Stateseverance

Mandatory Severance Laws Won’t Fix Our American Crisis — But for the Working Class, They’d Be a Start

When it comes to protections for laid-off employees, it’s a dark and desolate landscape

When Toys “R” Us declared bankruptcy in September 2017, the news came as a huge but unsurprising blow to the tens of thousands of workers that filled its retail stores, warehouses and corporate headquarters in New Jersey. 

It was unsurprising because for years, employees like Anne Marie Reinhart had watched as conditions at Toys “R” Us got worse and worse under the weight of $5 billion in debt. People were fired, with remaining workers forced to pick up the extra work. Raises disappeared. Morale dropped. Many feared for their jobs, wondering how much severance pay they could get and how far it could stretch. 

Then Reinhart found out that, despite nearly three decades of working for the company, there would be no severance at all. The ownership group claimed the bankruptcy left them no other choice. “Retail workers are already poorly paid,” she told The Nation in 2018. “Now, to be let go without any severance is devastating. Not knowing how you’re going to pay your rent, feed your family and pay your bills is absolutely humiliating.”

In all, some 30,000 employees lost their jobs with the bankruptcy filing, and eventual liquidation, of Toys “R” Us. It required court cases and public activism to force the ownership group, led by private equity firms Bain Capital and Kohlberg, Roberts, Kraviz & Co. (KKR), to create a severance fund. The meltdown also triggered a new policy effort in New Jersey, where more than 2,000 people lost their jobs. Last month, the state signed into law a new rule that forces companies with more than 100 employees to pay severance any time a mass layoff happens. Defined as a termination of 50 or more people, a mass layoff can only happen with 90 days’ notice (up from 60) under the new law. 

The payout will be calculated as one week of pay for every year of employment, with no cap on the number of years. Pro-business voices decried the impact it would have on companies that are already broke and broken, but worker advocates hailed it as a significant step for labor rights. “When these corporate takeover artists plunge the companies into bankruptcy, they walk away with windfall profits and pay top executives huge bonuses, but the little guys get screwed,” Democratic N.J. Sen. Joseph Cryan, a co-sponsor of the bill, wrote in a Facebook post.

The hope from labor advocates is that other states will follow suit with similar laws, but the whole debate reveals a seriously stark landscape when it comes to protections for laid-off employees. In short, only a tiny handful of states have laws requiring severance pay. Most of the time, unless it’s negotiated in an initial employment contract, the company owes a suddenly-fired worker exactly zero. There are several reasons why a company would offer severance pay regardless, and it has less to do with goodwill and more with liability — usually, the money comes with the condition that the employee won’t sue the company in future, and in some cases even refrain from public criticism of the layoff or the company. 

The power then clearly remains in the hands of management. But Alec Levenson, a labor expert and senior research scientist at the USC Marshall Center for Effective Organizations, argues that a large number of employers see the value in a worker payout. “The companies that take a more holistic approach and understand the importance of keeping employees engaged, do not enter into layoff decisions lightly. And many of the better employers in the U.S., including a lot of household brand names, actually do offer severance packages,” he tells me.

Instead, Levenson suggests that the New Jersey law is limited in its power and scope because mass layoffs are relatively infrequent. Many shrinking companies choose to “rip off the Band-Aid all at once” in an attempt to maintain morale in the remaining workforce, while others will shed significant numbers over time, which wouldn’t qualify as a mass layoff under the law. Given that, Levenson explains that the value of severance laws is really about the details. 

“They could’ve set the rates much higher, but it’s kind of like the argument over how high is too high for a minimum wage,” he tells me. “One week of severance for every year you worked there isn’t out of line from most voluntary severance packages. So to me, it’s plugging a slight hole in the social safety net, but it’s not going to make a fundamental difference in workers’ lives.” 

Losing a job is highly destructive, with the best-case scenario being that you find a similar position in the same industry with about the same pay. History suggests that more often than not, wage workers end up worse off, needing significant retraining or having to start careers over with entry-level positions in a different industry. Even if they can find a new job, a sudden downshift in pay is disproportionately stressful for working-class families, who already face stagnant wages and unfair tax rates. This is made more maddening when you see headlines of how fired CEOs and top execs can take home hundreds of thousands to tens of millions in severance pay, often dubbed “golden parachutes.” There are reasons why CEOs have the leverage to ask for a massive severance before even accepting a job, but it’s a privilege not afforded to 99 percent of the workforce. 

So if something like New Jersey’s law can’t help workers in a significant way, what will? Levenson suggests that states need to consider not just private-company severance, but existing unemployment insurance programs that could better assist struggling workers in transition. Sending more funds to community college retraining programs would also be an improvement over the status quo, given that most states prioritize their top university programs instead (despite community colleges serving a bigger, more diverse cohort). 

The Toys “R” Us story shines a light on the predatory private equity industry as well, which has been responsible for a rapidly growing number of bankruptcies and mass layoffs in the last 20 years. There’s no doubt that private equity firms create value for investors when they swoop in on “distressed assets” or underperforming companies. These firms often take on massive amounts of debt in order to buy a company, but the critical twist is that the debt is then put simply on the company’s ledgers. The $5 billion Toys “R” Us was buried under? That came as a result of Bain Capital and KKR’s 2005 purchase. 

The abuses occur when private equity firms throw up their hands at the mess and start shedding “costs” — often human workers — and sell off parts of the company. These profits go to investors and PE execs, a cycle that’s been criticized as unethical, abusive and a financial crisis on repeat. The number of private equity buyouts has risen sharply in just the last few years, which doesn’t bode well for a whole lot of people. And unionization can only do so much to prevent this damage, given that some research suggests that many unions don’t help at all when it comes to layoffs. 

There are good economic reasons layoffs have to happen, and the metaphor of a controlled forest burn-off is apt; sometimes, internal bloat and massive inefficiency means a company can only survive if it cuts workers. (Let us ignore the irony that it’s management that screws that up in the first place, too.) But the fact of the matter is that in the big picture, layoffs don’t help companies in the long-term. Experts agree there are better methods of managing costs — methods that don’t cause as much psychological damage on all levels of a company. 

Securing severance is obviously an important gain for the worker and wage inequality. But given the long road ahead for the average American who loses their job, we need to figure out a way for prevention, not treatment, to be the policy priority ahead.