Severance Pay - What You Should Know
Unfortunately on regular basis employees lose their jobs. If
they were fortunate, they may have been offered a severance package by their
employer. Severance pay is best described as an employer voluntarily offering
payment to a worker who has been terminated or whose job has been eliminated.
I hope you never have to deal with severance pay but if you
do, here's what you need to know and what things you should consider before
accepting a severance agreement.
Why does Employer Offer Severance Pay?
Slightly less than 50% of employers provide some amount of severance pay to
workers whose employment is terminated. Mostly they are offered by large
businesses. Except in those cases where an employment contract, union agreement
or a preexisting employer policy requires or provides for severance pay, there
is no law or regulation requiring any company to offer severance.
Employers use severance pay to seek a "release from
liability" or waiver from lawsuits for improper or discriminatory
termination. In most cases, an employer will include a release in the sevserance agreement. These
releases help employers reduce the possibility of legal action by terminated employees.
In fact, it may be to your benefit that an employer requires a liability
release because it may affect your eligibility and amount of unemployment
compensation.
What's Included in Severance?
Employers sometimes establish severance pay policies which are based on a
formula factoring in length of service, pay level, and job category. A
severance package may also include continuation of health and life insurance
benefits. Employers may elect to allow a terminated employee to continue paying
"active employee" premiums or offer only COBRA health benefit
continuation. Occasionally, employers may also offer job search or
"outplacement" services.
Lump Sum or Payments?
Employers may elect to pay severance as a lump sum upon termination.
Employers will often base their decision of providing lump
sum versus periodic payments on the unemployment compensation laws. Workers are
not eligible for unemployment payments if they are receiving ongoing periodic
income from a severance. So a person may need to wait to file for unemployment
until the employer is finished paying out the severance. Paying out severance
in this fashion helps employers avoid or reduce unemployment claims charged to
their record and as a result, prevent their unemployment compensation premiums
from increasing.
If you accept the severance agreement, I would recommend
filing for unemployment compensation immediately and let the state officials
sort out your eligibility. You can always appeal an unfavorable decision.
Unemployment
and Severance Pay
This will frustrate you, but severance pay affects your unemployment
benefits. Massachusetts
will reduce unemployment benefits in weeks you receive a severance payment but often
will not if you were required to sign a release of liability.
Do I Need an Attorney?
Be very careful about signing an
agreement without an attorney viewing it for you. The attorney can read the
agreement and provide you with an interpretation
and clarification of what it means and how it affects you. Remember the
agreement in reality is to benefit the company and not you.