Written by Professor Rachel Arnow-Richman, Chauncey Wilson Memorial Research Professor & Director of the Workplace Law Program at the University of Denver, Sturm College of Law.
[Editorial Note: For Canadian readers, U.S. employment law presumes “at will” employment, meaning that either party can terminate the employment contract with no notice or pay in lieu of notice, as is required under most employment contracts in Canada. Professor Arnow-Richman is the leading academic voice in the U.S. arguing for American law to adopt a Canadian style legal obligation on employers to provide some form of severance pay for displaced employees. This article also appears in the Denver Post as an op-ed]
In a period of historic unemployment, news of layoffs and salary cuts barely command attention. Still recent reports of furloughs and other labor cost-saving measures by profitable healthcare conglomerates raise eyebrows. These hospitals, which received billions in federal COVID funds, continue to dole out millions to their highest-earners while front-line medical providers and lower-paid workers suffer the brunt of the cuts.
Part of the problem is insufficient oversight of government funds. Congress could have imposed more conditions on deep-pocket industry recipients, requiring them to maintain a minimum percentage of their pre-COVID payroll and workforce levels. Lawmakers had no problem doing this with small business owners seeking forgivable loans under the recently enacted payroll protection program. Intended to help businesses meet payroll and overhead during state closures, those funds had so many strings attached that some owners chose to return the money rather than navigate compliance.
But deeper issues are also at play. Bailout funds aside, the employment terms of corporate bigwigs and ordinary workers are starkly unequal, and not just when it comes to pay. High-ranking employees enjoy individually negotiated contracts for secure employment backed by promises of income continuity in the event they are let go. Companies must pay severance, often in amounts equal to multiple years of earnings, if they choose to end the relationship without performance-based cause.
In contrast, employers can lay off ordinary workers at will without pay and, except in narrow circumstances, without any advance notice. That is because the U.S., unlike most other Western countries, does not mandate severance pay upon termination. Employers may choose to provide it – either as an act of benevolence or a risk management strategy – but unless a company binds itself to a contractual policy or is subject to a collective bargaining agreement, providing severance pay is purely discretionary.
That is why so many Americans have found themselves out of work with no warning and only their final paycheck in hand. It is also why the public benefit system is at a breaking point. Ordinary unemployment insurance, which typically imposes waiting periods and works search requirements, is designed to support dislocated workers who cannot find new employment. It is not intended to be a remedy for lost employment and it cannot substitute for separation benefits. The over forty million new benefits claims filed since March have overwhelmed the system’s administrative capacity and nearly exhausted its funds. This has left would-be recipients unable to make it through the filing process and in some cases not even bothering to try.
Severance pay should be an employment right, not an optional practice. Ordinary workers – even more so than elite earners – require a modicum of continued pay to support their transition to the next job or, if necessary, the public benefits system. The legislative foundation for such a duty already exists. Federal plant closure law requires large employers to provide sixty days’ notice of a foreseeable mass layoff or shutdown. That law could be expanded to cover all economic-based terminations and require pay in lieu of notice where the need to reduce staff is unforeseen. This would ensure that when companies make termination decisions, the cost to affected workers is part of the calculus.
Policymaking in a time of crisis is a dangerous thing. Roiled by state shutdown orders, many companies are as much in need of government assistance as their workforce. It can be difficult to imagine expanding their legal obligations at this moment. But catastrophe exposes structural flaws that can inform future lawmaking.
The federal COVID response — including paid sick days, childcare leave, and gig workers benefits – temporarily patches a few regulatory cracks. But those measures ignore the gaping absence of severance rights, an even more fundamental failure of the system. When it comes time to forge enduring reforms, Congress should require employers provide an economic cushion to all laid off workers. That way ordinary workers can enjoy a measure of income security, much like the one percent who so richly benefit from their labor.
Rachel Arnow-Richman, “Severance rights for the 99%” Canadian Law of Work Forum (June 30 2020): https://lawofwork.ca/?p=12785