Severance packages compensate laid-off employees based on their tenure and the severance agreement terms. While no federal law mandates the payment of severance, many companies offer them to recognize an employee's contribution and mitigate the financial impact of an involuntary job loss. Additionally, while no law mandates severance, some state laws or company policies may require severance under certain conditions (e.g., in union contracts or under WARN Act regulations, which require severance in mass layoffs).
Types of Severance Packages
Severance packages can include various components:
- Lump Sum Payment: A one-time payment to the departing employee upon termination.
- Salary Continuation: The employee receives a regular salary for a specified period after termination.
- Benefits Continuation: The company provides health insurance, dental insurance, and retirement benefits. Benefits like health insurance can continue under COBRA, where employees pay premiums to maintain coverage.
- Outplacement Services: The company offers career counseling, job search assistance, and interview coaching to help employees secure new employment.
- Stock Options or Equity: The employee may receive accelerated vesting of company equity or stock options, allowing them to retain ownership or participate in future company gains. Accelerated vesting can be part of a severance package, but it's not always guaranteed. Stock options often expire a short time after termination unless vested.
- Performance Bonuses: The employee may receive performance bonuses or other incentives earned before termination. Bonuses are up to the company's discretion and prior agreements.
Definition and Purpose
Severance pay compensates employees, usually in the form of pay and benefits, when their employment ends abruptly due to termination or job elimination. It recognizes the employee's contribution and helps reduce the financial impact of a layoff. Laid-off employees typically receive severance for reasons unrelated to their performance.
The amount of severance pay depends on the company's policies and the employee's tenure. It may include both cash benefits and other perks.
Components
The details of severance packages are typically in the company handbook, employment contract, or job offer letter. The components may include:
- Severance pay varies by company, typically one to four weeks of pay for every year of employment.
- Payout for unused paid time off (PTO), including sick and vacation days.
- Continued retirement benefits include 401(k) plans or stock options. Severance typically does not include continued contributions to retirement plans (e.g., 401(k)), but vested benefits remain.
- Continued health insurance coverage usually comes through COBRA, which may not necessarily be at the same rate as when employed—employees often shoulder more of the cost.
- Continued vision, dental, or life insurance coverage at the same rate for a set period.
- Continued company perks, such as employee discounts, for a specified period.
- Outplacement services, including career transition support and job placement assistance.
Negotiating and Understanding a Severance Package
You have the opportunity to negotiate severance packages in two key situations:
The Hiring Process:
Job offers may include severance terms as part of the overall benefits package. If your offer does not include severance terms, you can request them. You can also negotiate for more favorable conditions if the terms are included but unsatisfactory.
After Job Termination:
When facing a layoff or termination, you can also negotiate the terms of your severance package.
Tips to Negotiate and Understand a Severance Package
Review Non-Compete and Non-Disclosure Clauses:
Severance packages may include non-compete agreements that prevent you from working for a competitor in the same industry. Non-disclosure clauses ensure you do not share sensitive company information after leaving. Consult a lawyer to understand your negotiating rights regarding these agreements.
Take Time to Consider the Severance Package:
It's best to thoroughly review your documents before signing them. The Older Worker Benefit Protection Act (OWBPA) gives employees over 40 years old 21 days to review the documents and seven days to revoke a signed agreement.
Pros and Cons
Pros:
- Severance pay acknowledges the employee's contribution and reduces the financial impact of a layoff.
- Offering severance packages can help companies avoid negative publicity.
- Severance pay may include terms that prevent employees from taking legal action against the company.
Cons:
- Severance packages may not provide sufficient financial support after a layoff.
- Not all employees qualify for severance packages.
- Although negotiable, employees often have limited bargaining power.
- You'll pay tax on your severance pay in the year it is received.
- Some severance packages include non-compete clauses or claim waivers that may limit the employee's legal rights.
Takeaway
Severance packages provide financial support to employees during layoffs and offer some security during the transition until they find new employment.