1. Risks in Employee Selection
In the U.S., any VSP must be designed to ensure that there is no violation of federal and state discrimination
statutes, in particular in relation to age discrimination. Due to their voluntary nature, VSPs are often not
designed in a way that would create overt age (or other) discrimination. However, these programs can risk being
discriminatory in operation. For example, if a company retains the right to approve applications for the program,
and company managers uses this approval power to set criteria or make inherently biased decisions which may
create de facto age, gender, disability or racial discrimination, the company could have exposure.
Outside the U.S., employee selection is often bounded not just by discrimination issues but
also by the need to avoid creating unfair dismissal risk or breaching collective redundancy
consultation requirements. In some countries, a signicant business justication is
needed to even lawfully oer a VSP–and the very concept of a voluntary termination for
redundancy may be unattractive to employees, making this fairly uncommon.
Careful planning is required as VSPs are often eectively an early stage of a wider
reduction in force program which is regulated by local laws and may involve mandatory
engagement with employee representative bodies such as works councils, and notications to governmental
agencies. Finally, employers will need to check if any local anti-dismissal laws implemented in response to the
pandemic might apply to the VSP.
2. Severance Structure
The structure of cash severance payments can have legal and tax implications for companies and departing
employees. Companies in the U.S. with ERISA-covered severance plans will need to consider the impact of the
existing severance plan on the cash severance oered under the VSP. Companies in the U.S. without ERISA
severance plans should consider whether to establish such a plan to pay cash severance oered under the VSP.
In addition, cash severance paid in the U.S. should be carefully structured to comply with or be exempt from
treatment as nonqualied deferred compensation under Code § 409A. Care must also be taken to avoid adverse
tax consequences when structuring company-subsidized continued medical coverage
Internationally, local rules need to be considered to maximize the tax-eciency of
severance, as there are often special tax breaks or other support for terminating
employees (particularly in response to the pandemic). In addition, in most countries
outside the U.S. employees are entitled to notice payments, and often to statutory
severance payments (which may include variable compensation within the formulae);
it is important to check that a U.S. severance formula actually meets the minimum
contractual and statutory entitlements which employees are subject to locally.
Some European countries require a ‘social plan’ to be negotiated with works councils, within which
severance terms fall, and which can lead to such sums being negotiated upwards signicantly (along with the
implementation of a range of other measures, such as paid leaves of absence, re-training and unemployment
benets). In some jurisdictions, the ‘reason’ for termination can also impact both the taxation of severance
payments, and the ability of employees to access state-funded benets following termination.
Continued
