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Get What’s Coming to You: Severance Packages Explained

Sometimes, when you are about to lose your job, your employer may offer you a “severance” package or “separation” package: an amount of money that is meant to temporarily offset your job loss.

Employers are not required by labor law to give severance packages, but if you belong to a labor union, your labor union might have negotiated the terms of your severance package, and those terms might even appear in your union contract.  

A severance package may have several types of benefits. Some severance packages contain just money payments. Others contain additional “perks” such as free enrollment in job training or placement services. 

Severance Package Money
Because there is no legal requirement that your employer even give you a severance package, there is no set amount of severance pay that you are entitled to—unless you have a contract (perhaps a union contract) requiring your employer to pay severance money.

Many employers set a formula for severance benefits based on the time you worked before you lost your job, such as one week’s (or one month’s) pay for every year you worked for the employer. 

Will my severance pay be in a “lump sum” or paid over a period of time?

That’s up to your employer. Many employers pay severance over time simply because they don’t have the money to pay you in a lump sum - especially if your co-workers have lost their jobs too and the employer has to pay them severance money too.

If your severance is paid over time, you might not be able to collect unemployment insurance benefits during that time, because the government agency that handles unemployment benefits might view your payments as wages. You should check with an attorney who specializes in employment law to see if that is the rule in your state. 

Health Benefits
Many employees who lose their jobs are entitled to keep their medical benefits for eighteen months under a federal law called the Consolidated Omnibus Budget Reconciliation Act or COBRA - although those employees still have to pay what it cost the employer to keep them on the medical plan. So some employers offer severance packages that include the cost of those payments. That can be a significant benefit to the employee, as the cost of continuing benefits can be hundreds of dollars per month. 

Job Training and Career Placement
Some employers include job retraining or career placement services as part of their severance packages. 

Letter of Recommendation
Some employers offer to write a good letter of recommendation as part of their severance package. That can be important to an employee—especially if the employee had trouble with the employer and might have trouble finding a new job.

Can I negotiate severance packages?

Yes—unless you are in a labor union, which will negotiate your severance package. But there are some dangers in trying to negotiate severance benefits. Although you might want to add things that are really important to you in the severance package, once you make a counterproposal to your employer, the employer’s offer might be considered legally rejected. If your employer then rejects your counterproposal, you might not be able to go back and accept the employer’s original offer. 

Can I collect unemployment insurance benefits even if I accept a severance package?

Since unemployment insurance benefits are meant for people who have lost their jobs and have no further income, you might not be eligible for these benefits if your employer’s severance package makes it look like you are still working. For example, if your employer simply keeps you on the payroll for a number of months and tells you not to come in while you look for future work, you might be viewed by the state as still working for the employer.

You should check with a lawyer who specializes in employment law (an labor law attorney) to see if you will be entitled to unemployment benefits if you are collecting severance pay. 

May my employer require me to sign a “release of claims” in order to get a severance package?

Yes. Some employers will give you severance benefits only if you agree to a “release” that gives up any claims you might have against the employer. Those releases are usually legal and will be upheld in court.

If your severance package also includes a release of claims, you should decide whether the amount of money in the package is more important than holding onto your claims against the employer. For example, you might not want to accept $200 in exchange for releasing a clear discrimination claim that could result in a verdict for you of $200,000 in damages. Before signing any release, you should consult a lawyer who specializes in employment law (an labor law attorney) to help you evaluate the claims you are releasing. 

What claims must I release?

That depends on the wording of the release. Most employers require you to give up all of your claims, including wrongful discharge claims and discrimination claims. And, the release might even require you to give up claims that you don’t even know about yet, e.g., you later discover that you were fired because of your age or disability, otherwise entitling you to file a claim under federal anti-discrimination laws.

Consult a labor law attorney who specializes in employment law (an employment attorney) before signing such a broad release - to make sure you are not giving up something that could be much more valuable than the severance benefits. 

How much time do I have to decide whether to sign the release?

As little time as the employer chooses to give you—with at least one exception: if the employer wants you to surrender a claim of age discrimination, federal law requires him to give you twenty-one days to consider the release and seven days to change your mind after signing the release.

If you have questions about severance packages, contact a labor lawyer in your area.

For more legal, financial, and employment advice, visit GotTrouble.

Updated February 6, 2009