Severance Package: Everything You Need to Know

A severance package includes the pay and benefits that an employee receives when his or her employment contract has ended unexpectedly, generally due to a layoff or job elimination. An example of this includes if a company is expecting to downsize due to a downturn in profits or reorganization, and a number of employees in certain departments are laid off. All employees laid off will be given a severance package, which will consist of a specific amount of money, and certain benefits, i.e. health insurance, bonus pay, 401k benefits, etc.

Keep in mind that this is not the same as someone voluntarily leaving his or her position or getting fired from the position.  

A severance package generally includes a waiver that specifies the employee cannot file a wrongful termination suit against the employer. A severance package will also include any other terms and conditions regarding the employee’s rights and responsibilities.

It is important to note that severance packages are not in fact required under the law; however, almost all employers today provide severance pay and severance packages to those employees who are let go from their position involuntary for any of the aforementioned reasons. Again, as previously mentioned, this is not to be confused with termination. If an employee is terminated for any reason, i.e. performance issues, inappropriate behavior at work, etc., he or she cannot and will not receive a severance package.

While no specific laws set forth the rules and obligations of an employer when laying off an employee, the Worker Adjustment and Training Notification Act (WARN Act) provides employees with a certain level of protection. Particularly, under the WARN Act, if an employer is laying off more than 100 people, then it must provide at least 50 days notice to the employees who will be laid off. If the company fails to do so, then all employees who will be laid off are entitled to severance pay.

Severance Packages: What You Should Know

Your last paycheck is not the same as your severance pay. This is a simple fact. While your last paycheck is the last paycheck you will receive due to the work you’ve completed, it is not the final and last check that you will receive from your employer. That is because the severance package includes severance pay. The severance pay itself can include anything from unused vacation days, sick days, bonus pay, additional compensation for a period of several months, and other compensation paid to the employee for the sudden loss of a job.

Can you suddenly walk into work and be “laid off” that same day? No. If this happens, then you not only have the right to severance pay and a severance package, but you likely have legal recourse. When it comes to being laid off, there is usually a long process that takes place before you will be laid off. Most often, you’ll know well beforehand if you or others in your department are at risk of being laid off.

Other terminology that is generally set forth in a severance package include the following:

  • COBRA benefits will usually continue for up to 2 years after your employment contract has ended.
  • Information regarding unused sick days and vacation days as you will usually receive additional pay for these unused days.
  • Returning employer-owned property, i.e. work phone, laptop, company car, etc.
  • Non-compete clause agreement
  • Confidentiality agreement
  • Other important items that the employer deems important, particularly agreements providing that you will not sue your employer for wrongful termination.

It is important to remember that, if you are let go from your position due to the fact that your employer is reducing the overall number of employees, then you can apply for unemployment benefits.

Frequently Asked Questions

1. What is an employer required to pay?

While there are no laws requiring employers to offer severance packages, the Fair Labor Standards Act (FLSA) requires employers to pay their employees the standard wages, which simply includes the last paycheck. Sometimes, the last paycheck will include unused vacation or sick days, particularly if the employer doesn’t provide a severance package to the employee.

2. Will I be taxed on the amount I receive in my severance package?

Yes, severance pay will be taxed at the lump sum that you receive, which may in fact put you in a higher tax bracket for that taxable year.

3. Will I be eligible for unemployment benefits?

Maybe. It really depends on the reason for being laid off. Regardless, even if you are eligible to receive unemployment benefits, this amount will be calculated based on the level of severance pay you received.

4. Can I receive my severance pay in installments?

This also depends on the agreement entered into between you and the employer. If the employer agrees with this type of arrangement, then the employee can receive such pay in weekly installments.

5. Can someone negotiate higher severance pay?

Yes, any employee being laid off can negotiate a higher severance pay, or at least try to negotiate for higher pay. However, this is not an automatic as most employers offer the severance package and expect the employee to take it. In fact, if an employee turns down the severance package and requests for higher pay, an employer could renege on the offer and provide no pay whatsoever. Surprisingly, this decision is legally allowed. However, if an employer wants the employee to sign a covenant not to sue, then the employer should consider negotiating a higher amount. But if the employer is laying off several people, this type of negotiation may be tough for the employer, so it is best for employers in this situation to be mindful of any issues that could arise beforehand so that they are prepared to deal with it appropriately and timely.

6. Will my salary continue?

Again, this depends. Generally, an employer offering a severance package will continue paying a salary to the employee for a specified period of time; however, this is not guaranteed. But if the employee does receive a continuation of salary, then he or she will, for all intents and purposes, still be viewed as an employee of the company. This is because the employee will need to remain in the system in order to continue being paid. In addition, the employee will continue receiving medical benefits. Since the employee is continuing to receive a salary, he or she cannot apply for unemployment benefits. Only until the salary ends can the employee apply for such benefits as well as COBRA benefits, unless health benefits continue to be paid by the employer afterward.

7. What about my unused vacation and sick days? Is there a chance that I may not receive pay for those unused days?

While there is a chance you may not be paid for those days, most employers understand that you technically earned those days, and are more than willing to pay you for those earned days. Just know that the law does not require it. However, if you do receive this pay, you may receive it in your last paycheck or in your severance package.

If you need help establishing a proper severance package policy for your company, or if you believe that you should have been provided with a severance package, 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, Stripe, and Twilio.