What Is Severance Pay?

Severance pay is compensation that you receive when you are released from employment. There are many reasons a person might receive severance pay. Some common ones include:

  • Company-wide layoffs

  • Your job is eliminated.

  • You and your employer agree it's best for you to leave the company.

  • Mergers

You almost never receive severance pay if you are fired for poor job performance. Packages are determined by your contract. Generally, you receive one to two weeks of pay for every year you were employed. Top-level employees may receive a month's pay for every year with their company.

Severance pay amounts depend on several factors, including:

  • Company status

  • Length of employment

  • Your contract

  • Past payment packages

Regular employees may receive hundreds to thousands of dollars. Executives sometimes receive millions. Most severance packages also include benefits like health insurance and possibly help with finding a new job.

A business usually provides severance on a case by case basis. When a New Mexico superintendent agreed to resign from the Las Cruces school system, he was given a $140,000 severance package after the Third Judicial Court ensured it met state rules. Because he still had one year left on his employment contract, this severance could be viewed as annual compensation.

Sometimes companies damage their public image and their relationship with employees by not offering severance. In 2016, the Four Seasons closed and only provided $500,000 to cover all of its released employees. This meant some staff members received severance pay as low as $600.

If an employee receives severance pay in a lump sum, it can help them receive their full unemployment compensation. The week the lump sum is received, unemployment payments are reduced for that one week and then return to normal. Weekly severance can limit unemployment.

Packages outline the following areas:

  • Pay Terms: The money you receive

  • Vacation Pay: Money for unused vacation or sick time

  • COBRA Benefits: Continued health benefits

  • Company Property: Allows workers to keep some company property

  • Non-Compete Clauses: Prevents workers from working for a competitor

  • Confidentiality: Allows workers to be sued if they tell company secrets

  • Release Claims: Protects employers from being sued

Some packages include letters of recommendation to help workers find a new job.

Employer Requirements

When a worker is separated from employment, the employer is required to offer them COBRA. These regulations help employees keep their health insurance after losing a job. It is possible, however, for an employer to require the former employee to cover the full cost of the insurance premium to keep the coverage.

Employers are not required by law to offer severance pay. The Fair Labor Standards Act (FLSA) only requires you to get paid through your last day worked. You may also be paid for accumulated time. This includes sick days and vacation time. Some employers offer severance pay, but some won't.

Employers protect themselves in several ways, including:

  • Avoiding Negotiation: Some employees try to negotiate the severance package. This means refusing the first package. After such a refusal, an employer is not legally required to make a second offer.

  • Release of Claims: Many employers require employees receiving severance pay to sign a release form. This means that the employee cannot file a lawsuit. If an employee is over 40, they sign a second form related to age discrimination lawsuits. Certain states like Michigan give employees 21 days to decide if they want to sign the release and accept the severance.

An employer is sometimes required to provide severance. These circumstances include:

Some employers only offer severance to certain workers. This is legal. However, severance must be consistent, and employers must be clear about who receives severance.

Employers can benefit from offering severance. This is especially true if it's not legally required. Offering packages to loyal employees improves morale. This makes for a more productive workplace. It also makes workers more committed to the company.

Worker Information

Workers are not entitled to severance pay. However, they do have some protections. The Worker Adjustment and Training Notification (WARN) Act provides some severance rules. Companies with more than 100 workers must give a 60-day notice if they are planning massive layoffs. If no notice is given, severance pay is required. Individual employee notification is not required.

Some employees try to negotiate severance pay. This can sometimes be successful. For example, you can try to negotiate for benefits. However, employees have no bargaining power. This makes negotiations difficult.

Severance pay is usually given in a lump sum. It can be paid weekly or monthly, depending on your package. All severance pay is taxable. Your taxation amount depends on the total amount of your severance package. It is possible to defer payments to lower your tax burden. This is especially useful with a large lump sum.

Salary Continuance

Some employers offer to keep paying an employee's regular salary. This is called continuation. You receive your pay as if you were still working. You may also still receive benefits. Your salary ends when you get a new job. You can't receive unemployment during this period.

The benefit is that this is a steady source of income. The company's payroll department usually sends out these checks. This can sometimes result in late or even missed payments. Employees should keep track of their payments.

Vacation and sick days are a complicated issue. If you get a severance package, you may receive payment for this accumulated time. With no package, you may lose out on these days. There are not many states that allow workers to cash in sick and vacation days. Also, if you've been fired for misconduct, you will not be able to cash in these days.

Things to Know About Severance Pay

There are many things to keep in mind about severance pay, including:

  • Outplacement: The package usually includes outplacement services to help you find a new job. Outplacement can include interview prep, networking, and resume services.

  • Older Workers: Older workers have more protection because of the Age Discrimination Employment Act (ADEA). Workers over 40 can consider payment packages and release forms. They can also revoke a signed release within seven days.

  • Non-Compete: Some companies want a worker to sign a non-compete clause. This limits where you can work after layoffs. Carefully read these forms before signing.

  • Unemployment: You are still eligible for unemployment with severance. However, this depends on the rules of your state.

  • Money Concerns: Packages include more than just pay. They can also include stocks, pension rights, and profit-sharing.

Getting the Best Package

There are several ways for workers to get the best possible package.

  • Hire a Lawyer: It's always a good idea to hire a lawyer. A lawyer can examine your package and tell you if it is fair. If not, they can advise you on other steps to take.

  • Collect Evidence: You need to collect evidence when you are let go. This can include company handbooks and your employment record. This allows you to prove you deserve a package.

  • Negotiations: You should decide who negotiates your package. It's possible to do this yourself if you have a good relationship with your employer. Letting your lawyer negotiate is a better idea. Negotiating is easier than filing a lawsuit.

  • Request More Pay: You can't increase your payment if you don't ask. See if your employer increases your pay amount. It's also a good idea to negotiate how you are paid. Weekly payments are better than a lump sum.

  • Don't Ignore Benefits: Insurance is as important as pay. Don't accept a package without insurance benefits. You are entitled to COBRA, but you can ask for full benefits. You may be able to convert your health plan to an individual policy.

  • Request Other Benefits: There are certain benefits you should ask to keep. These can include stock options and deferred compensation. You should also ask that your company continue matching your 401(k) payments.

Severance Pay FAQ

  • Am I Entitled to Severance?

Unfortunately, no. Employers are not required to give you a severance package. There are some exceptions, including company policies and contract terms.

  • How Will My Package Be Calculated?

Packages are calculated in many ways. A figure based on the number of years you have worked for the company is one formula. Another is your job within the company. The size of the business can also affect your package. Your employee contract may outline the terms of your separation.

  • Is Severance Only Money?

No. Your package can include many items, like medical benefits. You may also receive job placement help. Some packages allow you to keep an interest in the company. Closely examine any severance package offer you receive.

  • Do I Need an Attorney?

Yes. You should hire an attorney. A lawyer can examine your package terms. They can tell you if you should negotiate. Your lawyer can also help you if you want to file a lawsuit. Always consult a lawyer before signing any agreement.

Find an Attorney

Severance pay is a complicated issue. Get legal advice about your severance package by finding a lawyer on UpCounsel. Using UpCounsel is the easy way to find a high-quality lawyer at an attractive price. Our attorneys can help you with your severance pay questions and other legal needs. Post your job on UpCounsel today and find a great attorney.