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What is a severance package?

In short, a severance package is an agreement between an employee and their employer which may offer a combination of cash and benefits upon the employee leaving the firm. It is common for a Severance Agreement to require an employee to give up any legal claims they could pursue. They are sometimes negotiated prior to someone being hired and may be part of a collective bargaining agreement should one exist. Some companies offer a severance package to employees who are nearing retirement age, while others may plan a severance package in the event they are planning to close an office or cut the size of their workforce.

Who is eligible for severance pay?

Generally speaking, the company policy decides who is eligible to receive severance pay, and often it is tied to a specific length of service. Whatever the policy, it is important to ensure it is applied fairly and consistently to avoid discrimination claims.

While severance pay is not standard, employees who are terminated by an employer with more than 100 people as part of a reduction in force (RIF) may require payment of severance unless the employer provides 60 days' notice of a layoff, in accordance with the Worker Adjustment and Training Notification (WARN) Act. There are some states that have similar laws, so medium to large size employers may want to be aware of those requirements.

Employers who are closing their business or temporarily laying off workers may want to consider speaking with an employment lawyer who is familiar with both federal and state WARN Acts.

How much is severance pay?

The amount of severance pay varies depending on the agreement reached between the employer and employee. In general, upper-level management personnel are more likely to get a more generous severance package. Typically, one can expect to receive the equivalent of one- or two-weeks full pay for every year of service. In addition, employees may also be entitled to a period of extended insurance benefits and outsourcing services to help them find a new job.

Employers may also include other benefits in their severance packages, such as an agreement to not contest a claim for unemployment benefits and payment for any unused sick and vacation days which were accrued (if not otherwise required to be paid by state regulations).

How is a severance package amount determined?

The severance package amount is nearly always determined by tenure and the wage or salary of the employee at the time of their separation. Employers generally standardize their policy for determining severance pay so employees feel that it is fair. On occasion, however, some employees may receive more severance pay depending on factors specific to their role or employment. For example, an employee who moved from out of state to accept the position may receive more severance due to the relocation.

How is severance pay taxed?

Severance pay is taxed like any other payment the employee receives. That means employers withhold federal, state, and local taxes just like they would for an employee’s regular pay.  Even if an employer pays severance in a lump sum, taxes must still be withheld.

How long does it take to get severance pay?

This depends on the agreement between the employer and the employee. In some cases, employers pay out all severance pay in one lump sum. Other employers pay out in incremental payments (weekly, biweekly, or monthly) until the employer has fulfilled the terms of the agreement. Severance pay typically is paid on the same schedule as regular paychecks are paid for a company’s payroll.

How do you negotiate severance pay?

Employees can usually negotiate a severance package at the time of hire, or, in some cases, at the time their job is being cut. Typically, it is a good idea for an employer to have a firm severance pay policy in place that covers all employees. When an employee is offered severance that is not part of a layoff, employers may be more inclined to negotiate if there are potential legal claims that the employee can file.

If you do not currently have a severance pay policy in place, you might consider adding one to your current Employee Handbook.

Is severance pay required by law?

There is no requirement under existing labor laws for an employer to offer a severance package. The only exception to this would be if the employer was not in compliance with state or federal WARN Act statutes. Of course, employers that contractually agree to a severance package are bound by those terms. 

How long do I have to sign a Severance Agreement?

Some employers may require that Severance Agreements be signed in a fairly short period of time. In some states, there are specific laws that outline the minimum amount of time an employee will have to sign a severance. For example, in California, state law requires employers provide at least 5 days to workers under the age of 40, and 21 days to workers who are over 40.

As an employee, am I giving up rights by signing a Severance Agreement?

In most cases, employers require employees to give up certain legal claims in exchange for the severance pay. Employees may want to have their Severance Agreement reviewed by a lawyer if they are uncertain about the terms of the agreement and how it will impact them. 

Need more help?

Employers can draft all of their human resources documents, including employment agreements and policy manuals, easily online using Rocket Lawyer. If you have more questions about severance or any other employment-related issue, reach out to a Rocket Lawyer network attorney for affordable legal advice.

This article contains general legal information and does not contain legal advice. Rocket Lawyer is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.

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