It’s never easy to lose your job, even if it’s through no fault of your own. But it sometimes happens, and severance pay is something you should understand. In fact, your initial job offer and salary negotiation should include the terms of your severance package.
What is severance pay?
Severance pay is money paid by an employer to an employee, upon termination of employment. Typically, you would receive severance pay if you’re being laid off because of downsizing or other restructuring that eliminates your job. You will almost never get severance pay if you quit.
Am I guaranteed severance pay?
According to the U.S. Department of Labor, the terms of any severance package are a matter of agreement between the employer and employee. Severance pay is not a requirement under the Fair Labor Standards Act.
There is one situation, however, where federal law comes into play. The Worker Adjustment and Retraining Notification Act (WARN) requires employers with 100 or more employees to provide 60 days notice of a plant closing and mass layoffs affecting at least 50 workers. If notice is not given, you are entitled to 60 days pay. Always check with your state’s labor offices to make sure the laws in your area are complied with.
If your employer has agreed, verbally or in writing, that a severance package or severance pay will be provided upon termination, that promise is legally binding. In fact, the FindLaw team says just the company’s history of giving severance packages may be enough to legally require them to provide you with the same.
Business compliance firm BLR notes that severance pay isn’t only for those workers who have lost their jobs due to layoffs, factory closings, or corporate takeovers. It can also be used to induce employees to retire early or resign voluntarily.
How much severance pay can I expect?
Usually, the amount of severance pay provided to non-union employees is two weeks of pay for each year of employment. For workers paid by the hour and represented by unions, severance pay is typically one week of pay for each year of employment. Both cap at 26 weeks. However, if a company has a severance policy in place, those figures could change dramatically.
For example, there may be groups of employees, such as those paid by the hour, who do not receive severance pay at all, plus conditions under which no employee receives severance, such as when they are fired for cause. It is also possible that higher-level executives would receive up to one month’s salary for each year worked plus benefits.
A severance payment must include accrued vacation and may include health and/or life insurance too, as well as annual bonuses, retirement accounts, and stock options, according to Investopedia.
Severance payments are usually given in a one-time lump sum instead of in weekly or bi-weekly payments. The reason for this is to remove you from appearing to have an employee status with the company, which could negatively impact unemployment benefits. A lump sum payment allows you to apply for unemployment compensation immediately after termination.
Remember that you can negotiate the terms of your severance package. “For example, maybe your manager persuaded you to turn down a job at a different company earlier this year, and you can argue that your severance should be increased because your loyalty to the company is leaving you unemployed now,” writes workplace advice columnist and consultant Alison Green.
Green says to look beyond the payout amount. “You can negotiate to be paid for unused vacation and sick days, having the company cover your health-insurance premiums for longer, or even keeping your company laptop,” she advises.
Yes, severance pay is taxable
Like any other income received, severance pay is taxable. That includes pay you receive for unused vacation days. If you are receiving a large severance package, you can find ways to minimize the taxes you have to pay, says business writer Steven Melendez. Spreading the lump sum over several years or contributing much of it into a tax-sheltered retirement or health savings account can keep you from moving into a higher tax bracket and lessen the impact of a tax payout.
You’ll likely have to sign documents when terminated and before receiving severance. One such document is a general release of any future claims. Another is one confirming that you resigned voluntarily from your position at the company. If you sign the latter, be forewarned that this statement prohibits you from claiming unemployment insurance.