Voluntary Separation and Early Retirement Programs
Organizations sometimes lay off employees to cut costs, reduce headcount, reskill their workforce or adjust to existing economic conditions. While this is a practice all employers may need to exercise at times, some organizations may want to offset the impact of laying off employees. Voluntary separation and early retirement programs are two examples of voluntary reduction-in-force programs, which have the same goals as traditional layoffs but are designed to benefit both the employer and the employee.
These two types of incentive programs are designed to provide participating employees with a financial cushion and help employers cut costs, reduce headcount and tailor their workforce without having to terminate employees. They are similar but distinct; in certain circumstances, some individuals may qualify for and receive both.
Understanding voluntary separation and early retirement programs can help organizations determine whether implementing one of these programs when reducing costs and headcount is right for them. This article explains the differences between the two incentives, the reasons organizations use them and considerations for employers before implementing them.
Voluntary Separation Programs
Voluntary separation programs allow employers to minimize the impact of downsizing or cutting costs by permitting employees to volunteer to be separated. Organizations typically incentivize employees to voluntarily resign by offering eligible employees a lump-sum payment.
Voluntary separation programs may apply to entire organizations or to specific departments that are being downsized. Employees occupying critical positions or possessing vital knowledge and skills are generally not permitted to participate in voluntary separation programs.
Early Retirement Programs
As with voluntary separation, early retirement is a benefit employers can offer employees to encourage them to leave their employment voluntarily. Employers typically provide early retirement to highly compensated employees or long-serving employees approaching retirement age.
Early retirement programs allow employees to retire before meeting the typical age and years of service requirements. Accordingly, employees can terminate their employment without forfeiting retirement benefits they may otherwise lose by voluntarily resigning. To incentivize employees to end their employment, early retirement packages may include severance, life insurance, pension benefits, continued health insurance or education funds. These programs are common after a merger and acquisition.
Like voluntary separation programs, early retirement programs allow organizations to adjust their workforce without having to terminate employees. However, employers need to consider potential legal liabilities, such as age discrimination, since early retirement programs typically target individuals based on age. Employers sometimes offer early retirement to younger employees, but this is usually referred to as a buyout.
Reasons Employers Implement Voluntary Separation and Early Retirement Programs
Voluntary separation and early retirement programs allow organizations to reduce costs, strengthen their workforce and restructure job positions.
Reduce Costs
Employers can use voluntary separation and early retirement programs to reduce payroll costs and realign resources. One of the easiest ways for employers to reduce payroll costs is by decreasing the number of employees. Using these incentive programs can allow an employer to achieve its goal of reducing overall payroll costs while limiting the negative impacts and potential legal liabilities of layoffs and involuntary terminations.
Strengthen the Workforce
Employers may utilize voluntary separation or early retirement programs to strengthen their organizations by creating room to promote employees to managerial or later positions, allowing those individuals to gain critical experience. By making room for new employees, employers can gain a workforce with newer skills and more recent education. This is common after an organization is purchased by a larger one.
Restructure the Organization
Voluntary separation and early retirement programs allow organizations to restructure job positions to account for industry changes and technological advancements. These changes and advancements can enable organizations to automate certain job functions. Once a job function is automated, employees who perform that function may no longer be needed. Eliminating unnecessary or inefficient jobs allows employers to reduce their payroll costs while improving overall efficiency. Employers can offset the impact of these changes and advancements by offering impacted employees voluntary separation or early retirement packages.
Employer Considerations
Before implementing voluntary separation or early retirement programs, employers need to consider their ultimate financial and staffing goals. These goals should account for the number of employees needed to voluntarily separate in order to cut costs and streamline an organization.
When developing a voluntary separation or early retirement program, employers need to consider the program’s scope, employee eligibility requirements and potential risks to ensure its success. These considerations may include:
Number and types of employees to be included
Criteria for employee eligibility
Financial incentives and benefits to be offered
Situations in which too many or too few employees volunteer
Length of time employees have to decide to voluntary separate or retire early
Methods to best communicate program incentives and advantages of volunteering to target employees
Proper planning can increase the odds that employers will meet their organizational goals. If employers fail to incentivize enough employees to volunteer for separation or early retirement, they may be forced to lay off staff, which may increase an organization’s legal risks and liabilities.
Assessing Potential Legal Risks
Although they have their advantages, voluntary separation and early retirement programs can create potential legal risks for organizations. This is especially true of early retirement programs, as they directly implicate an employee’s age and can trigger age discrimination protections. While voluntary separation programs do not carry the same level of risk as early retirement programs, organizations should still proceed with caution when implementing voluntary separation programs, as they can run afoul of anti-discrimination laws in their execution. Employers need to ensure they design both types of programs to comply with federal, state and local anti-discrimination laws. The Equal Employment Opportunity Commission provides employers with a guide to assist with designing workforce reduction programs.
Employers should also consider the impacts other laws may have on their voluntary separation and early retirement programs. Typically, employers need to consider the following federal laws and regulations:
Worker Adjustment and Retraining Notification Act
Employee Retirement Income Security Act of 1974
Title VII of the Civil Rights Act of 1964
Age Discrimination in Employment Act of 1967
Older Workers Benefit Protection Act
This article only provides a general overview of potential legal concerns resulting from voluntary separation and early retirement programs. Employers are encouraged to seek legal counsel to discuss specific issues and concerns.
Summary
Voluntary separation and early retirement programs can help reduce the need for involuntary layoffs and minimize the negative impact of layoffs on an organization as a whole. Although they do require careful planning and legal liability assessment, these programs can alleviate some of the strain of workforce reduction, making them attractive options for employers.
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This HR Insights is not intended to be exhaustive nor should any discussion or opinions be construed as professional advice. © 2022 Zywave, Inc. All rights reserved.