Unemployment Claims In Cases Where You Have Given a Severance Package

Tuesday, December 12, 2006
Contributed by: Charles A. Mallard

The question goes something like this - "But we gave them a severance package, why do we have to pay unemployment?" The answer to this question is one that employers hate - because there is no such thing as waiving or negotiating away an unemployment claim.

Section 207.072 of the Texas Labor Code prohibits an employer from requiring or accepting a waiver of that right of an employee. Section 207.074 of the Labor Code further makes an employer criminally liable if it requires or accepts a waiver of an employee's right to unemployment compensation. So whatever you do, when you respond to the Texas Workforce Commission (TWC), do not say that the employee "waived" his or her right to unemployment compensation.

Instead, the magic words are either "severance pay" or "wages in lieu of notice." Understand the difference:

  1. Most employers designate any post-employment wages paid to ex-employees as severance pay.
  2. For purposes of unemployment compensation, however, it is important to know that such payments may not be severance at all, but rather, wages in lieu of notice.
  3. Section 207.049(1) of the Labor Code states that a claimant will be disqualified from receiving unemployment benefits for any benefit period in which he is receiving wages in lieu of notice. The Labor Code does not, however, disqualify an individual from receiving benefits who is receiving severance pay. What, then, is the distinction?
  4. Although the Labor Code does not define the terms "severance pay" or "wages in lieu of notice," the courts have generally defined severance pay to be a payment the employer has obligated itself to make, either verbally or in writing, which is based upon a set formula, such as length of prior service. For example, an employer may have a company policy that a terminating employee is entitled to one month's wages for every year of service. Those wages are severance pay.
  5. Wages in lieu of notice are additional wages that the employer is not obligated to pay. They are paid only because the employer has chosen not to give the employee notice of termination in advance of the date of termination. The amount of wages is not based upon longevity or length of service. For example, an employer may call an employee in for termination and offer him X number of weeks' wages to assist him during the time he is seeking new employment. No obligation + no notice = wages in lieu of notice.

What does that mean in English? Getting severance pay does not disqualify an employee from receiving unemployment benefits, and the question turns on whether the employee would be disqualified from receiving unemployment compensation on the basis of either misconduct or voluntary termination (a voluntary quit), just like any other case. Getting wages in lieu of notice forecloses the ability to collect unemployment benefits but only for the period of time that the wages cover. After that period of time, the employee can file and receive unemployment benefits unless the employer can prove some disqualification on the basis of misconduct. In a wages in lieu of notice case, you cannot defend the case on the basis of a voluntary quit, because the threshold issue even to get you to a wages in lieu of notice situation is that the employee was terminated against the wishes of the employee.

Generally, when an employer enters into a separation agreement, the employer is not obligated to give the employee any money per a traditional policy and procedure. As such, the money given does not fit the traditional definition of severance pay and might qualify as wages in lieu of notice. Alternatively, such payments do not often fit as a wages in lieu of notice for two reasons: (1) the agreement contemplates that the employee had 21 days to consider the agreement per the Age Discrimination Employment Act (ADEA) and (2) the agreement recites that the employee resigned rather than was terminated. Thus, because the money was not wages in lieu of notice, by elimination it becomes severance pay, and the employee is not disqualified from receiving benefits. Ultimately, your only chance (and again it is a chance) to avoid paying any further money is to respond by producing the agreement and characterizing the separation a voluntary quit case with a severance package. Again, the severance package will not disqualify the employee from receiving benefits, but the voluntary quit will.

To make matters more complicated, don't forget that the TWC will likely take the position that the employee had no choice but to sign the agreement or face termination, and as such the TWC is then administratively going to shift the burden of proof and make the employer prove misconduct at the hearing. Ultimately, you need to be ready to prove a misconduct case as well.

At the end of the day, the answer remains the same: an employer cannot negotiate away an employee's right to make an unemployment claim. Because the Labor Code prohibits and criminalizes agreements that require employees to waive their right to unemployment benefits, you cannot build anything into the agreement that specifically says the employee waives their right to unemployment benefits. The best thing you can do is add one additional sentence to the employment agreement that reads, "To the extent permitted by law, the payments contemplated by this Agreement are to be considered as wages in lieu of notice under the Texas Unemployment Compensation Act." Remember, that if such a sentence works, it will only apply to the period covered by the payments. Thereafter, the employee can file for benefits, and you will then have to defend against the payment of any additional benefits with either a voluntary quit or misconduct defense like any other case.

This column is published for informational purposes only. It should not be construed as legal advice and is not intended to create an attorney client relationship. The views expressed are those of the author and do not necessarily reflect the views of the author's law firm or its individual partners.