Losing your job isn't easy to cope with. In fact, it's usually a stressful and frightening time. You have to find a new job, or maybe even change careers. What do you do when no one seems to be hiring? How are you going to make ends meet until you find a new job?
Sometimes, when an employee is laid off, she's offered things like part of her salary and maybe even the continuation of some benefits. This is known as a severance package or agreement. When faced with the possibilities of not finding a new job soon and not being able to pay your bills, a chunk of money from your employer sounds like a great deal, doesn't it?
Before you sign the agreement, though, you need to pay attention to its details. Although the severance package usually offers a nice sum of money, it doesn't come for free. You typically have to give up certain things, like any right you may have to sue your employer. Also, you may not realize it, but you may be able to negotiate a better package.
Severance in General
First, you should know that there's no law that requires employers to offer you a severance deal. Many employers do so as an act of good will to show some appreciation for your work and to help you make the transition to a new job. Good intentions aside, however, one of the main reasons for a severance package is to get you to go away as quickly and as quietly as possible.
Sound harsh? Unfortunately, it's true. Practically every severance agreement contains a number of things that you agree to give up or "release" in exchange for the money and other things in the package. One of the most important terms for the employer is your agreement not to sue the employer for discrimination or retaliation.
For example, you may think that you're being laid off because of your age or gender, or maybe because you filed a claim for worker's compensation or took leave under the Family and Medical Leave Act (FMLA). It's illegal to lay off an employee for any of these reasons, and a lawsuit filed by a worker on such claims can't only be very expensive for the employer, but it can damage its reputation in the business community. If you sign the agreement, you won't be able to sue the employer.
Be cautious when balancing your emotions and possible employment-related lawsuits. However, if you have any legitimate reason to believe that you're being laid off for some unlawful reason, don't sign the severance agreement until you've talked to your attorney.
The severance agreement may also limit your ability to work for another company. Non-compete or non-competition clauses are common in severance packages. Generally, they bar you from working for a business or company that competes directly with your old employer. They can also stop you from opening your own small business and competing with the employer. You usually also agree not to divulge any of your employer's trade secrets or other confidential information, like customer lists or recipes.
So, before you sign the agreement, make certain you understand any restrictions on your ability to work in the same field for another employer.
Other Things to Consider
Most severance packages offer a number of things, and they're not always set in stone, or offered as a "take it or leave" proposition. Sometimes you can negotiate a better deal, and sometimes you have to make some important choices.
Severance pay. This is how much salary or wages your employer is offering to pay. It can vary greatly from employer to employer. Sometimes they offer one or two weeks of salary. Sometimes they have a formula that's based on your current salary and the number of years you've worked for the employer.
When it comes to severance pay, you may be able to negotiate more than what's being offered. Maybe you were an exemplary employee with long service, or you were set to receive a pay raise or promotion before the layoff. Things like these may help you increase your severance pay by a week or two, maybe more.
Unused time off. Some employers offer to pay you for vacation, holidays and sick time that you haven't used before the layoff. Some offer to pay a portion or percentage of it, and others offer nothing at all. If you have unused paid time off (PTO), see if it's included in the package. If it's not, ask that you be paid for it. State law may require payment for this time.
Insurance. You don't need to be told that insurance is expensive. Generally, your employer-paid insurance benefits end when you're laid off. You need to think about types of insurance and options before you sign the package:
- Health insurance is probably the most important and most expensive insurance. Continued coverage usually isn't offered in severance packages, mainly because of the high costs. You can ask, though. Also, under the Consolidated Omnibus Budget Reconciliation Act (COBRA), if your employer has at least 20 employees, you can continue you current coverage for up to 18 months, but you have to pay all of the insurance costs and premiums. You can also buy a private insurance policy, but this option is expensive, too. The American Recovery and Reinvestment Act of 2009 offers some employees help in paying their COBRA premiums
- Disability insurance, if you had it, most likely will be discontinued after you sign the severance agreement. You may be able to negotiate continued coverage, or you can check to see if your state offers short- or long-term disability benefits. As with health insurance, you can always buy coverage
- Life insurance ends when you're laid off. You'll either have to negotiate continued coverage through your employer or buy your own policy
Unemployment benefits . In some states, you may waive or forfeit your right to get unemployment compensation benefits if you sign a severance agreement. In other states a severance agreement doesn't impact your right to benefits. You should check your area's unemployment benefits law to see if you're eligible for benefits if you take the severance package.
Payment method. Typically, you'll be given the option of being paid all at once, or a lump sum, or periodically, just like receiving weekly or bi-weekly paychecks, which is sometimes called salary continuation. This decision is important because:
- A lump sum payment usually is taxed as a "bonus" or "supplemental wages," which has a higher tax rate than regular income. Salary continuation payments will be taxed as regular income
- If you need money immediately, like to pay bills, it may take up to two weeks before you see any severance money if you choose salary continuation
- In some states, salary continuation payments are treated as income for purposes of unemployment compensation benefits. So, if your payments are equal to or more than your pre-layoff salary or wages, you may be ineligible for benefits
Time to decide. The severance package will tell you how long you have to think about the offer. Sometimes you're given only a few days, sometimes you may get a week or two. If you're at least 40 years old, the Older Workers Benefit Protection Act requires some employers to give you 21 days to think about the offer.
The key here is to make a decision before the offer expires. If you want to negotiate with your employer, you need to give it time to consider and reply to your requests.
Questions for Your Attorney
- I've been given 5 days to accept a severance package. I think I've been discriminated against because I'm a woman. Do you have time to figure out if I should sue my employer, or should I take the severance?
- A co-worker's severance package offered her more severance pay than I was offered, even though we've been with the company the same amount of time. Is that legal?
- Can I get around paying taxes on my severance pay by having my employer deposit the money into my 401(k)?
- How will my severance package affect my eligibility for unemployment insurance? Which state's law applies if I live in one state and work in another, as in a multi-state metropolitan area?