Severance Pay Mistakes: A Quick Guide to Employee Rights

When word leaked last weekend that Microsoft had asked former employees to whom it had accidentally paid too much severance to return the money, the news of Microsoft’s HR and accounting blunder spread thick and fast.

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The kerfuffle raised questions about whether Microsoft had any legal right to demand the money—and whether laid-off Microsoft workers were obligated to return it. After all, it was Microsoft’s mistake. (Microsoft decided early this week to let the laid-off workers keep the extra severance pay, after the company’s senior vice president of HR found out about the issue.)

John Phillips, an attorney specializing in employment law with Miller & Martin PLLC in Chattanooga, TN, says severance payment errors aren’t unheard of, and when they do occur, it’s usually on a small-scale, affecting a handful of people. At Microsoft, 25 former employees were asked to give back the extra severance, according to Computerworld.

“I have seen situations where because of carelessness or because a wrong date was put in [an accounting system], an employee gets paid a few extra weeks or months or up to a year,” says Phillips. “What I’m talking about is a one-off kind of thing. I’ve never seen a situation where hundreds of employees are overpaid and asked to refund the money.”

When one former employee is over-paid, Phillips says it’s not uncommon for the employee to voluntarily refund the money. Nor is it uncommon for the employee to keep quiet. “In most situations,” the attorney adds, “the employer will say, ‘It’s not worth fighting about. We screwed up anyway.”

But is either party legally entitled to the money? Naturally, it depends. Here, Phillips explains the circumstances in which an employee needs to pay back the money and when an employee has a valid claim for keeping it.

When Employees Have to Pay Back Severance

Companies with severance plans specifically state the amount of severance pay to which an employee is entitled and under what circumstances an employee is entitled to it in the severance agreement that the employee signs at layoff time, says Phillips. Severance agreements usually state that in return for accepting the severance package, the employee agrees not to file a lawsuit against the employer.

If the employer ends up paying the laid-off employee more than was stated in the severance agreement through an accounting or administrative error, the employer can argue that the employee owes the company the difference, says Phillips, because the employer made it clear how much the employee would be paid and because the employee is contractually bound to that amount through the severance agreement.

When Employees Have a Valid Claim on the Money

If the severance agreement stated the wrong amount from the start—if it stated that the employee was entitled to more money than the company intended—the employee has a case for keeping the money because it’s what both parties agreed to in the severance agreement, says Phillips.

What’s more, the employee may have even greater leverage over the employer: If the employer admits the severance agreement stated the wrong amount and asks the employee to refund the difference, the employer effectively invalidates the severance agreement and the release of legal claims against the employer that it contains. If the severance agreement consequently becomes void, the employee is no longer bound by the legal release and can then sue the employer, says Phillips, for any claim the employee deems reasonable.