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A severance package is compensation a company offers to employees who face layoffs. It can include money and other benefits, such as continuing insurance coverage, job placement assistance, or a performance bonus.
A severance agreement, signed by the employee, outlines the financial terms on which the employee will leave the company.
Key Takeaways
- A severance package can include payment, continuation of insurance coverage, and job placement assistance.
- A severance agreement defines the financial terms for an employee when their employment is terminated.
- Severance packages are not required by law, but employers tend to offer them as gestures of goodwill or to be competitive in their industries.
What’s Included
- Severance Pay: Employers may offer one to weeks of severance pay for every year the employee worked for the company. Middle managers and executives may receive a higher amount. A considerable lump-sum severance payment could push the employee into a higher tax bracket.
- Insurance Coverage: The Consolidated Omnibus Budget Reconciliation Act (COBRA) guarantees temporary group health coverage, typically for 18 months, for employees, former employees, spouses, and dependent children when health coverage is lost due to a layoff. However, most former employees must pay the employer’s portions of the premium with the amount they paid while employed.
- Job Placement or Training: Many employers provide outplacement services, one-on-one counseling, or retraining opportunities.
- Unemployment Insurance: Employees commonly contribute to an unemployment insurance fund through their pay. The Federal-State Unemployment Compensation Program provides temporary financial assistance for unemployed workers. The taxable benefits usually last around 26 weeks, but a state may extend them when unemployment is high.
Important
Federal and state laws in the U.S. do not mandate severance pay. According to the U.S. Department of Labor, “severance pay is a matter of agreement between an employer and an employee.”
Prepare and Negotiate
Employees facing a layoff often have a termination meeting with a manager or company representative to discuss and sign the severance agreement and are allowed time to review the information. They should create a list of benefits they’d like to receive and, if necessary, negotiate. Employees may even research to find out what former colleagues have received. Some negotiation strategies include:
- Hire a Lawyer: Employees may consult an attorney if there is evidence of discrimination, if the language in the package is too complicated or broad, or if the agreement is extensive. The lawyer can validate state laws governing severance agreements and if there are specific stipulations regarding timing and payment amounts.
- Negotiate Payment: Employees may talk to the local placement and recruitment agencies to determine how long it may take them to get a new job at the same level and salary. The right severance package can ease a laid-off worker’s transition to a new job, relieve stress, and provide some financial cushion.
- Negotiate Benefits: Employees can ask if the company can cover life insurance and disability income insurance premiums if they were offered during employment after the layoff. Although employees will have access to COBRA, they can negotiate with the employer for covered health care premiums after the layoff.
- Perks: Employees may be able to keep or buy used company equipment, such as a laptop. Have the employer acknowledge this in writing. Some other perks to consider negotiating include extending an employee’s use of the company car or a company-sponsored health club membership.
Retirement Plans After a Layoff
What happens to an employee’s retirement plan or pension plan varies by employer. The outcome of a 401(k) depends on how much money the employee had in the account and if the employee was vested when the layoff occurred. A vested balance is a combination of an employee’s contributions plus the contributions of the employer that cannot be taken back when the employee leaves.
Employees can cash out their balances, leave the money in the account without further contributions, or roll over the money into an Individual Retirement Account (IRA) that the employee controls.
In a defined pension plan scenario, an employer may end the pension agreement and offer the employee an annuity from an insurance company or issue a lump-sum payment for the entire benefit.
What Laws Regulate Severance Packages?
Severance packages are usually calculated based on an employee’s length of service with the company. Employers are not required by law to offer severance packages to laid-off workers.
What Happens When a Lay Off Includes Multiple Workers?
Employees facing a group reduction-in-force may or may not have more opportunities to negotiate the terms within the agreement. A standardized package may be offered in a mass layoff, and an employer is less likely to deviate from this contract. Still, numbers carry weight, and employees can band together to ask for a revision in terms.
Why Should Employees Negotiate a Severance Package?
Employees should attempt to negotiate a severance package. This may help increase the severance pay, alleviate health care costs after the layoff, or extend the employee’s termination date.
The Bottom Line
A severance package offers compensation and other benefits to laid-off employees. Individuals should research company policies to maximize their severance pay and benefits. An employment law attorney may be able to advise employees or help decipher lengthy paperwork.
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