What is Severance Pay?

Employees who have been wrongfully, involuntarily, or prematurely terminated from employment by their employers can receive severance pay. It is an exit package paid to employees who have suddenly been rendered redundant.

Severance pay cushions recently unemployed individuals from financial hurdles. During the COVID-19 pandemic, many people were laid off, yet not all received severance packages. This is because most companies had no laid-out structure for paying out severance packages. Only about 70% of companies offered their employees this benefit.

Severance Pay vs. Termination Pay

While severance pay is optional, termination pay is compulsory at the termination of employment. The latter is calculated according to the number of days the employee has given notice.

Right to Severance Pay

As per the law, if a severance agreement exists, any employee is liable to a severance package if they have been employed by the same employer at the same place of employment. However, it is not a mandatory requirement by the Fair Labor Standards Act (FLSA) to provide severance pay. Employers do so as an act of good faith or to edge out the competition. Employees will definitely select companies that offer severance packages over those that don’t.

Severance pay should be paid in the following cases:

• Death or bankruptcy of the employer such that it causes the termination of employment to staff.
• Death of the employee; severance pay shall be paid to their bereaved.
• Resignation of the employee due to health reasons.
• Resignation by a parent to raise their child nine months after giving birth.
• Non-renewal of a contract
• Dismissal of an employee unwillfully

These factors may differ per state. It is, therefore, paramount to consult an employment lawyer to help you understand what options are available to you. Signing the release form may also be complicated without professional help. Seek the assistance of an Employment Law Attorney. They also help in noticing intentionally left-out clauses.

Once you receive a severance agreement from your employer and you have consulted with your lawyer, you typically have 21 days to sign it and send it back to them. During this time, you can consult some more and have deep introspections if what you are being offered works for you. If not, you should consider negotiating some of the terms. Just as you would negotiate your first salary, you should also negotiate your final salary.

After you have signed, you are given a seven-day allowance to change your mind. Within this period, you can request that the prior signed form be ignored as you make a decision. As a matter of fact, it is a feasible option to stall the decision-making process as you weigh all factors.

Individuals laid off as a group are entitled to 45 days to think about the severance agreement offered to them and make a correct decision.

Purpose of Severance Pay

Severance packages soften the blow of redundancy so that the former employee receives a somewhat smooth transition. Also, employers provide severance packages to prevent instances of a future lawsuits. While most terminations are legal and happen under reasonable circumstances, there are times when such terminations may be illegal and caused by discrimination.

Employers require that their employees sign a release form before receiving their severance pay to curb future instances of legal action. Employers should also give a 60-day warning if they plan to fire employees. Laying them off before this timeframe warrants severance packages if they offer them.

Benefits included in severance packages

Some of the perks included in some, but not all, severance packages include:

• Continuing salary.
• Insurance. The Consolidated Omnibus Budget Reconciliation Act (COBRA) provides for laid-off employees to continue receiving health insurance from their employers for one and a half years after termination. However, they have to shoulder costs for both their and their employers’ premiums.
• Outplacement benefits. Employers could help their former employees find suitable jobs by referring them to possible employers. Also, it should be clearly defined what the employer is free to divulge to potential employers.
• Loan forgiveness. Some employers may pay off their employees’ existing loans or create a framework to assist in paying premiums. If the loan was internal, it could be waivered or cleared entirely.
• Retaining company materials and merchandise such as laptops, branded clothes, and motor vehicles. Some companies may allow executive employees to keep company-provided houses or cars.

Rate of Severance Pay

The average wages paid to laid-off employees are to be calculated as one or two weeks of pay per year of service. Salaried employees receive a month’s salary per year of employment, while workers receiving wages are liable to receive two weeks’ wages per year of service. Some companies offer a flat rate without considering prior factors, such as $500.

Some companies offer severance pay to senior executives and leave out lower-level employees.

Severance pay is added to your remaining usual salary. Other additional inclusions are:

• Unused vacation allowances.
• Unused leave allowances.
• Retirement savings accounts, such as your 401(k) contributions.
• Stocks.

Receiving this money in a lump sum may attract higher tax interests. You could opt for a breakdown of the funds into installments that will fetch lower interests.

Final Thoughts

As you begin a new job, ensure that you have set the bar in terms of negotiation. While most individuals focus on negotiating for the best salary, they forget to do the same for other income avenues. Be an entrepreneur in your place of work. Research your company’s severance pay policy, and if they do not fit your bill, negotiate them, or petition others to lobby for change. Check whether these policies apply to all cadres of employment, from monthly salaried employees to hourly wage and part-time.

Another rule of thumb is to always prepare for the worst. You could be terminated from your position any day. Severance pays do not solve a predictable issue; they act as insurance for unpredictable events. Being prepared for this helps you to stay on top of the game.