Don's Discussion

Are you a member with a question? Contact IA&B Legal & Corporate Affairs Director Don Bankus at 800-998-9644, ext. 603 or DonB@IABforME.com.

QUESTION:

My customer recently initiated a voluntary termination program, including severance pay, and some senior-level employees accepted. Will these severance payments be included as remunerations/payroll for Workers’ Compensation purposes when the employer is audited?

ANSWER:

While no laws, either in our three states or at the federal level, require an employer to pay severance pay, doing so does come with some considerations. These include what effect, if any, severance payments may have on a Workers' Compensation premium audit.

In each of our three states, this issue is governed by the respective state’s Workers' Compensation “rate manual,” which we all know is subject to change from time to time. At present, in Pennsylvania, Delaware, and Maryland – under both PCRB/ DCRB and NCCI rules – “dismissal or severance” payments are expressly excluded from remunerations/ payroll and should not be subject to additional premium for audit purposes. Please note, however, that monies paid for time worked and/ or for accrued vacation would be considered remunerations for audit purposes.

WHAT RULES APPLY?

Pennsylvania and Delaware:

Both the PCRB and DCRB Rate Manuals, at RULE V – PREMIUM BASIS, Rule V - B.3.d, provide as follows:

RULE V – PREMIUM BASIS

B. REMUNERATION – PAYROLL

3. Exclusions; Remuneration excludes

d. Dismissal or severance payments except for time worked or accrued vacation.

Maryland:

The NCCI Rate Manual, at RULE 2—PREMIUM BASIS AND PAYROLL ALLOCATION, Rule 2 - B-2-e, provides as follows:

RULE 2—PREMIUM AND PAYROLL

B. Payroll

2. Excludes:

e. Payments for dismissal or severance except for time worked or vacation accrued.

THE BOTTOM LINE

Whatever the underlying circumstances, severance payments should not be considered remunerations/payroll for Workers' Compensation premium audit purposes; the employer should be permitted to deduct/exclude the severance payments from the audit; and the employer should not be required to pay Workers' Compensation premium on severance pay.

This document is not a legal opinion and should not be relied upon as such. The intent of this document is to provide a general background regarding the topic or topics discussed, not to provide legal advice. Producers and agencies should consult an attorney regarding specific situations and specific questions with respect to the topic or topics covered in this document. Neither the Insurance Agents & Brokers nor any of its employees shall be responsible for any errors or omissions regarding any statements made in this document, nor any errors or omissions regarding any statutes, regulations, court rules, and/or any other government documents cited in this document.