After losing your job, every dollar matters. If you’ve been laid off, you may be offered severance pay from your former employer. Should you just take the money and run? Are there other considerations to make when accepting severance? Let’s take a look at what you need to know about severance pay as part of your overall strategy. We’ll consider what factors come into play to determine whether you are eligible for severance pay, how much you’ll get and whether you can also receive other benefits.
Will I be eligible?
Not everyone is eligible for severance pay, but for those who receive it this goodwill gesture helps cushion the financial impact of a job loss. With some layoffs, every employee qualifies for at least some remuneration while in others only more senior roles receive this compensation. Some severance pay can be at a level that leaves a positive impression with the former employee.
Factors that may determine qualification may be: past compensation amount, how compensation is paid (hourly or salaried), length of service and the overall health of the company.Severance amounts may have been negotiated prior to hire as part of an employment agreement or collectively bargained for as part of your labor union agreement.
Health of the Company
If a company is headed for bankruptcy and/or going out of business, no severance may be paid. Companies on the brink may even fail to pay earned compensation to a terminated employee. While it rarely happens, even expected severance pay sometimes fails to materialize. If the proverbial ship is sinking, you may consider accepting a voluntary severance package or seeking another job before the inevitable layoff.
How much can I expect?
Typically, severance is based on years of service with the company. For example, a year of service will be equal to one to two weeks compensation, not including incentive compensation or bonuses, with a minimum payout of two week’s pay.
For example, if the company is paying two weeks of pay for every year of service, and a terminated employee worked for the company for 10 years, they would receive 20 weeks of compensation. In some cases, severance is paid as a salary continuation over a period of, but in most cases it’s paid as a lump sum.
Can I negotiate my severance amount?
There are several factors that can determine whether you can negotiate for a larger severance amount. If a company is offering voluntary severance packages to reduce the size of their workforce, you may be able to ask for and receive more. Layoffs are often driven by a need to reduce costs. The level of your compensation may make you a more favorable layoff to the company inspiring them to offer a larger amount. If asked for tactfully, the worst-case scenario is likely the offer you’ve already received.
Should I still file for Unemployment Benefits
YES! The first step after a layoff is to file for unemployment. Unemployment benefits vary by state, but we put this handy guide together (LINK) to help direct you. While severance pay will often reduce or eliminate your unemployment benefits for a period of time, getting filing done up front will give you clarity on the timing and amount of those benefits. In the midst of the COVID-19 crisis, record numbers of individuals have filed for benefits creating frustrating challenges to access online portals or human help. Filing for benefits may be challenging but should be at the top of your to-do list post-layoff.
Understanding the Severance Agreement You May be Asked to Sign
Some severance pay is provided without strings attached. It’s simply paid as part of your final check. Some organizations may ask you to sign an agreement as part of receiving your severance. In times of financial insecurity, it may be tempting to quickly sign the document without review.
Instead, make sure you carefully read the agreement and raise any questions in writing before signing. Consider consulting an employment attorney for advice if the amount due is significant and their stipulations are onerous. Potentially unfavorable terms in a severance agreement may be related to a “release of claims” (saying you’ll never sue your former employer), a non-disparagement clause (stating you won’t say anything bad about the company), and occasionally a non-solicitation or non-competition clause (stating you won’t solicit your former companies remaining employees or customers in a new role elsewhere). While it’s debatable whether such clauses would hold up in court, and while you may have agreed already to such terms when you were hired, proceed with caution with any agreement you sign to get your final payment. One positive with a release of claims contingency is that it may help you to be eligible for unemployment benefits in some states earlier than without it.
Can there be benefits beyond money?
Similar to being furloughed, at termination you may be offered other benefits such as extended health insurance, permission to keep your technology (phone or laptop), outplacement assistance, or career counseling. These additional benefits may be offered to everyone or may be negotiable.
Losing a job can feel overwhelming and scary. By understanding the ins and outs of severance pay you can come away with an increased financial cushion and favorable outcomes for you and your former company.
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SAVVI Financial LLC (‘SAVVI’) is an investment advisor registered with the Securities and Exchange Commission. SAVVI does not guarantee investment results and past performance is no guarantee of future results. Information provided is for educational purposes and does not constitute investment advice, which is only provided to registered users who have a valid Investment Agreement in place with SAVVI. No information on this presentation should be construed as an offer to buy or sell any security or insurance product. SAVVI is not a certified accountant, lawyer, tax professional or HR professional. Nothing in this document may be considered as tax, accounting, employment or legal advice. Please consult with your accounting, tax, human resources or legal professionals before taking any action.