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Severance Package: Pay and Benefits When Laid Off

A severance package is a pay and benefits an employee receives when he or she leaves employment at a company. Severance packages are usually paid to the employee after the employee has been terminated. However, companies are not required to provide severance pay. Often times, severance agreements contain clauses in which the employee waives his or her right to sue the employer for wrongful termination.

Is There a Law That I Am Entitled to a Severance Package When I Am Laid Off?

No. There is legal no requirement making it mandatory for employers to provide severance pay or severance package to employees. However, almost every employer in every state must pay a state-run unemployment compensation fund and if an employee is fired or laid off without fault, the employee can collect unemployment compensation for the time they are unemployed.

How Much Can I Expect from a Typical Severance Package?

Every severance package agreement is different because severance pay is usually based on the length of employment. For example it could be a week's pay for every year or service or a flat amount based on six week worth of pay or it could be any other amount that the employer has determined. Some employers have different packages for each level or tier of employees. For example, managers and executives who have a higher role in the company would receive a much higher severance package than a regular employee.

How Are Severance Package Calculated?

Many companies provide severance packages depending on the employees role in the company. Companies also have policies that state the way that severance pay is determined. The Severance package can also be be negotiated between employee and employer. There are certain factors that go into calculating severance packages:

  • Number of years employee has worked at the company
  • Employee's level or role within the company (management, executive, etc)
  • The Size of the Company
  • The way severance package was listed to be paid in the employment contract

Severance pay does not always come in the form of cash. Many companies will extend health benefits, cover future medical expenses, provide outplacement services, and other employee benefits

Are Severance Packages Taxable Income?

Severance packages are considered taxable income because they are considered a salary that you receive from your employer. The way severance pay is to be taxed depends on how the severance pay is paid out. If you take your severance pay as a lump sum agreement and everything is paid at once, then the payment will be treated as a "bonus" and taxes will be withheld at a higher rate than a normal wage.

If the severance pay is paid out as a salary continuation meaning that you will be paid the severance pay over a period of a time and in installments, it would be considered like a normal weekly paycheck and will be taxed as regular income.

Can My Employer Make Me Agree Not to Sue in Exchange for Severance Pay?

Yes, although an employer is not required by law to provide severance packages to employees who are terminated or fired, many employers offer a severance package in exchange for the employee's agreement not to bring a lawsuit for wrongful termination. Many employers do not provide any type of severance pay unless the employee signs an agreement stating they would not bring any claims against the employer. Employers know that employees have a valuable right to sue and they provide some type of payment in exchange for the employee to give up that right.

It sounds unethical for an employer to do this, but its perfectly legal for an employer to provide severance packages in exchange of the employees release of rights.

Is Everyone in the Company Entitled to a Severance Package?

No, every employee is considered differently what it comes to whether a severance package should be paid. Companies are not required by law to provide any type of severance benefit after termination of employment other than unemployment benefits and any unpaid wages. An employer may offer severance pay to employers who have had a higher role in the company or have had a solid relationship with the employer in order to keep a positive relationship. A company may also offer severance pay as a way to negotiate with an employee to give up their legal right not to bring suit against employer.

If you are fired for misconduct it will be unlikely that your company would offer you a severance package. However, there are situation where employee is legally entitled to a severance pay:

  • The employment contract given to employee at the start of employment says all employees are entitled to severance package
  • Company policy states employees are entitled to severance pay
  • Company has a massive lay off and does not give a 60 day notice

Do I Need a Lawyer?

It is very important to consider how obtaining a severance package will affect your legal rights and ability to bring a claim against the employer. Contacting an employment lawyer is a good idea since a lawyer can review any documents that your employer wants you to sign, and would help you understand what rights you are giving up. Never feel forced to sign any document on the spot and always ask to take the severance package document home to review it and determine whether its the right opportunity.

Photo of page author Kourosh Akhbari

, LegalMatch Legal Writer

Last Modified: 10-10-2017 08:42 PM PDT

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