Voluntary layoffs are a great tool for organizations looking to reduce their workforce. They allow employees to self select that they are interested in exiting the organization, which can save your organization capital over the long run. Whether that be from a reduction in payroll or by reducing the impacts that an involuntary reduction-in-force can have on morale.
There is just one big problem: how much financial incentive should people receive in a voluntary layoff?
Before we dig into this question, make sure to download our voluntary layoff financial incentive calculator (excel spreadsheet) by clicking the link below.
Now, let’s get started…
Severance For Employees Participating In A Voluntary Layoff
When your organization does an involuntary reduction-in-force, it is best practice to offer some sort of severance agreement to your employees. This builds goodwill and shows empathy for the distress your employees will experience with this life change.
Severance is usually calculated by how long an employee has worked for an organization, and their age (employees over the age of 40 have specific rights under the Older Workers Benefit Protection Act).
From these two factors, an organization determines how much severance should be given. Severance is calculated in units of time in regards to salary. For example, an employee’s severance could be worth 2 months of salary.
Depending on your employee value proposition, and your reasons for having a reduction in force, your organization might want to give more or less than the industry standard.
See the table below for an example severance payout scheme:
Severance Payout Scheme
Less than 1 year
1 month of base salary (4 weeks)
1- 5 years
2 months of base salary (8 weeks)
6- 10 years
3 months of base salary (12 weeks)
11- 15 years
4 months of base salary (16 weeks)
16- 20 years
5 months of base salary (20 weeks)
6 months of base salary (24 weeks)
Along with this structure, people over the age of 40 are usually given an extra age adjustment factor that is a certain percentage of their annual salary. (Please consult with your corporate counsel to determine regulations and best practices around this in your region.)
So if your organization is involuntarily laying off someone who is 55 (age adjustment factor = 4%), makes $80,000 a year, and has worked for your organization for 9 years, their severance would be worth:
(80,000*4% + 3 months of base salary)= $23,200
Voluntary layoffs are very similar to involuntary reductions-in-force in regards to severance payout.
However, there is one big caveat. Voluntary layoff severance packages are usually a bit more generous because they are trying to incentivize an employee to leave their role.
This is where many HR teams have trouble figuring out what the appropriate pay is for someone who has volunteered for a layoff.
If an organization offers a voluntary severance that is too generous, they will lose too many employees. If an organization is looking to reduce expenses but continue to grow revenues, they will still need a solid base of employees to accomplish these goals. So losing too many could be a huge detriment.
On the other hand, your organization doesn’t want to give too little of a financial incentive that doesn’t motivate any of your employees to participate in the voluntary layoff.
Many organizations offer a voluntary layoff as a way to avoid doing an actual reduction in force. If not enough employees accept your voluntary separation package it could force your organization to take the next step in conducting a layoff.
Putting your employees through several different rounds of voluntary and then involuntary layoffs is also horrible for morale. If your organization needs employees to work harder than ever to create financial revenue gains, offering a lower financial incentive that sparks these multiple rounds of reduction events would be a disaster.
There are several ways your organization can figure out how much financial incentive they should provide to employees in a voluntary layoff. The first could be to send out a company wide anonymous survey that implores what financial incentives would help your employees actually participate in a voluntary layoff event.
This is a great option because of the transparency it gives the HR department, but many organizations opt out of this method because of the panic it can cause internally if someone connects the dots that a reduction event is in the works.
The next best option would be to do online research about what your competitors offer in terms of severance pay during a voluntary layoff. You can easily find this information through a quick Google search, on Glassdoor, or even through networking with industry colleagues.
If that isn’t an option either, your organization should focus on finding a percentage increase on top of your normal severance payout scheme for involuntary reductions, and then apply that across the board.
For example, if your organization had a payout scheme like the table listed above, you could determine that a 20% increase in each of those categories would be sufficient for a voluntary layoff incentive.
That would look like this:
Severance Payout Scheme
Less than 1 year
4.8 weeks of base salary
1- 5 years
9.6 weeks of base salary
6- 10 years
14.4 weeks of base salary
11- 15 years
19.2 weeks of base salary
16- 20 years
24 weeks of base salary
28.8 weeks of base salary
You can see that the amount of severance pay in the right hand column has been increased by 20%, as compared to the payout scheme in the first table that was used for an involuntary reduction in force.
How To Communicate About Severance Pay In A Voluntary Layoff
It is important for you to communicate to your workforce that participating in the voluntary layoff will have financial incentives greater than a normal layoff.
Communicating this will help urge your employees that are already interested in leaving the organization to take the final step. However, the verbiage you use to describe this should be carefully looked over by your counsel.
You will want to communicate the positives of taking the financial incentive associated with the voluntary layoff, as opposed to the negatives of employees waiting it out and receiving less severance pay in an involuntary reduction in force.
However, you’ll want to make sure that this doesn’t come off as threatening the potential of a reduction in force if your employees don’t accept the voluntary layoff package.
If your verbiage does come off this way, and then your organization does have to proceed with a reduction in force, your employee’s could have fuel for a legal suit. Because of this, extra attention should be paid to the details of how you communicate the increased financial incentives for participating in a voluntary layoff.
Your communication should not feel coercive, and they should make no mention of having to have an involuntary reduction in force if the voluntary layoff is unsuccessful.
Voluntary Layoff Severance Pay: Other Considerations
Figuring out your organization’s voluntary layoff severance pay includes more than just strategizing about financial incentives! Your organization needs to understand how it will handle deductions, vacation balances, and taxes.
Each state has different laws regarding how deductions can be withheld from severance pay and wages. You will want to research the laws in the states where your are voluntarily laying of employees.
Deductions will also be affected by how they are outlined in your severance agreement. If your organization wants to deduct the costs of lost equipment or other damages from severance pay, make sure the procedures for that are outlined in the severance agreement.
If your employees have any paid vacation or sick days that they haven’t used while employed with your organization, you will need to pay them for that time. For example, if you have an employee who hasn’t used 5 vacation days, you would have to include 5 days worth of their salary into their severance pay.
If your organization allows employees to carry over vacation time, you could have employees with several days worth of vacation that you will have to pay out. Since this is a benefit that you have offered, it is a best practice to pay these balances out regardless of their size.
If that isn’t in the best interest of your current financial state, you organization will need to have a policy in place about how much vacation pay they are willing to pay out in the event of a severance. It would be best to have this policy hammered out way before you announce the voluntary reduction in force, and have it visible in the employee handbook and company intranet.
A best practice is to still offer a generous amount of payoff before you cap out the amount of days your organization will honor. This could be 15 days, 20 days, or even 45 depending on the amount of vacation days built up that your employees generally carry. It is always a good idea to also do research on how your competitors handle this to make sure that you are in alignment.
State laws differ widely on how severance pay should be taxed. To ensure compliance your HR team needs to consult with your corporate counsel to make sure that all regulations from each state where you are voluntarily laying off employees is being followed.
The taxation from severance pay can become tricky depending on how it is delivered to the employee. If it is delivered along with wages in a normally occurring cadence, it can be taxed as so. If the severance pay is delivered in a lump sum, outside of this normally occurring cadence, then it will be taxed differently occurring to the IRS.
Looking for more tips about how to handle a voluntary layoff event? Check out our other guides: