Severance: Everything You Need to Know
Severance is the amount of compensation that an employer pays an employee when the employee is leaving the company.6 min read
Severance is the amount of compensation that an employer pays an employee when the employee is leaving the company. Common reasons for providing severance include downsizing, financial hardship, job elimination, or an agreement made between the employer and employee.
For example, if a company is suffering from financial hardship, it will likely let go of several employees. This is not to be confused with an employee who is being terminated for performance or behavioral issues. The employee handbook should specify the details and steps that are to be taken when the company offers a severance package; however, such terms can be negotiated depending on the employee’s length of time with the company, seniority level, and amount of income. Be mindful that severance is not required as companies who are in significant financial trouble will likely not be able to afford to offer severance to multiple employees.
If an employee is receiving a severance, this will likely forbid the employee from subsequently filing a wrongful termination lawsuit or collecting unemployment insurance thereafter. The severance package will set forth all of the rights and obligations of both the employer and employee, which will include the amount being paid to the employee, including unused vacation and/or sick days, unreimbursed business expenses, and a positive referral for any future potential job opportunities. Such severance rates can vary; there are even some companies that will offer up to a year in severance pay depending on the industry in which the company operates and length of time the individual has worked for the company.
Although not required by law, most employers provide some sort of severance package to certain qualified employees who leave the company. Under the Worker Adjustment and Retraining Notification Act (WARN Act), employees being laid off have some level of protection. If the company has over 100 people that are being laid off, the employer is required to give employees at leas 50 days notice of a company closing or a large business unit closing within the company. If the employer fails to do this, then all employees being laid off are entitled to severance pay.
Severance vs. Paycheck
This difference is rather simple and straightforward. Your last paycheck is the last check you will receive for your position in the company. The severance package, or severance pay, if the amount of compensation you are being awarded due to your length of time with the company; it is a lump sum of money paid to the employee. Sometimes, the lump sum will also include all unused vacation and sick days, reimbursed expenses, and any other amounts the company deems appropriate. However, these amounts may in fact be included in your last paycheck. In addition, an employee may also receive his or her bonus, either in full or a partial bonus, at the discretion of the employer.
Method of Lay-Off
You need not worry that you’ll one day go into work and be laid off. There is generally a lengthy procedure that will take place, making you well aware of what is to come. Employers are required to establish a justifiable business reason for laying off its employees, and that the lay off does not affect a protected class of persons, i.e. religion, age, gender, etc. The severance agreement will typically involve several HR representatives to ensure consistency and fairness throughout the process. To reiterate, the company will take into account many factors, including an employee’s length of time with the company, seniority level, and specific business unit.
What’s Included in the Severance Package
- Vacation and sick pay
- Severance pay terms
- COBRA (benefits) information
- Return of employer property- i.e. work phone, laptop, etc.
- Non-compete clause
- Confidentiality agreement
- Your rights to a bonus
- Stock information agreement
- Business expense repayment
- General release and covenant not to sue
How Much Will an Employee Receive
As previously mentioned, the law doesn’t require employers to offer severance packages. The Fair Labor Standards Act (FLSA) requires that an employer must pay an employee regular wages, i.e. the last paycheck, when an employee leaves the firm. It is important to note that, if the company allows it in its policy, the last paycheck must include unused vacation and/or sick time, bonus money, and any other items that the policy covers. This holds true even if the employee is involuntarily terminated due to behavioral reasons.
Severance pay is taxable as the lump sum is considered income for all intents and purposes. Therefore, the full amount will be taxed before you receive it. Be mindful that this may put you in a higher tax bracket for the taxable year. Depending on the reason for the lay-off, you may also be eligible for unemployment benefits, in which you must disclose the amount you received in your severance package. Depending on the amount of severance pay you receive, this will ultimately affect the amount of unemployment income you receive as well as the length of time you will receive it.
If the employer agrees, the employee can chose to receive his or her severance pay in weekly installments. If this route is taken, however, the unemployment compensation will still be decreased for as long as the severance pay is being awarded.
Any employee being laid off can surely try to negotiate a higher severance package than what is offered in the initial package. By declining the offer, the employer is legally allowed to renege on the offer and provide no severance pay to the employee. However, if the employer wants the employee to sign a release of claims (i.e. covenant not to sue), then the employer should consider offering a higher amount, if they feel comfortable doing so.
There is really no concrete rule in this area as it is solely up to the company how it wishes to handle these matters. It may be easier to negotiate up if only one employee is being laid off; however, if several employees are being laid off, then this would be rather difficult to do. In order to prevent such negotiation requests, the employer should advise any employees being laid off that negotiations are not acceptable, and if they don’t accept the offer upfront, then the employer will not provide severance pay.
If an employer agrees to salary continuation, the employee will remain on the payroll system for a specific length of time receiving ordinary income as if he or she continued working for the company. During this time, the employee’s medical benefits will continue until he or she finds another job. Therefore, all benefits and compensation will continue as if the employee was still employed with the company. If an employer goes this route with one or more of its employees, those employees cannot collect unemployment insurance because they are still continuing to receive compensation from their former employer. Only until such salary ends will an employee be able to apply for unemployment insurance and COBRA benefits if the former employee hasn’t yet found another job.
While most employees may assume they should be awarded additional money for unused vacation or sick days, there are very few states that require this by law. For those states not enforcing this type of law, companies can choose to either pay an employee for any unused paid time off (PTO) or simply not pay up for those unused days. This can be an issue with employees who may be involuntarily terminated for misconduct or other legal-related issues. Therefore, for egregious conduct on the part of the employee, such unused days will likely not be awarded to a terminated employee.
What Happens After Leaving the Company
Most employers want to assist its employees with transitioning into a new position; for those employees being laid off, many companies will provide employee resumes to outplacement companies to help those employees leaving find another job as quickly as possible. However, the same doesn’t hold true for those employees leaving the company due to behavioral or performance issues.
If you need help learning about your rights and responsibilities when receiving severance pay, or if you believe that you are entitled to severance, you can post your legal need on UpCounsel’s marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.