Navigating Compensation and Benefits After an Employee Departure

When an employee departure occurs—whether by resignation, layoff, or termination for cause—HR and legal teams must act quickly to address compensation, benefits, and compliance obligations. According to an article by Kathleen Dreyfus Bardunias, Casey D. Knapp, and Nick J. Welle of Foley, missteps in this process can create significant financial and reputational risks for organizations. Each situation depends on the reason for termination, relevant plan documents, and governing law.

The authors emphasize the importance of gathering all relevant agreements and benefit documents early, including employment contracts, severance policies, equity awards, and retirement plans. Terminations for cause can result in the forfeiture of certain benefits, while non-cause separations may involve severance, pro-rated bonuses, or continued participation in incentives. Because definitions of “cause” vary across agreements, employers are advised to audit documents to ensure consistency.

Compliance with federal, state, and local laws is critical. This includes WARN Act obligations, timely delivery of final paychecks, and COBRA notice requirements. Section 409A of the Internal Revenue Code presents additional complexity, as poorly timed payments may result in severe tax penalties. Employers must also ensure that separation agreements meet the requirements, such as those under the Older Workers Benefit Protection Act, when employees are over 40.

Retirement and health benefits require careful administration, with timely notification to third-party administrators and strict attention to vesting and rollover rules. Public companies face added disclosure obligations under SEC rules, including Form 8-K filings and proxy reporting.

The key is to treat each employee departure as a structured legal process. By reviewing documents, coordinating across HR and legal, and adhering to statutory timelines, companies reduce the risk of disputes and penalties while ensuring fair and consistent treatment.