Losing a job can be tough. Both on your mental health and your bank account. One way some companies try to cushion the blow: offering severance pay. Sometimes, a severance package can be a gesture of goodwill from your employer. Other times, it can come with strings attached. Like an NDA. Or no future lawsuits against the company. And it's important to know what you're agreeing to before you accept. So we tapped employment attorney and co-owner of Sparks Law Firm, Paige Sparks to learn more. And to get her advice on negotiating and agreeing to a severance package.
What is severance pay?
It’s when your employer agrees to compensate you after your employment ends. Sparks says severance pay is usually offered in cases of mass layoffs, but not always. Sometimes employers also offer severance pay to employees even if they’re at fault for the job loss. That is, unless they’re fired for misconduct.
And the decision to give severance pay is totally up to your employer. Because in most cases it isn’t illegal to let employees go with no severance. Unless it’s required by state law or promised in your employee handbook or contract, which Sparks says doesn’t happen a lot. “Companies can include any severance policies in their handbooks, but I would not say that is something we commonly see,” she explains.
What might be included in a severance package?
Severance pay can be more than a direct deposit. Other benefits you might see in a severance package may include:
Continued health insurance coverage at the same rate
Job placement assistance (career coaching or counseling)
Continued life insurance coverage
Continued company perks (think: employee discounts)
Why do employers offer severance pay, if it isn’t required by law?
For a few reasons. Like, one: To help soften the blow of job loss. Two: To help cushion possible blows to a company’s reputation. And three: Sparks says severance packages are sometimes a way for companies to avoid potential lawsuits down the road.
Example: If you sign the dotted line before realizing you weren’t paid correctly for overtime, Sparks says you may not be able to sue the company. “The employee wouldn’t be able to participate in that legal claim for this scenario because they have already waived all claims by previously accepting the severance offer,” she notes.
What does a typical severance package look like?
It’s usually based on how long you were with the company before you lost your job.A typical severance package includes one to two weeks of pay for each year you worked for the company. So if you worked for a company for three years, you could expect three to six weeks of severance pay. Sparks explains that benefits like health insurance work a bit differently: “By law, employers of a certain size must offer the opportunity to continue health care coverage under COBRA.” But how long that coverage continues can vary.
Psst…No need to rush your decision, you normally have around 21 days to decide if you want to accept a severance offer.
Can you negotiate severance pay?
Yes. But Sparks warned it’s risky. “Making a counter-offer can legally reject the severance offer and the company could take it off the table altogether,” she says. Meaning, if you choose to negotiate, you should be prepared that you could lose the entire offer. If you’re considering negotiating, it may be a good idea to reach out to an employment attorney.
Is severance pay taxable?
Also yes. Severance pay is taxed for the year you receive your payments. Look out for the exact amount on your W-2 you get from your employer. Unless your severance pay came in a lump sum, you can expect the same tax routine as when you were working. Hint: Lump sum severance payments can put you in a higher tax bracket. Remember to reach out to a tax pro for help if you need extra guidance.
Losing a job is one of life’s grim realities. If this happens to you, know you're not alone. And that you might be offered a severance package to help with the transition. But before you sign the dotted line, make sure you understand what your package includes.
*This is for informational purposes only and is not legal advice. Employment law in each state varies and each person's individual situation is different, so check with a local employment lawyer for any potential legal claims.
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