by using traditional severance plans, we should expect companies will each waste a few million more dollars.

A Look Back on 2009

2010-01-01T18:33:00.002-05:00

As 2010 begins, it seems most of us hope for a year far less grim than 2009. Many who have managed to stay one step ahead of the corporate survival tool known as layoff still hold onto jobs white-knuckled while others not so lucky search relentlessly for the job that might not come for another month. As we look back on 2009 to analyze mistakes with resolve to avoid the same in '10, it is interesting to watch businesses do the same. Slightly more interesting when we realize that many of the business mistakes of 2009 were made with the intention of saving short-term costs, and are what have created the country's staggeringly high rate of unemployment. Some economists have claimed the national unemployment rate has hit its peak, yet dismal state unemployment rates ranging from 12-16% give evidence that the economy is quite far from recovery and perhaps such claims are a bit premature.

One of the highlights, and interestingly, huge business mistakes, of 2009 relates nicely to the scandal surrounding compensation and severance. Throughout the year we heard nonstop news rotations about "golden parachute" severance sums paid to highly compensated executives, or minimal severance provided to long-tenured employees laid off in massive cost-cutting initiatives, or sizable severance packages awarded to individuals with high reemployment potential. Daily reports came in from hundreds of companies reducing headcount by thousands to get salaries and benefit costs off the books. Should we think of what may be assumed was a very widespead use of severance in 2009 as a successful short-term cost-saving measure? Probably. As an avoidance of risk? Somewhat. As a balance of interests? Not really. Strategic tool for the economic recovery that will eventually arrive? Not at all.

Severance does provide immediate cash savings, and it has been shown to increase a company's protection from litigation by unhappy former employees. But severance does not consider the needs of employees, either those terminated or those often unfortunate enough to remain to do twice the work. Nor does severance put in place a strategy to protect a company from similar losses in the future.

In 2009, reported layoffs of approximately five million occurred across all industries. What one company offersed as a severance benefit typically differed significantly from what another provided, and some terminated personnel walked away with upwards of a year’s salary while others were lucky to receive a two-week payout. Two weeks' salary in any economy does little to support an employment transition. But 39 weeks? 52? 65? Here is the mistake. When a company seeks to cut costs, how might it be beneficial to pay anyone 52 weeks of salary in return for a signature on the dotted line? Seems a good deal for the person leaving, who, more often than not, will go back to work in approximately 26. What about those workers who are left to pick up the slack? Or the millions of shareholders whose returns are more greatly reduced because billions were spent on severance?

When layoff seems such an easy answer to a financial challenge, a business will typically take advantage of the in-place severance process when necessary without seeking potential alternatives. It seems to be forgotten during a layoff that when an employee is on a company's payroll, tax dollars are paid to federal and state agencies by the employer to cover potential unemployment benefit expenses for that employee. During force reductions, why don't companies take advantage of those dollars, already in place for such use, as supplemental funds when doing a layoff? The IRS offers benefit structures precisely for that purpose. To offset severance funds paid out by a company with dollars previously paid by that company in the form of taxes offers a company not only an immediate savings on that severance payout, but also a long-term tax advantage.

Think about it this way. Five million people are laid off and each person awarded two weeks of severance benefit. The former employer offsets each of these two weeks with state unemployment funds already paid into the unemployment system by the employer, let's say $200 per week. That's $40 billion saved. $40 billion which could have probably saved a few, maybe more than a few, jobs. Maybe some of it reinvested in the company to develop other employee-centric programs. Or strategize to avoid future financial black holes.