Labor and Employment

FAQ Severance Agreements

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Q: Am I entitled to benefits if my employer has a severance plan?

  • A:Maybe. Your employer's severance plan doesn't have to cover all employees. The severance plan should spell out exactly which employees are entitled to the benefits of the severance package. The plan should also spell out when the severance package kicks-in, such as when an employee is laid-off, quits or resigns.

The plan can change at any time. There's nothing to stop an employer from changing it or getting rid of it altogether. In most states,employers are required to give employees a copy of any severance plan the employer either has in place or creates after an employee is hired.

Get a copy of your employer's plan and see if you're covered. It may be in your employee handbook. If you have any questions, ask your supervisor or human resources department for details.

Q: Can my employer make me sign an agreement not to sue it in exchange for a severance package?

  • A:Yes, many employers don't give employees a severance package unless they sign an agreement stating they won't sue the employer. Your right to sue your employer is a valuable right, and your employer has to give you something extra in return for giving up that right, like severance pay. It's perfectly legal for your employer to refuse to give you severance benefits unless you sign a release.

Q: How much severance pay should I expect?

  • A:Every severance agreement is different. Some employers offer one or two weeks of salary as severance pay, while others may use a formula based upon your current salary and the number of years you've worked for the employer. Some employers have different packages for each level or tier of employees. So, severance packages for executives and managers may be much larger than those offered to staff employees.

Other than wage-based severance pay, some employers will include payment for unused vacation time, while others won't. And, some packages may include services to help employees find new jobs, like job placement and resume services.

Q: How will my severance pay be taxed?

  • A:It depends on how you're paid. If you take your severance pay as a lump sum,meaning you're paid everything all at once, the payment will be treated as a "bonus," which means taxes may be withheld at a much higher rate compared to your usual wages.

If you choose salary continuation and get your severance pay over time, like receiving your weekly paycheck, your severance pay will be taxed as regular income.

Q: I'm thinking of taking a severance package, but I'm not sure about what I'm giving up and what it's worth to agree not to sue my employer. What should I do?

  • A:Talk to a lawyer as soon as possible. Depending on your age and the severance offer, you may have only a few days to accept the severance package. An attorney can help you determine if you have any legal claims against your employer, how much they may be worth if your suit is successful, and how much a suit might cost you in attorney's fees and court costs.

All of this information can help you determine if your employer's offer is fair.

Q: Is severance pay required by law?

  • A:No. There's no legal requirement making it mandatory for employers to provide severance pay or severance packages to employees.

However, almost every employer must pay into a state-run unemployment compensation fund. In most cases, workers who are laid-off or fired for no fault of their own can collect unemployment compensation.

Q: My employer always used to pay severance, but now there's no severance plan at all. Can I still get severance?

  • A:Generally, employers can cancel or change their severance policies at anytime. Nonetheless, you may be able to establish a right to severance pay if your employer led you to believe that you'd get severance if and when leave. You may be able to do this if you can prove:
  • Your employer consistently paid severance to employees in the past. And, you'll need to show which employees got paid, how much, and under what circumstances (laid off, fired, resigned, and so forth)
  • You and your employer have a written employment contract stating you'd be paid severance, or even an oral promise from your employer may be enough
  • A current employee handbook states that severance will be paid to employees who are laid-off or terminated out of no fault of their own (for example,an employee won't receive severance if fired for disciplinary reasons)

Q: What will happen if I ask my employer for a better severance package?

  • A:Usually nothing, but you may lose your severance if you try to bargain with your employer.By trying to negotiate a better deal, you're actually turning-down or rejecting the current deal. In legal jargon you're making a "counter-offer."Once you do that, your employer is free to accept or decline your proposed deal. If your employer rejects your request, then you lose the whole severance deal.

This doesn't happen too often. Most employers will let you take their original offer even after you've made a counter-offer. However, you need to accept your employer's offer within the time specified in the severance package, otherwise you may get nothing.

Q: What if I'm re-hired by my employer after I take a severance package?

  • A:It depends on the severance package. Some employers may let you keep anything you've been paid under the severance plan if you're re-hired after you've left. Some employers may make you repay all or part of any money you received. Read the severance plan carefully.

At the very least, if you're former employer contacts you after you've left, ask if you'll have to pay back your severance benefits.The answer may make a big impact on your decision to return to work for the employer.

Q: Why does my severance package give me 21 or 45 days to consider the deal? Can I accept it before the time is up?

  • A:Generally, you have to be given some time to think about the severance package. It can range from a few days to a few weeks. The 21-day (or 45-day) period is included because, most likely, the severance package contains a release in which you promise not to sue your employer in exchange for the severance benefits.

Under a federal age discrimination law, the Older Workers Benefit Protection Act (OWBPA), if you're at least 40 years old, you have to be given 21 days, and sometimes 45 days, to consider the severance package. If you're not given the correct amount of time, your waiver of any age discrimination claim is no good, and you could still sue your employer.

Usually, your employer can't withdraw its offer of severance during the waiting period. And,you don't have to wait the full 21 or 45 days, either. You can accept it any time.

The severance offer probably also includes a 7-day period to change your mind and "revoke" or cancel your acceptance of the severance offer. This is also required by the OWBPA. However, this 7-day period can't be waived by you or the employer. So, you probably won't see any of your severance pay until at least 7 days after you accept the deal.After the 7-day period, the employer knows you can't revoke the deal, and so it's safe to pay you without fear of being sued for discrimination or wrongful termination.

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