The past few years have been somewhat tumultuous in terms of the labor force. The pandemic led to a massive wave of layoffs, which was followed by a rapid — and somewhat chaotic — rehiring of workers. Now, as businesses face high levels of inflation, a looming recession and economic uncertainty, many employers are rethinking those recent hires and starting to make cuts again.
An obvious and common way to cut labor costs is to lay off workers. According to the Layoffs.fyi database, more than 1,000 tech companies made layoffs in 2022, resulting in more than 150,000 employees being laid off. However, layoffs aren’t business owners’ only option when it comes to reducing their workforce. One alternative is to offer voluntary severance — paying your employees to quit.
What is voluntary severance?
Voluntary severance is an agreement between an employer and an employee in which the employee voluntarily resigns from the organization in exchange for severance pay. Employers will usually offer voluntary severance programs to their staff if they need to downsize or reduce costs without making layoffs. Unlike involuntary severance, such as layoffs or other kinds of employee termination, workers have the ability to accept or decline a voluntary severance agreement. A voluntary severance contract can be discussed, negotiated and agreed upon by the employer and employee.
FYI: Severance pay is a sum of money that is paid out to an employee after they leave an organization. It’s typically included as part of a severance package, which can contain other financial benefits, such as health and life insurance, unused vacation or sick leave, retirement accounts and stock options.
What are the benefits of voluntary severance?
Voluntary severance can benefit both the employer and the employee. On the employee side, it can give unhappy workers the push they need to leave an ill-fitting job or organization, allow older staffers to benefit from early retirement and/or give workers the financial assistance they need to comfortably transition to another opportunity.
Voluntary severance is often advantageous for business owners as well, depending on the initiative’s purpose.
1. It can be an effective way to downsize.
Voluntary severance allows employers to downsize their organization without having to lay off employees. This is typically the primary reason a company will offer voluntary severance, and it often comes as a result of needing to cut costs, such as salary and benefits, or increase efficiencies. We tend to see voluntary severance programs pop up when organizations are faced with economic uncertainty and need to protect themselves.
2. It can help you cut costs.
Offering employees the option to partake in a voluntary severance program can benefit your organization monetarily in the long run. Not only do you reduce the amount of money you’re spending on employee wages and benefits, but you also prevent your organization from having to manage costly unemployment insurance (UI) claims. Having a large number of UI claims against your business can result in higher state tax rates and penalties.
3. It can encourage disengaged or underperforming employees to quit.
When you offer a voluntary severance program, it puts employee termination in the hands of the employees. Since these agreements are voluntary, workers have the option to accept, negotiate or reject your offer. If you have unhappy or underperforming team members in your organization, this type of incentive can be just the push they need to leave the company peacefully.
Instead of continuing to dole out performance improvement plans, discipline inadequate workers and ultimately fire lackluster employees, you can get these staffers to leave on their own. Underperforming or ill-fit employees can cost your business a lot of time, money and resources — and sometimes, the best solution is to cut ties in the cleanest way possible. [Read related article: How to Handle a Bad Hire]
4. It can give your company legal protection.
When you enter a voluntary severance agreement with an employee, it can give your business a bit of protection from potential litigation. This is often due to the fact that the agreement is voluntary. It makes sense if you think about it: Wouldn’t you be less likely to raise concerns or lawsuits against a previous employer if you voluntarily chose to leave amicably and received adequate compensation for doing so? A business owner can also choose to include a section in the severance agreement that restricts the employee from pursuing legal claims against the employer.
5. It can help with brand reputation management.
A voluntary severance program can protect your brand reputation from unhappy or disgruntled employees. Giving team members the option to take voluntary severance can be viewed in a positive light as opposed to the negativity often associated with laying people off. Since the decision to leave the organization is ultimately up to the employee, this kind of exit can build goodwill with that worker and reduce the possibility of them speaking poorly about your company to others.
Did you know? Company brand management is essential for every organization, especially during times of potential employee unrest. There are several highly rated reputation management services that can help you maintain a positive image in the eyes of employees, customers and clients.
What are the drawbacks of offering voluntary severance?
Although voluntary severance programs can be beneficial for certain employees and employers, they can also come with potential limitations or setbacks. If you’re thinking about offering voluntary severance, consider the following drawbacks first:
- It can be seen as a sign of company weakness or trouble: Voluntary severance is often offered during times of economic hardship or uncertainty and providing it could indicate to employees that you aren’t very confident in your company’s future if things continue as is. It also signifies that layoffs might be on the horizon, which can be unsettling to staffers.
- It can be an expensive way to downsize: Although it can save you money when it comes to unemployment insurance claims and potential lawsuits, paying out employee severance can be expensive. That’s especially the case if employees enter negotiations for higher severance pay.
- You might lose your highly skilled employees: When you lay off employees, you’re in the driver’s seat deciding who exactly to let go. However, voluntary severance puts the stay-or-go decision in the hands of the employee. As a result, offering voluntary severance might unintentionally convince your best workers to resign. This can cause a domino effect of problems down the line, impacting efficiency and your remaining staff.
- It might not work: You can provide the best voluntary severance terms, but that doesn’t always mean your offer will encourage employees to quit. If no (or not enough) employees accept the voluntary severance, you might have to renegotiate or extend the terms of the severance agreement — or eventually resort to employee layoffs anyway.
When should you offer voluntary severance?
Voluntary severance programs are usually offered when companies are facing economic uncertainty or hardships. If you know you will have to reduce your workforce to cut costs or increase efficiencies, providing voluntary severance can be a good way to do that if the pros outweigh the cons for your business.
Voluntary severance can also be a good option if you’ve already made drastic cuts to your staff and need to reduce your workforce further. Initial layoffs are often made based on employee performance, and another round of employee reductions can be difficult to make when your workforce is already lean. Voluntary severance puts the choice of separation in the hands of employees, reducing your burden.
The specific voluntary severance program and terms you offer should depend on your particular business. It’s always a good idea to speak with an experienced HR professional or legal counsel when determining if voluntary severance is the right option for your organization.