A Guide to Employee Termination and Severance Pay in Illinois

As any business owner knows, terminating a team member can be complicated. 

Whether it's because of budget restraints, low performance, behavioral issues, or some other reason, firing an employee is more complex than just giving a pink slip. With local, state, and federal guidelines to adhere to, employers must ensure they are up-to-date on all regulations related to terminating employment – including final pay requirements, layoff protections, and more.

Severance pay can add an extra layer of confusion, especially given its inconsistent application in the U.S. workplace.

As a result, knowing the state and federal requirements for terminating an employee and subsequent severance pay are vital for the success of any employer. An inability to do so could result in unnecessary payouts, wrongful termination lawsuits, and long-term legal ramifications. 

Luckily, our team is here to help. In this article, we will provide a guide to employee termination and severance pay for Illinois-based businesses. 

Terminating Employees in Illinois

Within the United States, businesses must adhere to local, state, and federal guidelines when terminating an individual's employment. In this section, we will explain what Illinois business owners must know when ending a relationship with their employees, whether for individuals or a large group.

Notice of Termination

Like the rest of the country, Illinois is an "employment-at-will" state. As a result, employees and employers may terminate their relationship at any time, without reason or cause. 

As a result, Illinois employers may fire employees at any time without advanced notice. Alternatively, an employee may also quit their position at any time without warning – a two-week notice is not required legally, just customarily. 

Like other states, there are some exceptions to Illinois's at-will employment statutes. While employers may terminate an employee without cause, they still cannot discriminate based upon age, race, sex, color, national origin, religion, citizenship status, handicap, and more. In the case of discrimination, employees can file an Employment Charge of Discrimination through the Illinois Department of Human Rights.

As a best practice, we recommend documenting the termination process for each employee, including the reasons that led to their firing. At a minimum, you provide yourself with added protection from wrongful termination lawsuits by having documentation of the termination. 

Final Payment Requirements for Terminated Employees

The state of Illinois outlines final payment requirements for terminated employees in statute 820 ILCS 115/5, known as the Illinois Wage Payment and Collection Act.

According to the bill, all final compensation must be paid by the employee's next regularly scheduled payday. For example, if an employee is paid a lump sum at the beginning of each month and is fired in the middle of September, they are expected to be compensated for their work by October 1st of that year.

In the case that an employer fails to pay an employee their full final compensation, the employee may file a wage complaint with the Illinois Department of Labor. Complaints must be filed within one year of the final compensation's due date.

Notably, final payment includes accrued wages, as well as auxiliary compensation, like vacation pay, commission, and more. Each of these additional forms of payment has different guidelines that employers must adhere to. In this next section, we will explain the requirements for each payment type, per Illinois state law.

Paid Vacation and Sick Leave

In the United States, paid leave is not guaranteed on a federal level. Because there are no additional state laws, an Illinois-based employer is neither required to offer paid sick leave or paid vacation time to their employees.

That said, final compensation refers to all final wages earned, including the monetary equivalent of any accrued, unused paid vacation time. As a result, if an employer offers PTO, they are required to include all accumulated time in the terminated employee's final paycheck. This includes lumped packages that combine sick leave and vacation pay into one sum.

Employees are not entitled to unpaid sick time, as long as it is independent of their PTO accrual.

Supplemental Compensation

In addition to their earned wages, terminated employees are entitled to their "supplemental" compensation. Supplemental compensation includes bonuses and commissions earned by their termination. For example, a salesman is entitled to receive the commissions they accrued before termination.

The employee's final paycheck must include all earned bonuses and commissions.

Exceptions may apply to employers with specific discretionary bonus policies or stated restrictions. For example, a terminated team member may not be entitled to receive an earned bonus if company policy states that the individual must be employed on the payout date.

The exception is when the employer's bonus policy is discretionary or has restrictions stating, for example, that entitlement to receipt of a bonus requires that the employee be employed on the date that the bonus is paid out.

Health Insurance

Because health insurance is often tied to employment, the Consolidated Omnibus Budget Reconciliation Act (COBRA) was created to protect recently unemployed individuals, regardless of who terminated the relationship.

If a terminated employee participated in a group health plan, then the employee is entitled to COBRA benefits for up to 18 months post-employment, depending on the size of the business. These benefits allow terminated team members to continue their current insurance plan. 

The employer is responsible for providing their terminated workers with sufficient notice of the healthcare option.

Typically, payment for COBRA benefits is the responsibility of the individual, not the employer. Often, rates are significantly higher than during employment, leading many to pursue other options.

Retirement

Because retirement packages are common benefits in U.S. workplaces, you probably expected their inclusion in an employee's final payment.

In Illinois, employees are entitled to any vested retirement benefits they accrued during their employment, although they may not be accessible immediately. The specifics for this requirement are primarily determined by the specifics of the retirement package itself, however.

For example, if a terminated employee participated in a 401(k) retirement savings plan, they must be given the appropriate account information. This includes establishing where the funds are being held, how the employee can roll funds to another tax-qualified account, and if they are permitted to maintain the account with a financial advisor.

The employer is responsible for providing their terminated workers with sufficient notice of the healthcare option.

Typically, payment for COBRA benefits is the responsibility of the individual, not the employer. Often, rates are significantly higher than during employment, leading many to pursue other options.

Layoff Protections

While most terminations will likely happen on an individual basis, there are times when businesses must lay off a significant amount of employees all at once.

Outlined in the federal Work Adjustment and Retraining Notification (WARN), as well as in additional state regulations, employees are entitled to certain layoff protections. Employees may also be entitled to monetary damages if an employer fails to meet these standards.

In this section, we will review the federal and state regulations that offer layoff protections and what Illinois-based employers need to know to stay compliant.

Notices

For layoff and plant closings covered by WARN and Illinois law, employees are entitled to a 60 day notice of termination. 

The notices must provide employees with clear information about the planned layoff, including:

• Estimated start date of layoffs;
• When the employee can expect to receive their termination letter;
• Expectations of temporary/permanent employment;
• Whether or not the employee will have bumping rights.

As a note, union member employees do not need to receive individual notices. Instead, the employer should notify the union's bargaining representatives directly, who will pass the notice to their impacted members.

Covered Businesses

Under federal regulations, employers are covered if they have at least 100 full-time employees, or at least 100 employees who combine for 4,000 or more hours of work per week. According to WARN, full-time employees are defined as those who work 20 hours per week and have been employed for at least six of the last 12 months, ending on the date when they received their layoff notice.

Illinois law is more strict, covering any business enterprise with at least 75 full-time employees, or at least 75 employees that work 4,000 hours a week – not including overtime. The definition of a full-time employee is consistent with WARN.

Applicable Layoffs

Regarding federal law, WARN applies only to plant closings and mass layoffs. Specifically, WARN outlines the following criteria for applicable layoffs:

• The reduction in force at a single site of employment for 500 or more full-time employees; 
• The reduction in force at a single site of employment for 50 to 499 full-time employees, if laid off employees account for at least 33% of the employer's active workforce;
• The shutdown of a single site of employment, or at least one facility within a single site of employment, that causes job loss for 50 or more full-time employees during any 30-day period. 

As a note, "a single site of employment" has a broad definition. A single site can refer to one geographic location of operations, like a building or office suite, but can also refer to a group of buildings that form a campus or industrial park. Physically separate work areas may also be considered a single employment site if they share the same purpose, staff, and equipment.

Illinois law aligns with WARN, but includes relocations on top of mass layoffs and plant closings. Additionally, under Illinois law, a mass layoff is defined as one in which at least 250 employees are terminated. A layoff of 25 or more employees is also applicable, as long as the impacted group accounts for 33% or more of the employer's workforce.

Exceptions

As with all state and federal regulations, exceptions do apply to the layoff protections offered to employees.

WARN does not apply to temporary or seasonal employees, for example, as well as completed temporary projects – as long as the employees knew they were hired for a limited time. Additionally, protections do not apply to job losses caused by strikes or lockouts.

In some cases, employers do not need to provide notice at all, depending on the circumstance.

Illinois law recognizes the same exceptions as WARN, outside of one additional exception: Illinois business owners do not need to provide any notice of job loss in the case of war or natural disaster. 

Severance Payments in Illinois

When terminating employment, offering the affected employee a severance package is not uncommon. 

A severance arrangement is a formal contract outlining termination conditions, typically tied to compensatory pay and benefits. Usually, employers offer severance packages in exchange for the affected employees waiving and release of any potential claims against the employer.

A remarkably effective tool, severance can be used to mitigate stressful transitions, as well as protect the company from high-risk terminations. In this section, we will outline the specific guidelines that Illinois-based employers must adhere to when offering severance payments, as well as its many benefits.

When Are Employers Required to Pay Severance?

As outlined in statute 820 ILCS 115/2, Illinois-based employees are not entitled to severance pay, holiday, or sick leave upon termination, unless stated in a contractual agreement.

This may be surprising to many U.S. employees and employers, as there is a widespread urban myth that companies must provide one week of severance pay for each year an employee worked. Fortunately for Illinois employers, there is no legal standing for this rumor.

Still, there may be conditions where an employer is obligated to pay severance. Below we will review three circumstances that Illinois employers must be aware of and how they may impact severance agreements.

Discretionary Obligations 

For most Illinois-based businesses, severance is a discretionary part of a company's policy. As a result, employers are not typically legally required to provide severance to employees who are terminated or quit.

As with most guidelines, there are a few exceptions. Illinois small business owners are required by law to provide severance pay and other benefits to terminated employees if:

• An employee has a signed contract, oral promise, severance plan, or agreed upon severance policy in place;
• The employer has provided severance pay or benefits to previously terminated employees in similar positions;
• The employer terminates employees as part of a mass layoff, as outlined by the Work Adjustment and Retraining Notification and Illinois state law.

As an important note, employers that inconsistently provide severance pay may create legal liability for their business. As a rule of thumb, it is best to establish a consistent severance policy for related positions, if not company-wide.

Contractual Promises

While employers are not legally obligated to pay severance under discretionary obligations, business owners must adhere to the terms and conditions of a terminated employee's contract. Typically, these provisions are set only for high-paid employees – leadership positions, highly-skilled roles, etc.

For example, if a department head were to have a condition in their contract that provides six months' worth of salary upon separation for any reason, then an employer would be legally obligated to provide the appropriate severance package. An inability to adhere to such terms and conditions could result in a breach of contract, which may result in costly litigation. In a worst-case scenario, offenders may be subject to investigation by the Department of Labor and Employee Benefits Security Administration (EBSA).

As noted before, it is best to establish consistent severance policies across comparable roles.

Severance Provisions in Employee Handbooks

In some cases, a company may have provisions in their employee handbooks that establish guidelines for severance packages, which an employee would be entitled to upon the conclusion of their employment. Like contractual promises, employers must adhere to the conditions outlined in their handbooks.

Traditionally, these provisions established certain guidelines for accruing severance pay, like earning a week of wages for each year with the company. In 2022, however, these provisions are largely outdated, as they place an unnecessary legal obligation on the employer with little benefit. 

To avoid any issue or ambiguity, most companies entirely avoid mentioning severance in their employee handbook.

Forms of Severance

There are many different forms of severance, which companies can use to bolster their offerings – as well as mitigate difficult terminations and avoid large payouts. These payout methods include:

• Wages, usually an established number of weeks or months of salary;
• Extended healthcare insurance, paid by the employer;
• Signing ownership of company equipment (laptops, tablets, etc.) to the employee;
• Transferring of the title of the company car to the employee.

Regardless of the form, all types of severance must have a monetary value that aligns with all contractual obligations and company policies. 

How Employers Benefit From Severance Pay

In the world of business, severance is rarely something paid out of the goodness of one's heart. Instead, employers only provide severance if there is a clear benefit for the company.

An Illinois-based employer may be motivated to provide severance in many cases, including:

• The prevention of the release of any claims against the employer, such as wrongful termination or withholding of pay;
• The establishment of a non-disparagement clause, which requires employees to refrain from speaking negatively about the employer to third parties;
• The avoidance of a disruptive transition, especially in regards to information about the business and its clients;
• The agreement by the employee to not solicit active customers or employees
• The establishment of a non-compete agreement.

In all cases, the offering of severance pay is almost entirely self-serving. 

Termination, Severance Pay, and Payroll Management

Of course, terminating an employee and providing them with severance is only half the battle. After dealing with the human resources side, employers must also ensure their payroll is up-to-date to reflect the personnel changes.

For example, severance is not considered wages by the Illinois Department of Employment Security (IDES) and must be categorized as a gift for past services. Otherwise, severance would block both the employee and employer from filing for unemployment insurance benefits.

Luckily for Illinois-based employers, we eliminate the hassle and worry of managing your payroll.

Combining concierge service with a premium software solution, we streamline the payroll process for businesses large and small. Our services include payroll processing, tax management, general ledger integration, and more – all with the guidance and support of our expert team. With us, managing your payroll has never been easier.

DISCLAIMER: The information provided herein does not constitute the provision of legal advice, tax advice, accounting services or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional legal, tax, accounting, or other professional advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation and for your particular state(s) of operation.