Layoffs in the technology sector continue to dominate headlines. Reports cite numbers already in the six figures as of early March 2023.
U.S.-based multinationals going through or considering reductions in force in Europe face a whole different kettle of fish. Worker protections are much more robust. Mandatory severance and notice payments can be very high. And the processes that employers must follow before even deciding to terminate one employee can be time-consuming and daunting to U.S. multinationals.
Below we provide answers to some of the most common, high-level questions we hear in connection with reductions in force in Europe, compared and contrasted against U.S. practices.
Do European workers have greater protections compared with the U.S.?
Superficially, European workers are substantially more protected from dismissals than their U.S. counterparts. This is because nearly all private sector U.S. employees are employed at-will, which means that both they and their employers may end the employment relationship at any time, with or without cause, good reason, or advance notice. The only exception is that employees may not be dismissed for an unlawful reason, like dismissals on the grounds of discrimination or retaliation/victimization.
In contrast, European workers (with a few exceptions) may only be dismissed for statutorily specified reasons, and other than in cases of serious misconduct, employees must be dismissed with some minimum amount of advance notice.
I say that European workers are only "superficially" more protected because the exception to employment at-will in the U.S. — that employees may not be terminated for an unlawful reason — has largely swallowed the rule of at-will employment. The extraordinary cost of litigation in the U.S. combined with the unpredictable and sometimes astronomical judgments against employers has led to a shadow system of termination protection for U.S. employees.
Even though they may not have protections against dismissal per se, the costs and uncertainty of litigation grant U.S. employees more than enough leverage to dispute the fairness of their dismissal by arguing that the reason was unlawful. The costs and uncertainty motivate employers to voluntarily make separation payments to employees out of fear of this litigation — even if it is thought to be meritless.
The upshot is that U.S. employers end up paying some kind of severance to buy a very valuable release of claims from their employees.
How do severance packages typically compare between the U.S. and Europe?
Severance packages in the U.S. are very different than in Europe. Most European jurisdictions either set out a formula for severance and notice payments or there's a generally accepted severance standard based on the expectation of how a labor court would rule on a termination.
Generally speaking, the German approach to severance — typically a half-month per year of service to one and one-half months' salary per year of service — is fairly indicative of the ranges of European severance payments.
In contrast, most private sector U.S. employees have no legal entitlement whatsoever to severance or notice unless it is been agreed in writing or the employer voluntarily implements a formal severance plan. Even so, most employers pay a severance anyway, which is typically one to two weeks per year of service. Employers voluntarily pay severance most often to buy a settlement agreement including a release of claims because they feel it is the morally appropriate thing. It is also because they know that dismissing people empty-handed will burn a company's reputation, and mostly because that release of claims is very valuable.
The amount of U.S. severance packages can be unpredictable if an employee can credibly threaten to bring a claim that they have been dismissed for an unlawful reason (like discrimination or retaliation/victimization). This is not uncommon. Because of the significant costs and risks associated with these claims, most employers will enhance a severance just to avoid them — even where the employer views them as meritless.
Severance payments made in Europe, though, are much more predictable. As a result, most European employees do not seek to enhance their separation payments by threatening other claims against employers. It happens, but not with the frequency or gusto that we see in the U.S.
In general, what are workers in Europe offered as a minimum? In the U.S. the bare minimum companies must offer in terms of severance pay under the WARN Act is 60 days' pay and benefits, and in New York, it is 90 days. How does this compare with Europe?
Most European workers are entitled to minimum notice and/or severance as defined by law. In contrast, and shockingly to many outside the U.S., private sector workers in the U.S. are generally entitled to neither.
The public policy underlying separation indemnities in Europe is that employers owe a social obligation not to put people out of work unless there is a good reason. In contrast, consistent with the U.S. concept of employment-at-will, employers are not generally viewed to have a social obligation toward dismissed employees. Rather, the burden is shifted to the state to provide employees with unemployment insurance, which employers fund as part of payroll taxes. Benefits for unemployment are meager, particularly for moderately and highly compensated employees.
The primary exception in the U.S. is where a facility closure or mass termination is large enough to trigger a mandatory advance notice under the U.S. Worker Adjustment and Retraining Act (the WARN Act) and the laws of a handful of states that have implemented more stringent versions of WARN that trigger at lower thresholds and require slightly longer advance notice. These state laws are often referred to colloquially as "Baby WARN."
WARN and Baby WARN are not severance. They are statutory advance notice requirements, obligating the employer to notify employees and local government officials that a WARN-triggering event will occur, generally, 60-90 days in the future, depending on the state.
The WARN Act does not provide for pay-in-lieu of notice. And, as there is no culture of notice generally in the U.S., most employers require employees to work most or all of their notice period. This is not much of a separation benefit, but it does give employees some time to seek out alternative employment before they are made redundant.
And to be clear, there is no notion of statutory or legal severance in the U.S. private sector. Employers typically offer 1-2 weeks per year of service to obtain settlement agreements with a release of claims, to avoid reputational harm, and because of a belief that it is morally appropriate.
Originally published by HR.com.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
