Severance pay is often granted to employees upon a termination of employment not due to job performance issues. It is usually based on the amount of time that the employee has worked for the company, and a severance package may include pay for benefits (such as unused vacation time) of the employee leaving the company.
Sometimes, severance benefits may be offered to people who resign, regardless of the circumstances, or are fired. Policies for severance packages are often found in a company's employee handbook and in many countries are subject to strict government regulation. Severance contracts often stipulate that the employee will not sue the employer for wrongful termination or attempt to collect on unemployment insurance and that if the employee does so, then the employee must return the severance money.
Also, it is not mandatory for employers to provide severance in any situation. It is paid at their discretion.
How does my Employer Determine the Amount of Severance Pay?
A common rule of thumb is to pay one week's pay for every year of service. Many severance pay policies provide a minimum and maximum benefit (for example, a minimum of four weeks and a maximum of 26 weeks). Severance pay is taxable income, and it can be paid out in regular payments like a paycheck, but most employers pay in a lump sum.
Are There Any Laws that Govern Severance Pay?
There is no requirement in the Fair Labor Standards Act (FLSA) for severance pay. Severance pay is a matter of agreement between an employer and an employee. The Employee Benefits Security Administration (EBSA) may assist an employee who did not receive severance benefits under their employer-sponsored plan if the employer says it offers one.
When severance pay is provided in lump sums, on a completely voluntary basis, it does not constitute an employee benefit plan covered by the Employee Retirement Income Security Act (ERISA). When an employer has a policy or procedure for paying severance pay, the policy or procedure may constitute an employee benefit plan under ERISA. This means that the severance pay program should be described in a formal plan and summary plan description.
Under the Age Discrimination in Employment Act (ADEA), an employer may not offset severance benefits against retirement benefits, with two exceptions.
First, the value of a retiring employee's medical insurance can be deducted from severance pay. Second, if an employee is eligible for a full pension, the value of additional pension benefits (such as in early retirement offers) can be deducted from severance pay.
In addition to the employee's remaining regular pay, a severance package may include some of the following:
- An additional payment based on months of service
- Payment for unused vacation time or sick leave
- A payment in lieu of a required notice period
- Medical, dental or life insurance
- Retirement (e.g., 401K) benefits
- Stock options
- Assistance in searching for new work, such as access to employment services or help in producing a resume
Questions for Your Attorney
- Do I have to sign a release to receive severance pay?
- Under what circumstance should I refuse to sign a release?
- How do I ensure that my employer is offering me the correct severance package?
- What recourse do I have if I feel I was laid off unfairly?
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