Severance Package Explained: The Layoff Payoff

Reviewed by Robert C. KellyFact checked by Kirsten Rohrs Schmitt

What Is a Severance Package?

A severance package is a form of compensation that a company offers to employees that it lays off. It can be comprised of money and other benefits, such as continuing insurance coverage, assistance in finding another job, the awarding of a pre-arranged performance bonus, and more. Its purpose is to ease the financial blow of job loss and acknowledge employees’ contributions to the company.

Most employers offer a severance agreement established by company policy that outlines the financial terms on which the employee will leave the company. Sometimes, employees can negotiate those terms. Regardless, they must sign the agreement to receive their severance package.

Your power to negotiate a severance package lies in the fact that companies don’t want you to bad-mouth or sue them. What’s more, they may not want you to work for, or share their company secrets with, their competitors.

Whether you are able to negotiate it or simply must accept what’s offered, a severance package can ease your transition to a new job, relieve stress, and provide some financial cushion.

Key Takeaways

• A severance package can include payment, continuation of insurance coverage, assistance finding another job, and other benefits.
• Most employers offer a severance agreement that defines the financial terms for an employee when their employment is terminated.
• Severance packages are not required by law, but employers tend to offer them as gestures of goodwill or to be competitive in their industries.
• Typical severance packages offer one to two weeks of paid salary for every year worked.
• You usually have 21 days to accept a severance agreement, and once it’s signed, you have seven days to change your mind.

Planning Your Severance in Advance

If rumors of layoffs are circulating in your office, the option of quitting before the ax falls may tempt you, but staying may place you in a position to claim unemployment insurance and receive a severance package.

Prepare in advance, whether you expect to be dismissed or not. Review your resources and your critical expenses to determine your financial needs. Create a list of the top benefits you want to receive and, if necessary, negotiate. Examine the company’s severance policy and make an effort to find out what former colleagues have received.

Steps To Take If Dismissed

Review the Agreement

If you are dismissed, take notes during the termination meeting and don’t feel pressured to sign the severance agreement immediately. Request time to review the document and think it through. Typically, you will have 21 days to accept the agreement, and once it’s signed, you have seven days to change your mind.

Hire a Lawyer

After an initial review of the agreement, you may decide to hire an employment law attorney, especially if you have evidence of discrimination, if the language in the package is too complicated or broad, or if the agreement is multiple pages long.

Ask the lawyer which state laws govern severance agreements and if specific stipulations exist regarding timing and payment amounts.

Consult With a Recruitment Agency

Also, talk to the local placement and recruitment agencies to determine how long it may take you to get a new job at the same level and salary.

Negotiating a suitable severance package involves straightforward discussion with your employer, knowledge of the cash and benefits you need to survive, and deciding whether to hire legal help.

What To Negotiate

Let’s take a look at some of the terms you may wish to negotiate once you’ve made sense of the agreement.

Severance Pay

The severance pay offered is typically one to two weeks for every year worked, but it can be more. If the job loss will create an economic hardship, discuss this with your former employer. The general practice is to try to get four weeks of severance pay for each year worked. Middle managers and executives usually receive a higher amount. Some executives, for example, may receive pay for more than a year.

A lump-sum severance payment that is considerable could push you into a higher tax bracket. If that’s the case, you could ask that the payment be spread out over two years to reduce the tax bite.

Insurance Coverage

Try to extend your health, life, and disability insurance coverage. The Consolidated Omnibus Budget Reconciliation Act (COBRA) extended the health insurance policy you had with your employer for 18 months (and sometimes longer).

Bear in mind that the policy can be costly since you now have to pay your employer’s portion of the premiums as well as your own. So, find out whether your employer can pay for your health coverage until you find a new job.

You can also ask if the company can cover life insurance and disability income insurance for that period, or at least one month.

Retirement/Pension Plans and Stock

What happens to your retirement plan, pension plan, and stock plan varies by state and employer. Request a copy of the policies and review them with your attorney.

Outplacement

Many employers provide outplacement services. Ask that the service be available until you find a new job. Try to choose the service yourself. Specify what you’ll need from the outplacement firm, such as one-on-one counseling services, retraining, a phone, an office, and secretarial support.

Announcement of Departure

Negotiate an agreed-upon announcement of your departure and a recommendation letter. Ask to draft the documents yourself, and make sure to include your major accomplishments. Attach the letters to the agreement.

Company Perks

Finally, find out if you can keep any company equipment, such as a laptop. Have the employer acknowledge this in writing. Some other perks to consider, if you’ve had them, include extending your use of the company car or your company-sponsored health club membership.

Unemployment Insurance

The Federal-State Unemployment Compensation Program provides temporary financial assistance for unemployed workers. However, you must have lost the job through no fault of your own, and that’s determined by state law.

The benefits, which are taxable, usually last around 26 weeks, but a state may extend them when unemployment is high. Make sure your employer doesn’t dispute your claim for this compensation.

Important

While most companies offer a severance agreement, they are not always required to do so. Laws can vary depending on the state.

Stay Ahead of the Game

1. One of the best times to alleviate the setback of a job loss is before accepting a new job. That is, when considering a new job offer, discuss whether the company offers severance and how it’s provided.

2. Be prepared at all times for a job termination by keeping a track record of your performance, performance reviews, and accomplishments to help you during the negotiation process.

3. Also, stay informed of any updates to your employer’s workplace policies, especially that which concerns the severance agreement.

4. Finally, employees who are among a group reduction in force may or may not have more opportunities to negotiate the terms within the agreement. A standardized package may be offered in a mass layoff, and an employer is less likely to deviate from this contract. Still, numbers carry weight, and employees can band together to ask for a revision in terms.

What Is an Appropriate Severance Package?

There is no single definition of an appropriate severance package, as they vary greatly by industry and company. However, severance packages typically include pay through the termination date and any accrued vacation time, unreimbursed business expenses, and an additional lump-sum. By law, employers of a certain size must offer the opportunity to continue health care coverage under the company’s plan at the ex-employee’s expense.

Why Would a Company Offer a Severance Package?

Companies typically offer severance packages as a gesture of goodwill and recognition of an employee’s service. A severance package reduces the sting of termination. A company may also offer one to stay competitive in its industry. Finally, severance packages are provided to forestall lawsuits, as employees often sign a release, agreeing not to seek further compensation or pursue legal action, as part of the separation agreement.

How Are Severance Packages Calculated?

Often, severance packages are calculated based on how long the employee has worked for the company. Employers develop their own formulas using time of service—for example, two weeks of severance pay for every year of employment. Calculations may also be based on the employee’s rank or position.

Should I Accept a Severance Package?

Accepting a severance package is entirely up to the individual employee. Usually, it is the only way to receive any money beyond what you are owed in terms of wages, vacation pay, and expenses from your employer. But severance agreements often demand that you sign a release waiving any right to sue the company or pursue further claims against it. So you might not wish to accept a severance package if you think you have been wrongfully terminated or discriminated against, and you might want to take legal action in the future. You might also decline the severance package if you feel the terms are too onerous: It includes a non-compete clause, for example, preventing you from working for another firm in your field.

Never accept a severance package without examining it carefully, asking questions, and making sure that you are fully satisfied with all the terms and conditions.

Can You Negotiate a Severance Package?

You can always try to negotiate a severance package. You generally have 21 days to sign an agreement, so take your time to review all the provisions, to get a sense of what is standard in your industry in general and at that company in particular, and for those at your management level or with your years of experience.
Severance package elements that might be up for negotiation:

• Amount of severance pay
• How severance is paid (installments or lump-sum)
• Coverage of healthcare plan costs
• Exact date of termination
• Vesting in a retirement plan or stock options
• Outplacement or job-training services

The Bottom Line

A severance package offers compensation and other benefits to employees who are laid off. Where the potential for being laid off is concerned, it can be smart to consider and negotiate a severance package before you take a job as well as after you lose it.

You may have some room to bargain because an employer likely has an interest in making the separation process as civil as possible and in maintaining its reputation as a good workplace.

Do some research to find out which severance benefits you’ll need, which you can reasonably expect from your company, and then do your best to maximize them. You also need to consider how to take any severance lump-sum payment most effectively to avoid a large tax bite.

Consult with an employment law attorney to get a sense of what is standard in your field or profession, or among employers of similar size.

Don’t hesitate to ask questions or request added benefits. Remember, you have nothing to lose, and you never know what you might get until you ask for it.

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