In the context of employment, severance packages may be offered to employees in connection with their termination. Typically, severance packages include pay or certain benefits, which can vary from individual to individual.

Although there are many employers that offer severance packages, no specific severance package laws exist which make them mandatory. Employers are only legally required to provide unpaid wages or unpaid employment benefits in situations where employees are entitled to them.

In addition, there is not a standard that is used to determine what is included in the severance package. Similar to other types of employment agreements, a severance package may be negotiable.

Severance packages may vary based upon the particular employee or the policies of the employer and may include many different items. In many cases, severance agreements will require employees to sign agreements that they will not sue their employer for wrongful termination in order to accept them.

There are only two situations in which employers may be legally required to provide severance pay. A few states require that an employer who is laying off a large number of workers or closing a facility must pay a small severance.

Another example where severance may be required include when the employer led an employee to believe that they would be paid a severance, which may be evidence by the following:

  • A written contract that states severance would be paid by the employer;
  • A personnel policy or an employee handbook which provides that employees will receive severance pay;
  • A history of the company paying severance packages to previous employees in the same position; or
  • Oral promises by the employer that severance packages will be paid.

What is a Typical Severance Package for a Layoff?

Although the details of severance packages can vay, they are usually based upon the length of the individual’s employment. For example, in a severance package, an employer may offer a week’s worth of pay for each year the employee works for the company.

There is, however, no standard severance package. Employers may offer whatever amount they desire, so long as it does not violate any laws.

In addition, an employer may offer different severance packages based upon the seniority levels of employees. For example, a company may offer managers or executives higher severance packages than entry-level employees.

It is important to note that severance packages or severance pay are not always provided in the form of monetary compensation. Instead, an employer may provide severance in the form of:

  • Extending the employee’s health benefits past termination;
  • Covering some future medical expenses;
  • Providing the employee with outplacement services; or
  • Offering various other employee benefits.

In certain cases, severance packages may include both monetary payments and benefits. It is important to note that there is no average severance package and the terms of the package will depend upon the policies or preferences of the employer and any other terms which were pre-negotiated between the employer and the employee.

Can I Negotiate the Terms of a Severance Package?

In many situations, companies will have employment policies which provide the manner in which the severance packages will be determined. These types of employment policies will typically include provisions that provide:

  • When employees are entitled to severance pay;
  • How severance pay is calculated; and
  • What the severance package includes.

The details of the severance package may also be addressed in the employment contract between the employer and employee. In these situations, an employer is legally obligated to offer an employee severance pay according to the terms of the employment contract.

In certain cases, negotiation of the severance package may be possible. If negotiation is allow, there are several factors which will likely be discussed during the negotiations with the employer, including:

  • The employee’s number of years with the company;
  • The role or level of the employee within the company;
  • The size of the company; and
  • The details of the severance package as provided in the employment contract or company policy, if any.

Employees are always encouraged to consult with a severance agreement attorney for negotiations related to severance packages. A lawyer can advise an individual about applicable laws, review their contract, and assist them in obtaining the best possible severance package.

Will My Severance Package be Taxed?

Yes, an employee’s severance package pay is subject to taxation. This is because severance pay is considered wages.

Because of this, it will be subject to the normal withholding and employment taxes an employee would see on their regular paycheck. Although this taxation may seem odd because this pay was not earned for work which was performed, the severance payment will still be taxed.

It is important for employees to be aware that employers are not required to clearly pay the pay as severance pay in order for it to be considered severance pay.

How is Severance Pay Taxed?

When employees are terminated, they might be offered a severance package. Generally, a severance package will include:

  • Pay;
  • Extended benefits; or
  • Both.

As noted above, severance pay is considered income and is subject to taxation. Because this type of pay is considered wages, it will include the normal withholding and employment taxes that the individual sees on their regular paychecks. These standard deductions may include:

  • Federal income tax;
  • Social Security;
  • Medicare;
  • State income tax; and
  • Court-ordered garnishments.

What if I Receive Severance Pay Upon Termination?

One common manner in which severance pay is offered is at the time of the termination of an employee. For example, an employee may have an employment contract which states that they are entitled to severance pay if they are terminated.

It is important to note that, although severance pay is not mandatory under the law, an employer may offer it anyway even without company policies or employment contracts in place.

What if I Receive Severance Pay After Filing a Lawsuit?

If an individual has sued their former employer for wrongful termination, they may not receive their severance pay until several years afterward. An employer may offer a former employee severance pay after they file a lawsuit in order to settle the dispute and to avoid having to go to trial.

If this occurs, an employee will still be taxed on the severance pay because, as noted above, it is considered to be earned wages. If, however, a former employee settles a wrongful termination lawsuit, not all of that settlement may necessarily be viewed as severance pay.

Instead, some of the settlement for the lawsuit may be viewed as payment for non-wages, which may include emotional distress or discrimination. If this occurs, any non-wage portion of the settlement will not be subject to the same withholdings as severance pay.

Instead, this income should be reported on a Form-1099.

Should I Contact an Attorney?

It may be helpful to consider consulting with a workers’ compensation lawyer or a tax attorney if you have any issues, questions, or concerns regarding severance pay in general or about how it may affect your taxes. Your lawyer will be able to explain the terms of accepting severance pay which is offered and different tax implications which may arise.

It is important to remember that a prospective employee can also consult with an attorney prior to signing any employment contracts or making any agreements regarding future severance pay or packages. Your attorney can assist during negotiations of the terms of the employment contract or severance package provisions.