What is Severance Pay?

Severance pay can be complicated to understand, with a lot of emotional and legal issues to work through. However, it's important for you to know that severance pay is payment that you receive upon termination that is not due to misconduct on your part as the employee. It is usually due to a Reduction in Workforce (RIF) or a layoff. You can breathe easy knowing that you have likely done nothing wrong if you receive a severance package. 

Some folks may think that severance pay is a straightforward financial deal, but this is often not the case. Severance pay involves quite a few legal nuances. For example, it may contain non-compete clauses that you as the employee need to abide by, or perhaps it includes a disposition of company stocks. A severance package also usually contains rules about release of claims and other conditions. 

As the general workforce worries more about job security, it's essential for you to know the basics about severance pay so you can navigate your professional life with confidence. We've laid out the most important facts and data for you to consider. 

What is the purpose of severance pay? 

The primary purpose of severance pay is to make the loss of the job easier by providing the employee support as they look for a new job. For the employer, severance pay allows them to obtain certain promises from the employee that will protect the employer. Let's say you work a job wherein you know confidential information about the company.

Your severance package would probably require you to sign agreements stating that you will not disclose that information to competitors if you go work for a rival company, and that you will not poach current customers from your current employer. This also helps reduce the company's legal liability by preventing illegal disclosure about clients or contracts that you helped fulfill during your employment. 

Severance packages also help keep the company's brand reputation positive. Many severance deals will include a non-disparagement clause wherein the employee agrees that they will not disclose contents of the severance agreement, and that they will not disparage the company in any way to any person or on social media. 

Severance pay also gives you a cushion to help you stay financially stable while in between jobs. The ideal severance package will provide enough so that you don't have to panic as you hunt for new employment. 

What are the legal requirements for severance pay? 

A severance package is a contractual agreement between you and your employer. The Fair Labor Standards Act does not require an employer to give you severance pay. In fact, there are no federal or state severance pay laws. However, if you do not receive a severance package, you may be able to get help from the Employee Benefits Security Administration. In some instances, you can even collect unemployment benefits even if you receive a severance package.  

Severance pay is usually based on how long you've been employed by the company. Some employers offer terms regarding severance pay in their employment contracts, meaning that you would know what you are signing up for when you first take the job. Employers are not allowed to base the terms of their severance deals on gender, ethnicity, disability, or other common protection classes. If you are in between jobs, make sure you ask about severance pay during your next job interview. It helps to know what you would be dealing with in case of a future layoff with that employer. 

What are the different forms of severance pay? 

Most severance packages offer these types of benefits, or a combination of a few of them: 

• Lump sum: A one-time payment that you will accept when you leave that employer. 

• Salary and/or benefits continuation: Your employer may offer to continue paying your salary, or offering your regular insurance benefits or retirement contributions, for a set period of time after your job ends. 

• Unused paid time off: If you have a lot of paid time off reserved, you may be able to receive compensation for this time. 

• Outplacement services: Your employer may offer you access to help with writing your resume or hunting for the next job. You also may receive career counseling or coaching on how to conduct a good job interview. 

• Age adjustment allowance: You may receive a certain percentage of your basic severance allowance for every year that you are over a certain age at the time of your job termination. 

• If you were granted stock as a benefit, the company may accelerate your vesting period so that you don't lose those shares. 

Be aware that not all severance packages will contain these kinds of benefits. If your company chooses to offer a severance package at all, it may only be a flat rate that every employee would receive, regardless of how long they have worked there. And some company handbooks may contain clauses stating that some circumstances exclude the option of severance pay, such as the company being too broke to afford it or the employee being at fault for the termination. 

What are the components of a severance package? 

Whether you are considering a job that mentions severance pay in the employment contract, or you are wondering if you should accept the severance package that your employer is currently offering, review the terms carefully before moving forward. An ideal severance package may contain some or all of these elements: 

• Specific amount of money that you will receive over the course of the agreed-upon period. 

• Benefits that you will continue to receive for an agreed-upon period, such as insurance or retirement. 

• An agreement that contains non-compete, non-disparagement, and confidentiality clauses, to prevent you from working for direct competitors, talking badly about the company, or from sharing important or private company information. 

• Covenant not to sue the company for things like harassment or wrongful termination. 

Since all of these details are so critical to you receiving a satisfactory severance package, it is essential for you to know what your severance package includes before you agree to accept it. You typically have a certain window of time to consider the terms before you agree or disagree to take the offered severance package. This is an ideal time for you to consult a lawyer for their expertise. 

How long does it take to get severance pay? 

It depends on the circumstances of your layoff. For example, if you have been warned of an impending layoff but you are still employed for the next two weeks, you probably won't receive that severance package until those two weeks are fulfilled. Or perhaps you don't like the terms of your severance package and you are fighting to get the details changed. This most likely means that you won't receive your severance package in the timeframe wherein the employer initially agreed to pay it out, since that timeframe is now delayed due to further negotiations. 

 What about severance pay negotiation? 

Does your severance package include terms that you don't agree with? Maybe the employer is refusing to provide insurance benefits, or perhaps the covenant not to sue includes a clause that you think might be illegal for the employer to demand. It’s essential for you to negotiate! 

As far as it is in your power, don't settle for a severance package that does not satisfy your wishes. Are you not happy with the terms of your severance deal? Consult your lawyer. It may prolong the length of time that you have to wait to receive your severance pay, but in the end, it will be worth it because you will be empowered to fight for the terms that you want. 

What should you do if you encounter legal issues? 

While we certainly hope that you are able to get the best severance package for your situation, we know that this issue can get complicated quickly. Is the employer fighting the new terms that you want to include in the deal? Do you need help reviewing the paperwork to ensure that it contains everything you need? This is where it is crucial for you to consult a lawyer. 

LegalShield provides access to the legal help that you deserve as you go through this process. For an affordable monthly rate, we connect you with a LegalShield provider law firm in your area.

You can contact your law firm to set up consultations, get help reviewing paperwork, receive assistance with phone calls and writing letters, and ask unlimited legal questions. We don't make you navigate important legal issues on your own. 

Take the next step! 

Explore more resources on how LegalShield can assist you with employment issues and other legal matters. Take advantage of:

• Consulting with a lawyer when you need one: Get advice on other employment-related legal issues.  

• Ongoing support: From contract reviews to negotiating new terms, we've got you covered. See how LegalShield works. 

• Tips and actions to help you make smarter decisions: Learn how to pay off debt. 

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