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Terminating an employee is rarely easy. Whether it is for cause, or just due to business needs, not only are there potential morale problems that can surface, a terminated employee can cause all sorts of legal headaches.
Offering a severance can really go a long way towards avoiding both a disgruntled former employee, as well as keeping morale high for those who remain. Generally, there's no legal requirement to provide one, unless it was contracted for, or state law requires it for layoffs. But knowing when to offer a non legally required severance requires careful consideration as giving away money is rarely a good business decision, and sometimes a severance can lead to negative PR.
If you are terminating an employee who could potentially assert a wrongful termination claim, or other legal claims against the business, offering a severance could potentially stop those legal claims from ever being asserted. Tying the severance to a release of liability could make the severance the most economical decision, particularly if a legal action is anticipated.
However, it should be noted that if a lawsuit is anticipated, offering a severance could be viewed as an admission of wrongdoing, which could serve to motivate the terminated employee to file the lawsuit rather than accept the severance.
Softening the Blow for Others
When a long-term, and/or well liked, employee is let go, it can often cause others around the workplace to feel uneasy. If it is known that the terminated individual received a severance, others will feel less bad, meaning that the morale problem for your remaining employees will be less pronounced. If a morale problem could be financially costly, in terms of underperforming employees, offering that severance could be the more economically viable option.
The Negative PR Problem
One interesting complication with severance packages is the potential for negative PR. An employee terminated for cause who gets a severance package could be held out as an example of the company rewarding bad behavior. Despite the bad actor being terminated, providing a severance is seen as an act of mercy, and the business world is notably merciless.