How Does an Employee Buyout Work?

Instead of handing out generic "pink slips" to terminate employees, companies can offer their employees "buyouts." A company's buyout offer generally includes an early retirement package, lump-sum severance compensation and other fringe benefit offers in exchange for the employee's voluntary resignation or layoff. Although not required by federal law, companies offer buyouts as a way to avoid unlawful termination claims or backlash from union representatives. Companies may also offer buyouts for publicity reasons, hoping that the voluntary nature of buyouts takes some of the sting out of announced job losses.


The Basics of Buyouts

Companies often offer buyout packages to their long-term employees as a form of goodwill. Businesses may require their employees to sign noncompete agreements as part of their buyout offers, and they may require them to take their compensation packages in installments, instead of one lump-sum payment. Furthermore, since employees who accept early buyouts may have to pay higher income taxes because of larger annual earnings, companies may be willing to spread their payments over time, instead of requiring a lump-sum disbursement.


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Release of Liability for Buyouts

Most companies offering their employees buyout agreements require a release of liability or indemnification. In exchange for the package, an employee agrees to waive his right to sue his employer for wrongful termination or employment discrimination. Buyout offers typically contain contractual provisions that state an employee is voluntarily quitting or terminating employment. Buyouts, early retirements and severance agreements are terms for the same type of termination agreement.


Buyout Effects on Future Unemployment Compensation Rights

Many state laws prohibit employees who receive a buyout package from filing for unemployment compensation benefits. Since state laws limit an employee's right to receive unemployment benefits to involuntary termination for a lack of available work or termination with good cause, accepting a buyout offer can affect an employee's right to receive future unemployment benefits. Although state unemployment laws can vary, most states do not consider voluntary buyout acceptances as valid reasons for terminating employment. States may view the buyout acceptance as a voluntary termination without good cause. However, some state laws allow employees who receive buyouts to provide proof that they would have been terminated regardless of acceptance. Some states, such as Michigan, view these arrangements as involuntary terminations, and allow employees who receive buyouts to receive unemployment benefits.


Federal Laws Relating to Buyouts

Employers who offer buyouts must also comply with federal laws. Although the U.S. Department of Labor does not require employers to provide their employees with severance compensation in exchange for terminating them, they may have to provide specific types of severance or buyout packages based on their private employment or collective bargaining contracts. Furthermore, according to the Employee Retirement Income Security Act, employers may have to provide their employees with specific types of pension packages under the terms of their private pension and retirement fund policies. Additionally, employers must comply with the federal Consolidated Omnibus Budget Reconciliation Act (COBRA). COBRA requires employers to offer their employees optional continuing insurance coverage if they terminate them for a lack of work or if their employees voluntarily resign.


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