Severance Packages in Employment Relationships - Legal Frameworks and Practical Implementation in Downsizing

Severance packages represent an important legal instrument in Norwegian labor law when businesses undergo restructuring processes or downsizing. Unlike terminations, severance packages involve agreements between the parties for the voluntary termination of the employment relationship. This presentation highlights the legal framework and practical aspects of designing and implementing severance package arrangements.

Definition and Delimitation

A severance package involves special benefits from the employer to the employee as compensation for the employee accepting the termination of the employment relationship. This fundamentally differs from termination, which is a unilateral imposition by the employer that the employment relationship shall end when the notice period expires.

Severance packages are not directly regulated by law but have developed through case law. Alternative terms include severance compensation and compensation package. The term does not encompass so-called "golden parachutes" or other compensations paid to terminate employment where the employer is dissatisfied with the employee's performance.

Severance Arrangements versus Individual Agreements

Businesses can implement severance packages in several ways. Management may offer standalone severance packages to specific employees, establish severance arrangements unilaterally after discussions with union representatives, or define arrangements through agreements with union representatives. The most common practice is for the business to offer standalone packages or set arrangements unilaterally to maintain control and flexibility.

Severance arrangements are defined as arrangements introduced by the employer, typically in connection with restructuring processes, where employees can apply for resignation against predefined and standardized compensation. Such arrangements are often established by larger businesses.

Purpose and Strategic Considerations

Businesses' motivation to offer severance packages includes several strategic elements. Primarily, companies aim to conduct downsizing quickly, efficiently, and voluntarily, with minimal conflicts and predictability for all parties. Union representatives may demand severance arrangements, prompting businesses to find it appropriate to meet such demands.

Severance packages often represent more flexible alternatives than terminations since they can be negotiated and customized individually. Through severance packages, businesses "buy out" of comprehensive procedural rules, termination rules, and potential legal disputes, although certain procedural requirements must still be followed and legal disputes may still arise.

An additional purpose is for companies to appear reasonable to both those leaving and those remaining in the business.

Legal Assumptions and Restrictions

As a general rule, it is assumed that an employee who accepts a severance package relinquishes the right to contest the termination of the employment relationship. Consequently, the employee also waives preferential rights to new employment under the Working Environment Act § 14-2, unless the severance agreement states otherwise.

Businesses' Rights and Obligations

There is no obligation under law, collective agreements, or case law to offer severance packages, although some businesses may have committed to doing so through collective agreements. Companies are entitled to offer severance packages at any stage in the downsizing processes at the level they find appropriate.

Businesses are generally free when deciding who should receive offers of severance packages, provided that the offers are based on reasonable grounds and do not involve discrimination. The Working Environment Act § 13-1 prohibits discrimination based on political opinions, membership in labor organizations, and age, while the Equality and Anti-Discrimination Act regulates other grounds of discrimination.

The Content and Structure of Severance Packages

Financial Components

Severance packages usually consist of monetary amounts, often calculated as severance pay for a specified number of months. Alternatively, fixed sums can be agreed upon as a lump sum. Payment can occur as ongoing payments or as a one-time amount.

If an employee is not to work during the notice period, this period should be included in the severance package. For example, a three-month severance package offered with exemption from three months' notice period in effect represents compensation equivalent to six months' salary.

Historically, the size of severance packages varies significantly, typically ranging from a few weeks of salary to two years' salary, depending on the company's circumstances and the individual employee's position.

Additional Benefits and Support Services

Severance packages often include contributions to further education or outplacement assistance to support the employee in career development and job seeking. Outplacement is defined as systematic assistance designed to get the employee into new employment, including application assistance, vocational courses, or the company paying others to employ the individual.

Employers sometimes cover the employee's expenses for legal assistance if the employee has used a lawyer during the restructuring process. Such cost coverage should be handled as a separate item and covered directly by the employer to avoid "double taxation" where severance pay is first taxed as salary and the employee then pays VAT on the legal bill.

Active versus Passive Severance Packages

Active Severance Packages

Active severance packages focus on helping the employee find new employment. This includes scholarships for further education and outplacement assistance. Scholarships for further education up to one and a half times the basic amount of the National Insurance can, under certain conditions, be paid tax-free and exempt from employer contributions.

Outplacement assistance means that the company invests resources to find the employee new employment outside the company, for example, by engaging specialized firms. Some companies transfer excess personnel to job banks where they can be leased out to multiple employers and receive courses and guidance.

Passive Severance Packages

Passive severance packages include severance pay, gift pensions, and material compensation such as home PCs. Severance arrangements can combine active and passive elements, but passive arrangements are dominant in practice.

Passive severance packages can, however, become costly compared to active packages, making active alternatives potentially more favorable for both businesses and employees.

Practical Recommendations for Implementation

Businesses should document the rationale for downsizing, implementation methods, timelines, and the consequences of various choices. As part of such planning, the company should assess the appropriateness of offering severance packages and the timing, implementation, and content of these packages.

The development of early drafts that can be critically reviewed and revised along the way, including input from union representatives, is recommended. Well-prepared plans that account for counterarguments can make downsizing processes smoother and more effective.