BETA
This is a BETA experience. You may opt-out by clicking here

More From Forbes

Edit Story

New Jersey Is The First State To Offer Guaranteed Severance Packages To Downsized Workers

Following
This article is more than 4 years old.

New Jersey is the first state to adopt a law requiring companies that conduct mass layoffs to offer guaranteed employee severance packages.

Democratic governor and former Goldman Sachs investment banker Phil Murphy signed a bill Tuesday, sponsored by state senator Joe Cryan, that calls for corporations with over 100 full-time workers to provide one week of severance pay for each year of service. This applies to the layoffs of 50 or more people. Companies must also offer 90-day notice to their employees that there may be a mass downsizing. There will be penalties levied on corporations if they don’t comply, adding an extra four-week payout to the worker’s package. 

The impetus for this new law is, in part, due to the closing of several major New Jersey-based companies, particularly Toys“R”Us. This company was a remarkable success story. Based in Wayne, New Jersey, Toys“R”Us started in 1948 and revolutionized the way toys were sold and helped introduce the big-box retailing concept. For those readers of a certain vintage, you will fondly recall visits to the store as a child and its fun commercials featuring Geoffrey the Giraffe and the “I don’t want to grow up, I’m a Toys‘R’us kid” jingle.

The company was taken over by private equity firms, loaded up with debt and subsequently went bankrupt. Private equity, loosely defined, refers to a company that raises money from institutions, endowments, insurance companies, pension funds and wealthy people. The funds are then used to acquire companies. The PE firms will then install new management, ruthlessly cut costs—which usually involves large-scale downsizing of employees—and take measures to turn around the fortunes of the acquired company. When the company’s fortunes improve, the PE firm sells it for a substantial profit. Executives at top PE firms are multimillionaires and billionaires. It's a lucrative big business and it’s only growing larger.

Critics point out that PE executives oftentimes benefit while the workers suffer. There are many instances where a deal does not work out and the company is forced into bankruptcy. When this happens, the executives keep the millions they already siphoned off from the company and still pay themselves handsome bonuses. Meanwhile, the workers are left without a job, benefits or severance packages.

To be fair, as it relates to Toys“R”Us, the swift ascendancy of tough competitors, such as  Amazon, brick-and-mortar and online powerhouse Walmart, that also sell discounted toys exacerbated the financial challenges of the company’s business model.

Cryan wrote on Facebook, "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." This piece of legislation was due—in large part—to this happening at Toys“R”Us.  

Over 30,000 workers, many of whom were loyal long-time employees, were unceremoniously fired. The former employees were only able to obtain some severance after a lengthy battle. Millions of dollars were paid out to executives to keep them motivated.   

While the motive to help workers seems well-intentioned, there may be serious unintended consequences. New Jersey is known for its very high taxes, crumbling infrastructure, crowded highways, cold and snowy winters and expensive homes. In light of the new progressive governor and concerns over new anti-corporate laws and regulations, businesses may think twice before relocating their offices or headquarters to New Jersey. Some businesses may opt to leave the state. New Jersey is already the state with the highest rate of people leaving, especially to warmer climates with less taxes.

There is another interesting thing to note. According to the New Jersey Department of Labor, if a person receives a severance paid over a certain period of time, they can’t file for unemployment until the severance stops. This may be self-serving on the part of the state. It can shift the financial burden of a person’s downsizing from New Jersey to the company and save a good deal of money. 

Follow me on Twitter or LinkedInCheck out my website or some of my other work here