What is Severance Pay?

Severance pay is compensation paid to an employee when employment is terminated by an employer. It could be a lump sum or paid over a period of weeks, and it is typically calculated based on the length of employment with an organization.

Who is Eligible for Severance Pay

First things first: your employer likely is not required to offer you a severance package. The Fair Labor Standards Act (FLSA) mandates only that the company pay your usual wages through your last day.

Collective Bargaining Agreements & Employment Contracts

However, there are exceptions. If you were hired under an employment contract—for example, a collective bargaining agreement negotiated by a union—the terms of your contract may require severance.

Mass Layoffs

Alternately, if your employment was terminated as part of a mass layoff, you may be covered under the Worker Adjustment and Retraining Notification (WARN) Act. This legislation requires employers with 100 or more employees to give workers 60 days’ notice before a plant closing or mass layoff. If a covered company does not give the required notice, it must pay employees up to 60 days’ wages as severance.

State Laws

Some states have legislation that requires employers to offer severance pay for terminations due to a facility closing or mass layoffs.

Company Policies

In addition, many employers choose to provide a severance package to ensure a smooth transition—for them, as well as for you. (More on this in a minute.) If you’re in this position, you probably want to know if your severance package is reasonable, and if you can negotiate a better deal. 

How Much Severance Will You Get?

In general, severance pay is based on length of employment. For example, it could be a week’s pay for every year of service or any other amount determined by the employer. When provided, it is given as either a lump sum or paid over a number of weeks. A severance package may also include health insurance coverage for a certain period and continuation of other employee benefits coverage.

Why Some Companies Offer Severance

Losing a job is often unexpected for employees, and a severance package offers some breathing room by providing a paycheck, and potentially, other benefits. However, employers do not offer severance packages merely to be nice. In order to receive the severance package, employees will often need to sign paperwork saying they will not speak negatively about the company. They may also need to agree not to pursue legal action or seek work with a competitor. Workers aged 40 or older may also be asked to sign a release of claims under the Age Discrimination in Employment Act (ADEA).

Company Severance Policies

When a company has a formal severance pay policy, it will often include: Purpose. The company will establish the purpose of the severance plan, which is generally to provide assistance to employees while they seek other employment. Conditions for paying severance. A severance policy will also lay out under what circumstances an employee will be paid severance (e.g., involuntary termination, layoffs, etc.) and circumstances under which severance will not be paid (e.g., involuntary termination for cause, etc.). Groups covered by the policy. Sometimes the company will limit the policy to certain classes of workers. For instance, salaried workers may receive severance, but hourly employees will not. How severance pay is calculated. The employer sets the policy regarding employees receiving a week’s salary for each year they were employed, or if another calculation ​will be used. The policy will also set guidelines for pay for such things as unused vacation time, sick days, personal days, etc. How severance is paid. Employers can pay severance in a lump sum, or via regular pay periods for the specified duration. The payment method may affect the payout of unemployment benefits, depending on your state. Documents to sign. A company may require employees to sign documents, such as a legal release, Hold Harmless Agreement, etc., before releasing severance pay. Employer’s rights to modify an agreement. A company’s severance policy will likely offer some protection for the employer, giving them the exclusive right to amend or terminate the severance policy. Also, the severance policy may stipulate that in the event that the company is sold, acquired, merges, etc. severance will not be paid unless an employee is involuntarily terminated.

Can You Negotiate Severance Pay?

If the involuntary termination is part of a group reduction in force, you will not have much power at the negotiating table, because it could be construed as discriminatory. However, it’s worth trying. You might be to negotiate payment for your unused PTO, for example, or for the company to cover contributions to your health insurance premiums. Bottom line: you won’t know until you ask. The information contained in this article is not legal advice and is not a substitute for such advice. State and federal laws change frequently, and the information in this article may not reflect your own state’s laws or the most recent changes to the law.