Work and Employment
Severance Pay: The Complete Guide for Employees
In this comprehensive guide, we explain what is severance pay, how much is severance pay, how does severance pay work, what states require severance pay, and more.
By:
Chelsea Spinos
Reviewer:
Timothy Lenahan, Esq.
11 min read • Jul 17, 2024
Key takeaways
Severance pay is compensation provided by an employer when an employee leaves the organization, typically during layoffs, downsizing, or mergers.
A typical severance package may include monetary compensation, benefits continuation, payment for unused vacation time, information on retirement benefits, and potentially other forms of support like outplacement services.
Severance pay is often calculated based on length of service, commonly offering one or two weeks of pay for each year worked. Other factors like the employee's role and company policy can also influence the amount.
In the U.S., federal law doesn't require employers to provide severance pay, but some states have laws mandating it under certain circumstances like mass layoffs or plant closures.
Employees often have the opportunity to negotiate their severance package — consult an employment lawyer who may be able to help get you more favorable terms.
After years of dedication and hard work, you suddenly find yourself facing the end of your employment. Whether it's due to company restructuring, a merger, or unexpected circumstances, the prospect of leaving your job can be both daunting and overwhelming. In this moment of uncertainty, one phrase often comes to mind: severance pay.
But what exactly is severance pay? How does it work, and more importantly, what does it mean for you and your financial future? Whether you're currently employed and want to be prepared, or you're facing imminent job loss, understanding severance pay is crucial for navigating your career transitions with confidence.
In this comprehensive guide, we'll demystify severance pay, breaking down everything from what it is to how it’s calculated. So, let's dive into everything you need to know about severance pay as an employee.
Severance pay is the compensation you receive from your employer when you leave the organization. Severance pay is designed to help ease your financial transition, providing you with support and stability as you move forward in your career.
Typically, severance pay is given during company restructuring, such as layoffs, downsizing, or mergers, where you aren’t at fault for your termination. However, you might also receive severance pay if you resign or are dismissed, depending on your company's policies.
While severance pay is common, it's not mandatory everywhere. For instance, in the U.S., federal law does not require employers to provide severance pay. The Fair Labor Standards Act (FLSA) allows employers to set their own terms regarding severance.
Monetary Compensation
Benefits Continuation
Unused Vacation or Paid Time Off (PTO)
Retirement Benefits
Stock Options or Equity
Non-Compete and Confidentiality Agreements
Other Support
This is the core component of severance pay, often calculated based on your length of service.
For example, you might receive one or two weeks of pay for each year you’ve worked at the company.
Many packages extend your health insurance and other benefits for a certain period. This is often through COBRA in the U.S., which allows you to keep your employer-provided health insurance temporarily
You may be paid for any unused vacation days or PTO you’ve accrued.
Information on how your departure affects your retirement plan, such as 401(k) or pension plans, and whether you can retain any employer contributions.
If you have stock options or equity in the company, the severance package should outline what happens to those assets.
Your severance package may include agreements that restrict your ability to work for competitors or disclose company information for a specified period.
Additional forms of support, such as training programs, educational assistance, or even financial planning services.
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Scenario
Lump sum payment
Installments
On the employee’s last day of work
After signing the severance agreement
Specific dates agreed upon
When is severance pay due?
Many employers opt to provide severance pay as a one-time lump sum payment. In this case, the payment is usually made within a few weeks after your last day of work.
Some employers choose to spread the severance pay over a period of time, similar to how regular paychecks are distributed. This can be on a bi-weekly, monthly, or another regular schedule. This method can extend the financial support over a longer period.
In some cases, the severance pay might be included in your final paycheck, which is given on the last day or shortly thereafter.
Often, the severance payment is contingent upon the employee signing a severance agreement. Once the agreement is signed and any required waiting period (sometimes referred to as a "revocation period") has passed, the payment will be made.
The severance agreement might specify exact dates or conditions for payment. For instance, the agreement could outline that the payment will be made 30 days after the termination date.
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Reach out to get an evaluation the strength of your case.
Emily has been working as a project manager at a manufacturing company for 15 years. Due to economic challenges, the company decides to downsize and Emily’s position is eliminated.
The company offers Emily a comprehensive severance package that includes:
Monetary Pay: Emily's annual salary is $90,000. The company's severance policy offers one month of salary for each year of service. Therefore, Emily receives a severance payment of $112,500 ($90,000 / 12 months = $7,500 per month x 15 years).
Benefits Continuation: The severance package includes continuation of Emily's health insurance coverage for herself and her dependents for a period of 12 months following her termination date. This ensures that Emily and her family maintain their healthcare coverage during the transition period.
Outplacement Services: The company provides Emily with outplacement services, including career counseling, resume assistance, and job search workshops. This support is designed to help Emily find new employment quickly and smoothly.
Retirement Plan: Emily's severance package outlines how her retirement benefits will be handled. She is informed that she will retain all vested contributions to her 401(k) plan and will receive information on rollover options and accessing her retirement funds.
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Jason has been a senior software engineer at a tech startup for 8 years. The startup recently merged with a larger tech corporation, and during the integration process, Jason's role is identified as redundant.
The company offers Jason a comprehensive severance package that includes:
Monetary Pay: Jason's annual salary is $120,000. The severance policy at the company provides two weeks of pay for each year of service. Therefore, Jason receives a severance payment of $30,769 ($120,000 / 52 weeks = $2,307.69 per week x 2 weeks x 8 years).
Benefits Continuation: The severance package includes continuation of Jason's health insurance coverage for himself and his family for 6 months following his termination date. This ensures that Jason and his family have healthcare coverage during the transition period.
Stock Options: As part of his compensation package, Jason was granted stock options over the years. The severance agreement specifies that Jason will have the option to exercise his vested stock options within 90 days of his termination date, allowing him to retain ownership of the company's shares he accrued during his tenure.
Outplacement Services: The company provides Jason with outplacement services, including access to career coaching, resume building workshops, and job placement assistance. These resources are intended to help Jason quickly find new job opportunities in the competitive tech industry.
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State
New Jersey
New York
California
Illinois
Hawaii
Law for severance pay
NJ WARN Act: Requires certain employers to give 60 days advance notice of mass layoffs, plant closings, or transfers resulting in significant job losses. Failure to provide notice may necessitate severance pay equivalent to one week of pay per year of service for affected employees.
NY WARN Act: Employers must give at least 90 days advance notice of mass layoffs, plant closings, or significant employment losses affecting 25 or more employees. Lack of proper notice may require severance pay for affected employees.
CA WARN Act: Mandates covered employers to provide 60 days advance notice of mass layoffs, plant closures, or relocations affecting 50 or more employees within a 30-day period. Failure to provide notice may result in payment of up to 60 days of wages and benefits as severance.
IL WARN Act: Applies to employers with 75 or more full-time employees, requiring 60 days advance notice of mass layoffs, plant closings, or relocations affecting 25 or more full-time employees. Failure to provide notice may necessitate severance pay for affected employees.
Hawaii State Dislocated Workers Act: Requires certain employers to provide 60 days advance notice of mass layoffs, plant closings, or substantial workforce reductions affecting 50 or more employees. Failure to provide notice may require severance pay for affected employees.
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💡 Manifest Tip: Hire a severance lawyer who can negotiate on your behalf when it comes to severance pay or any employment-related matters.
Reach out to get an evaluation the strength of your case.
Background: A client came to us after he was fired as lead software engineer at a startup company. He had accepted the job and moved from California to New York City. He was there for less than a month and his boss decided he was not a good fit for the role. He had not yet received his full sign-on bonus. The company offered him approximately 10% of his sign-on bonus as severance, to compensate him for his time and effort.
Outcome: We were able to negotiate his severance for him, and he received approximately $50,000 above the company’s initial offer.
Result:
$50,000
Background: A client came to us after being terminated due to her position being deemed "redundant" during a hospital department reorganization. Despite having over 20 years of service and being in her 50's, she received no severance. During our discussion, she mentioned her boss had made age-related comments. Upon investigation, we found that despite her experience, they retained a much younger, less experienced administrator during the reorganization.
Outcome: We were able to argue that our client was discriminated against based on her age. We were able to successfully negotiate a sizable settlement.
Result:
$45,000
Background: A salesperson was being fired due to poor sales performance. His company offered him a severance agreement that was the equivalent of approximately 3 weeks of pay. He was also told he would not be eligible to be paid commissions on sales that he had worked on, but had not yet closed. He felt that the company was firing him to avoid paying him out on those commissions.
Outcome: We were able to negotiate a severance agreement for approximately $62,000.
Result:
$62,000
Can you negotiate severance pay?
Yes, you can negotiate severance pay in many cases. When leaving a job, especially if you've been laid off or are resigning under specific circumstances, you have the opportunity to discuss the terms of your departure, including severance.
It's important to assess your situation, understand your rights, and seek legal advice to help negotiate a fair severance package. Book a free consultation with Manifest Law today.
When is severance pay due?
Severance pay is typically due according to the terms agreed upon between you and your employer. This can vary depending on company policies or any agreements negotiated during your departure.
In many cases, severance pay is disbursed in a lump sum shortly after your employment ends, especially if there's a severance agreement in place. However, the exact timing can vary, and it's important to clarify this with your employer or review your severance agreement for specific details.
If you have concerns about the timing of severance pay, discussing it with your employer or seeking legal advice can provide clarity and ensure compliance with agreed-upon terms.
Does severance pay stop if you find another job?
Severance pay may or may not stop if you find another job, depending on the terms outlined in your severance agreement. Some agreements stipulate that severance payments cease upon securing new employment, while others may allow payments to continue regardless of your employment status.
It's essential to carefully review your severance agreement for any clauses related to this scenario. If you're unsure about the terms or need clarification, consulting with an employment lawyer can help you understand your rights and obligations under the agreement.
How long does it take to get severance pay?
In many cases, severance pay is disbursed shortly after your employment ends, often within a few weeks.
However, it can take longer depending on factors such as legal reviews, administrative processes, or the terms agreed upon in your severance agreement. To ensure timely payment, it's advisable to discuss expectations and any potential delays with your employer upfront.
If there are concerns about the timeline or if severance pay is delayed beyond what was agreed upon, seeking legal advice can help address any issues and ensure you receive your rightful compensation promptly.
Is severance pay taxed differently?
Severance pay is generally subject to federal and state income taxes, similar to regular wages.
However, how it's taxed can depend on various factors, including the amount of severance pay received and any state-specific tax laws. Severance pay is typically considered taxable income in the year it is received, and your employer may withhold federal and state taxes from the payment at the time of disbursement.
It's essential to review your severance agreement and consult with a tax advisor to understand how severance pay will be taxed based on your specific circumstances.
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