What Is Severance Pay?
Severance pay is compensation that an employer offers to an employee discharged from employment in the form of a severance package. The terms and conditions of severance pay typically accompany an involuntary layoff of the employee for various reasons.
Regardless of the reason, severance pay is generally offered during a termination meeting between you and your manager or the human resources department. Your employer may also require you to sign a severance agreement to receive compensation. Speak with employment lawyers if you are asked to sign one since it is an employment contract that carries specific legal implications.
How Does Severance Pay Work?
Employers typically offer severance payments to employees under specific situations and circumstances, typically open the employee involuntarily resigning or being laid off. Most employers have policies in employee handbooks that describe their particular methodology of handling severance pay.
Here is how severance pay works in most organizations:
- The employer informs the employee of an upcoming layoff
- The employer sets a meeting with the employee to establish the steps
- The employer offers severance pay that is conditional upon signing a severance agreement
- The employee accepts the severance package or renegotiates it
- The employee and employer sign the severance agreement upon reaching an agreement
Upon signing and dating the severance agreement, employees will get a severance package that comes in the form of a single lump-sum payment or recurring payments over a specific period. Severance pay can also entail a continuation of benefits as a condition of the release.
Who Is Entitled to Severance Pay?
Few laws outline who is entitled to severance pay. The Worker Adjustment and Retraining Notification (WARN) Act provides severance pay if the employer has more than 100 employees, plans to lay off many staff members, and fails to give more than sixty (60) days’ notice before the layoffs.
Aside from the WARN Act, there are no stipulations regarding severance packages. Instead, the law focuses on severance agreements. Depending upon the types of employment contracts in place, there may or may not be a provision for severance pay. Work with an attorney to help you review the law as it applies to your specific situation.
Amount of Severance Pay
Severance pay can come in numerous forms depending on the employer’s policies and any severance agreement, including a lump sum payment and periodic payments. There are no mandates that describe how much severance pay must be offered since it is a benefit of employment contracts that only specific companies provide.
Calculating Severance Pay
Typically, the amount of severance pay you receive is based on a calculation of your wages and the amount of time you have worked for your employer. A company can offer two weeks’ pay for every year of company service. While this is the most common standard of severance pay, it is critical to remember no set amount.
Average Severance Pay
Every severance agreement is unique to the employment contract during at-will employment. How much you can anticipate receiving or paying depends upon company severance policies. If there is no severance policy or agreement in place, you may have the chance to negotiate with a licensed attorney in your state, such as California employment lawyers for contracts governed in California.
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Benefits of Severance Pay
While severance pay is generally a courtesy for employees, companies will also find several goodwill benefits of severance. Offering compensation upon involuntary layoffs displaces undue financial hardship for workers with the chance of them returning to your organization on a positive note if business returns as usual.
Protection from Potential Lawsuits
Severance pay is a way for employers to also protect against potential litigation and lawsuits. Since employees can sue an organization, it is generally a strategic approach to ensuring that severance pay is offered to prevent this possibility. Employers can further strengthen their positions by asking employees to sign a severance agreement and release all claims.
Flexible Terms and Conditions
Employers can offer severance pay as a lump sum or over several payments to the employee. These terms and conditions allow employers to offer to pay for former employees flexibly. You can also improve the package being offered by including benefits and unused vacation time pay.
Keeping Professional Relationships Intact
Not only does severance pay help employees bridge the gap, but it also helps retain professional relationships. Things can change quickly and at a moment’s notice, which means that an employer could end up calling laid-off employees back to work. By offering a generous severance package, they may be able to recuperate trained talent when business resumes as usual.
Can You Negotiate Severance Pay?
You can negotiate severance pay, even if the employer already has policies in place. However, the more specific the severance agreement is, the more challenging it is to negotiate since the employee agreed to the terms and conditions when signing. If the company does not have a written policy, it is all the more possible to renegotiate the amount of money and benefits you receive.
Consider the following steps when you negotiate severance pay:
- Preserve evidence, including pay stubs, taxes, and employee awards that speak to the length of your employment and amount of money you made
- Review the severance agreement with employment lawyers to help you understand if renegotiation or negotiation is possible
- Point out areas in your employment contracts where an increase of benefits can be requested, including pay for unused personal time off (PTO)
- Ask your human resources representative or department manager if they can increase the package
- If you have a noncompete agreement in place, use it as leverage to the get the amount of compensation increased
- For companies that are unwilling to provide more money, ask if you can receive a benefits extension, such as healthcare insurance
- If the employer denies your request, accept their response unless you believe that your rights and freedoms have been violated
- If you do negotiate a higher severance package, ensure that you get the new agreement in writing as soon as reasonably possible
Severance laws and pay vary from state-to-state. Look out for your legal rights and obligations, whether you are an employer or an employee. Always get clarification from employment lawyers when it comes to severance pay, packages, and agreements.
Is Severance Pay Taxable?
Severance pay is legally taxable income. Generally, both companies and workers alike pay a specific percentage on social security and Medicare taxes on employee salaries. These types of taxes are levied under the Federal Insurance Contributions Act (FICA). As such, planning for severance pay taxes is essential for financial management.
However, severance packages are made after you have ceased working for the company. As such, some workers believe that the law does not require them to pay FICA when, in fact, it does.
When employees understand that severance pay is a taxable instrument, they can better plan when receiving payments. In numerous situations, employees might negotiate a severance package that includes the value of the tax bill, thereby effectively increasing the amount of money received.
The complexities surrounding severance pay leave employees and employers alike with questions about their specific situations. If you are an employer or employee that needs help with severance pay and severance agreements, post your project to ContractsCounsel and start receiving proposals as soon as today.
