What to Expect in a Severance Package

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Are you losing your job? Have you been offered a severance package? While there is no legal requirement to offer severance, many companies will provide it to employees after their employment is terminated. If you're in this position, you likely have many questions: Is your package reasonable? Can you negotiate a better deal? How is severance pay calculated?

What is Severance Pay?

Severance pay may be given to employees upon termination of employment.

However, companies are not required to provide severance pay.

In general, severance pay is usually based on length of employment. For example, it could be a week's pay for every year or service or a flat amount based on six weeks pay, or any other amount determined by the employer. When provided, it is given as either a lump sum or paid over a number of weeks.

A severance package may also include health insurance coverage for a certain period of time and other continuation of benefits coverage.

There is no requirement in the Fair Labor Standards Act (FLSA) for severance pay. Severance pay is a matter of agreement between an employer and an employee. The employer has no legal obligation to give severance pay to a departing employee.

What to Expect in a Severance Package

Marikay Jung, Recruiting and HR Professional, shares information on what's typically covered in a company's written severance policy, typical severance payments, and when you may be able to negotiate a severance package.

Companies That Offer Severance Packages

It's reported that approximately 60% of business have formal severance plans. Losing a job is often unexpected for employees, and a severance package offers some breathing room by providing a paycheck, and potentially, other benefits.

However, employers do not offer severance packages merely to be nice.

In order to get the severance package, employees will often need to sign paperwork saying they will not speak negatively about the company, agreeing not to pursue legal action, or prohibiting them from seeking a job with a competitor.

Typical Severance Benefits

If severance payments are not specified in the current collective bargaining agreement, a company is under no obligation to provide severance benefits to employees represented by a labor union. When negotiated, a typical severance benefit for an hourly (union represented) employee is one week of pay for each year of service to a maximum of 26 weeks.

For non-union employees, severance benefits are typically two weeks pay for each year of service -- to a maximum of 26 weeks.

Typical executive severance benefit will be in the 6 to 12 months range.

As well as salary, companies may offer outplacement counseling, and will often cover health insurance and other benefits for the severance period.

Company Severance Policies

When a company has a formal severance pay policy, it will include:

  • Purpose: The company will establish the purpose of the severance plan, which is generally to provide assistance to employees while they seek other employment.
  • When severance will - and will not -be paid: A severance policy will also lay out when severance will be paid (involuntary termination, layoffs, etc.) as well as circumstances under which severance won't be paid (involuntary termination for cause, etc.).
  • Groups covered by policy: Sometimes the company will limit the policy to certain classes of workers. For instance, salaried workers may receive severance, where hourly employees will not. 
  • How severance pay is calculated: Will employees receive a week's salary for each year they were employed, or will another calculation be used? The policy will also set guidelines around pay for unused vacation time, sick days, personal days, etc.
  • How severance is paid: Employers can pay severance in a lump sum, or via regular pay periods for the specified duration. (The method of payout may play a role in unemployment benefits, depending on your state.)
  • Documents to sign: A company may require employees to sign documents, such as a legal release, Hold Harmless Agreement, etc., before releasing severance pay.
  • Benefits beyond pay: As well as pay, employers may cover health care benefits for the duration of the severance period. And, employers may opt to provide employment counseling. 
  • Employer's rights to modify agreement: A company's severance policy will likely offer some protection for the employer, giving them the exclusive right to amend or terminate the severance policy. As well, the severance policy may stipulate that in the event that the company is sold, merged, etc. severance will not be paid unless an employee is involuntarily terminated.

Negotiating Severance Pay

If the involuntary termination is part of a group reduction in force, it is most unlikely that an employee would be able to negotiate a different severance arrangement.

If the involuntary termination is an isolated event - i.e., a "mutual agreement" termination - depending upon the grade-level of the employee and the surrounding circumstances, there may be some "wiggle room" to negotiate, but typically, not much.

Suggested Reading: How Does Severance Pay Impact Unemployment?