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It is shown in movies and is probably true, such as in the movie Jobs about Steve Jobs, that when he came back to Apple as the CEO, he found out who was not productive or who were probably not inline with his operating style, and gave them a big envelope, with an offer to leave that they found hard to refuse.

But the thing is, we often hear, the boss could let a person go because they don't like the color of their hair (or dyed hair), and it is "employment at will". So the company can just tell you that you don't have to come back the next day. They may give the person some severance, but they don't have to, not to mention that they don't have to give the person a "big package" that they find hard to refuse.

So what is the reason companies give them a big package to leave?

2 Answers 2

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There are really about three tiers of employees for these purposes. Also, the reasons are a mix of legal and business considerations.

At the bottom, severance payments can be made in lieu of unemployment insurance claims being made by the laid off employees. Severance payments for workers at the very bottom are often modest.

At the top, "golden parachutes" are often written into the individually negotiated employment contracts of senior executives. Someone like a Steve Jobs will have negotiated a contract very favorable to him in the event of his termination with the board of directors when he is hired with attorneys on both sides heavily involved in its drafting.

In between, one of the reasons is to get a waiver of claims, for example, due to allegations of employment discrimination, harassment, and past work place related injuries that weren't properly processed through the worker's compensation system, and to reaffirm the existence of non-competition, non-solicitation, non-disclosure, non-disparagement, and assignment of intellectual property rights of the terminated employees.

Being able to "dot i's and cross t's" and definitively foreclose litigation from laid off employees also looks good to stockholders and prospective investors. If severance agreements cutting off liability and ruling out the possibility that sloppy paperwork could compromise the firm's intellectual property to be compromised by disgruntled former employees who no longer have a stake in the firm's well being were entered into, a larger layoff would often be followed by a stock price lag reflecting unknown contingent liabilities and intellectual property risks from former employees.

Closing off residual liability is particularly important in firms with stock or stock option compensation for a large group of employees and for firms with defined benefit pension plans.

But, it goes beyond that. There is also just a sense of moral obligation on the part of senior managers establishing the severance terms to good, loyal employees who are losing their jobs of often many years through no fault of their own. Most of those senior managers were once in the same position, worked with the employees who were laid off personally, and can related to their plight. In a publicly held firm, even for insider members of the board of directors, the shareholders are an impersonal abstraction, while the laid off employees are genuine people whom the executives implementing the plan know a sample of personally.

Of course, institutionally, this economy wide practice of big businesses also helps to fend off pressures from governments to impose bigger severance payment requirements as a matter of law. Substantial severance payments also discourage unionization by the employees who aren't laid off since it makes the employer look trustworthy despite not having its feet held to the fire by the law or a union.

Finally, it is a given that many of the laid off employees will land on their feet finding mid- to senior level jobs in the same industry or a related industry, or starting their own firms that may do business with the firm that laid them off, either as consultants providing institutional knowledge that was lost in the layoff to due carelessness, or as vendors or joint venture partners. A stingy severance package could sow ill will towards the former employer that could come back to bite that firm later, while a generous package will rarely leave significant ill will from the former employees who find new positions whom the firm will end up dealing with later on.

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    The benefit of the goodwill described in your last paragraph should not be underestimated. A good severance system reduces the risk for an employee who wants to work there, and reputation for bad/no severance can make it difficult to attract good job candidates.
    – bta
    May 10, 2023 at 15:56
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    Great rundown of the benefits of doing this. Could possibly add that giving generous severance packages to those employees being let go is also very good for morale/goodwill of those employees being retained (making them less likely to jump ship voluntarily / sabotage from within / "quiet quit" etc).
    – psmears
    May 10, 2023 at 15:58
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    To summarize this answer - there is a very big difference in America between the senior management of a major tech company and the barista who makes his coffee at Starbucks in the morning - and a big part of that difference is how much job protection they have. And a big reason for that difference is how much protection they can afford to make for themselves, or even represent for themselves in court.
    – Zibbobz
    May 11, 2023 at 13:11
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    The issue of goodwill applies to the remaining employees as well. If the employees who were not laid off feel that their former coworkers were not treated reasonably they may 1) decide to seek other employment lest the same thing happen to them in the future, or 2) stay but seek to find ways to improve their own "return on effort" wrt to their relationship with the employer (i.e., do less work or find ways to exploit more). Employees that are committed and motivated are far better than resentful ones. May 11, 2023 at 15:05
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    @rtaft Yes. Severance at the bottom exists and is fairly common, e.g., in warehouse and factory and retail store layoffs.
    – ohwilleke
    May 11, 2023 at 18:54
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A severance package may be legally required, depending on the state.

But the company can also make it conditional: You get this generous severance package if you sign an NDA, a non-disparagement agreement, and promise not to sue the company. In that case, the company gets legal security for not very much money. And the ex-employee gets money for not suing etc. which they may not have planned to do anyway.

In my case companies also paid for a lawyer of my choice to check the contracts. Which is cheap, it demonstrates they are not trying to rip me off, and I can’t claim later that I didn’t understand the contract.

In each case I could have refused to sign, but would have only received the legal minimum. If there is unfinished business about an accident where you think the company owes you half a million, you don’t sign. If you think they owe you $500 for travel expenses you sign. (Typical numbers $10,000 legally required plus $500 expenses vs $25,000 voluntary payment and you can’t sue).

Paying $25,000 and as a result everyone is happy may be a very good deal for the company.

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    Can confirm, when I was recently laid off I was given a severance agreement that was basically a generous severance package (money, and also a free 6 months with a career counselling agency) in exchange for me signing an NDA. It was not required that I sign it, but the offer made signing it the obvious choice. Now I'm (relatively) happy and so is the company.
    – Jason C
    May 10, 2023 at 14:18
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    In what state is it legally required to give a 10k severance package? May 10, 2023 at 15:20
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    Often in England, Wales, Scotland and Northern Ireland :-)
    – gnasher729
    May 10, 2023 at 15:40
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    Agree that it would be best to tag the answer with a jurisdiction, since the question title specifically asks about the U.S. and so "state" would be commonly interpreted as meaning one of the United States, rather than "sovereign country."
    – reirab
    May 10, 2023 at 18:42
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    @reirab just as US states call themselves states for historical reasons; a term that at the time denoted independent sovereign entities. And US states are still nominally "sovereign" in the US legal system even though the term that describes this nowadays is usually "autonomous." What all of this actually demonstrates is that one should not put too much weight on the use of this or that term; different systems use the same words differently and we just have to accept that words don't have a single immutable meaning that applies everywhere. The UK needed a word here and settled on "country."
    – phoog
    May 11, 2023 at 15:16

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