Severance Compensation and Severance Packages: A Legal Guide

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What you’ll discover:

What exactly is a severance package?
Who qualifies for severance pay?
How much does severance compensation cost?
How is the value of a severance payout determined?
How does severance money get taxed?
How much time does it take to get severance pay?
How do you bargain for severance pay?
Is severance compensation legally required?
Is signing and accepting a severance agreement a waiver of my rights as an employee?
Do you need further assistance?

Employers and workers have been asking more concerns about employment contracts, unemployment benefits, and severance packages as economic uncertainty continues to confront companies large and small throughout the United States. These are some of the most often requested severance package questions answered.

What exactly is a severance package?

In summary, a severance package is an agreement between an employee and their employer that provides a mix of cash and perks upon the individual’s departure from the company. They are sometimes discussed before to hiring and may be included in a collective bargaining agreement if one exists. Some organizations may provide a severance compensation to workers who are reaching retirement age, while others may provide a severance package if they intend to liquidate an office or facility or reduce the number of their personnel.

Who qualifies for severance pay?

In general, who is qualified for severance pay is determined by business policy, and it is often related to a specified period of employment. Whatever the policy, it is critical that it be administered fairly and consistently in order to prevent discrimination lawsuits.

While severance pay is not mandatory, employees terminated as part of a reduction in force (RIF) by an employer with more than 100 employees may be entitled to severance pay unless the employer provides 60 days’ notice of a layoff in accordance with the Worker Adjustment and Training Notification (WARN) Act. Other states have “mini” WARN legislation, so employers should be aware of their duties as well.

Businesses considering shutting their company or temporarily laying off employees should consult with an employment lawyer who is knowledgeable with both the federal and state WARN Acts.

How much does severance compensation cost?

The severance compensation amount varies according to the agreement established between the company and the employee. Upper-level management workers are more likely to get a larger severance compensation. With each year of service, one may expect to get the equivalent of one or two weeks’ full salary. Employees may also be entitled to extended insurance coverage and outsourced services to assist them in finding a new employment.

Companies may also include additional advantages in their severance packages, such as a promise not to challenge an unemployment benefit claim and reimbursement for any unused sick or vacation days (if not previously required to be paid by state regulations).

How is the value of a severance payout determined?

The severance package amount is almost generally decided by tenure and the employee’s compensation or salary at the time of departure.

How does severance money get taxed?

Severance pay is taxed in the same way as any other payment received by the employee. That is, prior to remittance, the salary is taxed, and federal, state, and municipal taxes are withheld.

How much time does it take to get severance pay?

This is determined by the agreement reached between the employer and the employee. Employers may pay out entire severance compensation in one big amount in specific instances. Some companies will make incremental payments (weekly, bimonthly, or monthly) until the parameters of the agreement are met.

How do you bargain for severance pay?

Workers may normally negotiate a severance payment when they are hired or, in certain situations, when their employment is terminated. An organization should typically have a solid severance compensation policy in place that covers all workers.

If you do not already have a severance compensation policy, you should consider including one in your existing Employee Handbook.

Is severance compensation legally required?

Existing labor rules do not oblige an employer to provide a severance payout. The only exception would be if the employer was in violation of state or federal WARN Act laws. Employers who legally agree to a severance payment are, of course, obliged by those conditions.

Is signing and accepting a severance agreement a waiver of my rights as an employee?

In most circumstances, if an employee is unsure about the contents of the agreement or how it will affect them, they should have a lawyer analyze it.