Now Severance Packages Are on the Chopping Block

As the economy swoons, some companies are cutting workforces—and severance benefits

By Michael Orey

Alsman refused Ford's severance offer and has sued the company instead Michael Nemeth

Cynthia Alsman knew the auto industry was struggling, but she was still surprised at being laid off from her job handling purchase orders in Ford Motor's (F) finance department in July. Then Alsman, who started at Ford in 1979, got another shock: Instead of getting the full year's salary to which longtime white-collar workers are entitled under a company severance plan, she was offered one month. The reason: In 2000, Ford spun off its parts operation into a company called Visteon (VC), making Alsman a Visteon worker. Five years later, with Visteon foundering, Ford reabsorbed many of its employees. Alsman, 49, was considered a "rehire" entitled to $5,750 in severance instead of $69,000. That, she says, "means the difference between paying your bills and not."

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While Alsman's situation may be unusual, her predicament is not. With the economy sinking into recession, companies around the U.S. are slashing workforces. In October alone the dozens announcing job cuts included Kraft Foods (KFT); Mervyn's department stores; trucking giant YRC Worldwide (YRCW); and drugmaker Merck (MRK). Already, indications are that the weak economy is squeezing exit packages. David Broman, CEO at compensation adviser Syzygy Consulting Group, says his firm's annual survey shows "a significant pullback in what [companies] are willing to pay outgoing employees during downsizing."

In most cases the law doesn't require employers to pay a cent to laid-off workers. While top executives often negotiate lucrative departure packages, few employees have such contracts. "Severance is a gift," says Steven Andrew Smith, a Minneapolis attorney who represents employees.

According to a 2007 survey by WorldatWork, a nonprofit human resources organization, most policies offer one or two weeks' pay for each year an employee has worked, often to a maximum of 26 or 52 weeks. But employee handbooks that set forth severance policies typically state that the companies are free to modify them. Says Steven Gross, who advises businesses for HR consultant Mercer: "Companies have gotten very stingy in their stated policies so they can come back and be more generous if they want to be."

In this environment, though, acts of generosity stand out. "Man, why can't I get laid off by eBay (EBAY)?" began a lament posted Oct. 7 on Valleywag, a Silicon Valley Internet gossip blog. A day earlier, eBay had announced layoffs of more than 1,000 employees with severance pay and continued health benefits for up to five months. As it happens, Valleywag had just cut its own staff. EBay declined to comment on specifics, though it did announce that it would take a $70 million to $80 million charge for severance and related costs.

There are compelling reasons to pony up for layoffs. Many managers feel that treating ousted workers well sends an important message to those who remain behind. "Everybody who survives looks at how well the other people were treated because someday they may be in that situation," says Mercer's Gross. But the primary reason employers offer severance is that they extract something in return: The departing worker must waive all rights to sue the company. Mass layoffs in particular put companies at risk for age discrimination suits, because cutbacks often target higher-paid workers, who tend to be older. Demanding a waiver is "really a mechanism that employers are using in a very effective way to eliminate the numbers of claims that come out of a reduction in force," says New York employee attorney Pearl Zuchlewski.