Severance. Yikes. Few words out there conjure such strong feelings of discomfort and negativity. Severance literally is the act of severing or the state of being severed, a breaking off, a division into parts, removal of a part from the whole. Being offered a severance package, especially after being employed at a company for several years, can be quite devastating, but there are some basics to be aware of in the event this should ever happen to you or a loved one. With the state of the current news cycle, it seems that there’s been more and more layoffs weekly- so it’s better to be prepared than sorry.
First thing’s first: Under the Fair Labor Standards Act (FLSA), no requirement for severance pay exists. Therefore, each state has different laws, from the deadline employees must receive their severance pay, to if a state requires severance pay AT ALL.
Severance Packages vs. Severance Agreements vs. Separation Packages
Sometimes referred to as one another, they are not the same:
Severance packages are offered when employees lose their jobs. In most situations, it offers them a lump sum payment, usually paid out in the next scheduled paycheck. A severance package refers to the monetary incentives a departing employee is given if a severance agreement is signed.
The severance agreement is a legal contract that almost always includes restrictions to your abilities and rights going forward. In exchange for giving up those rights, employees are offered the financial incentive of the severance package.
Separation agreements are when employers try to persuade their employee(s) to voluntarily leave their job(s). A common example in recent years is an employer offering early retirement to an employee that includes a cash payment and other benefits. Have you noticed a lot of folks have been retiring early? They were most likely offered a separation agreement.
How is severance pay typically calculated?
Most organizations choose to give around 1 month’s pay for each year the person has been employed by the company. For example, someone who has worked there for 3 years would get 3 month’s pay. One week’s pay for every year worked is also a common structure. If you've been employed for less than a year, you may be offered less than a month’s worth of severance. However, if you had a stellar performance, you could leverage this to negotiate a higher payout. Overall, the value of the severance package is in many cases tied to how long you worked for the company, so if your time there was brief, any severance value is likely to be limited.
Why would my employer even want to offer me severance if it’s not mandatory?
Great question. Companies usually offer severance packages as a gesture of “goodwill” and recognition of an employee's service. A severance package can reduce the burn of termination, leave the employee with a not so sour taste in their mouth regarding the company, therefore the company is still considered competitive in their market, and finally, severance packages are ultimately provided to avoid lawsuits.
This is because employees often sign a release or two (the severance agreement), agreeing not to seek further compensation or pursue legal action as part of the documentation.
Considerations and Warnings
Even though you may feel pressured to make an instant decision and sign in the (emotional) moment, don’t rush in deciding if you should accept or reject an agreement. Take enough time to examine the package independently, outside of the meeting, and if you can, consult with legal counsel, who will be able to let you know if the offer is a fair one. Give yourself some time to look over what's being offered but be sure to respond within your given deadline.
Before signing a contract, check to ensure you’ve been paid for all expenses that the company already owes you. If your employer does owe you money, set a specific date for reimbursements, and make sure that date is written down, not a verbal agreement.
If your company is struggling financially, you may not be able to negotiate for higher payout. However, an option is to ask if you can get insurance benefits instead.
For more information about severance pay, the DOL is always a solid resource.