What Is a Severance Package?

Some job hunters may know how to negotiate salary and benefits when they are hired, but they may not realize they can negotiate how they depart from an organization. Most employers offer a severance agreement that outlines the financial terms on which the employee will leave the company. Negotiating a suitable agreement involves considering how to conduct yourself during discussions with the employer, the cash and benefits you need to survive, and whether to hire legal help.

Negotiating this accord can ease your transition to a new job, relieve stress, and possibly provide a nice financial cushion. However, a monetary arrangement isn't the only topic to discuss in these discussions; you should also consider continuation of insurance benefits, assistance in finding another job, and other perks. Your power in this negotiation comes from the fact that companies don't want you to bad-mouth them or sue. And they may not want you to work for, or share secrets with, their competitors.

Key Takeaways

  • Most employers offer a severance agreement that defines the financial terms under which an employee will leave a company when their employment is terminated.
  • Continuation of insurance benefits, assistance finding another job, and other perks can also be negotiated as part of a severance agreement.
  • Typical severance packages offer one to two weeks of paid salary for every year worked.
  • You usually have 21 days to accept a severance agreement, and once it's signed, you have seven days to change your mind.

Planning in Advance

If rumors of layoffs are circulating in your office, the option of quitting before the ax falls may tempt you, but staying may place you in a position to claim unemployment insurance and receive a severance package. Prepare in advance, whether you expect to be dismissed or not. Review your resources and your critical expenses to determine your financial needs. Create a list of the top benefits you want to negotiate. Examine the company's severance policy and make an effort to find out what former colleagues have received.

Steps You Should Take

If you are dismissed, take notes during the termination meeting and don't feel pressured to sign the severance agreement immediately. Stall for time to review the document and think it through. Typically, you will have 21 days to accept the agreement, and once it's signed, you have seven days to change your mind.

After an initial review of the agreement, you may decide to hire an employment law attorney, especially if you have evidence of discrimination, if the language in the package is too complicated or broad, or if the agreement is several pages long. Ask the lawyer which state laws govern severance agreements and if certain stipulations exist regarding timing and payment amounts. Also, talk to placement and recruitment agencies local to you, to determine how long it may take you to get a new job at the same level and salary.

What to Negotiate

Once you've made sense of the agreement, you should consider negotiating the following terms:

Severance pay

The severance pay offered is typically one to two weeks for every year worked, but can be more. If the job loss will create an economic hardship, discuss this with your (former) employer. The general practice is to try to get four weeks of severance pay for each year worked. Middle managers and executives usually receive a higher amount. Some executives, for example, may receive pay for more than a year.

Insurance coverage

Try to extend your health, life, and disability insurance coverage. The Consolidated Omnibus Budget Reconciliation Act (COBRA) allows for the temporary continuation of the health insurance policy you had with your employer for 18 months. However, the policy is usually costly when you are no longer with the company. Find out whether your employer can pay for your health coverage until you find a new job. You can also ask if the company can cover life insurance and disability income insurance for that period, or at the least for one month, before offering the continuance option.

Retirement/pension plans and stock

What happens to your retirement plan, pension plan, and stock plan varies by state and by the employer. Request a copy of the policies and review them with your attorney.

Outplacement

Many employers provide outplacement services. Ask that the service remain with you until you find a new job and try to choose the service yourself. Specify what you'll need from the outplacement firm, such as one-on-one counseling services, retraining, a phone, an office, or secretarial support.

Announcement of departure

Try to construct an agreed-upon announcement of your departure and a recommendation letter. Ask to draft the documents yourself, and make sure to include your major accomplishments. Attach the letters to the agreement.

Company perks

Finally, find out if you can keep any company perks, such as a laptop, and have the employer acknowledge this in writing. Some other options to consider, if you've had them, include extending your use of the company car or your company-sponsored health club membership.

Unemployment Insurance

The Federal-State Unemployment Compensation Program provides temporary financial assistance for unemployed workers. However, you must have lost the job through no fault of your own, and that's determined by state law. The benefits, which are taxable, usually last around 26 weeks, but a state may extend them when unemployment is high. Make sure your employer doesn't dispute your claim for this compensation.

The CARES Act, signed into law in March 2020, is making unemployment insurance (UI) available for Americans affected by the novel coronavirus pandemic—who, for example, have been quarantined or have had their hours reduced. The legislation has also made UI benefits available to part-time and self-employed workers. Due to the unprecedented nature of the crisis, the legislation offers numerous other types of support, including a Paycheck Protection Program for small businesses and independent contractors, for example, providing them with loans through June 30, 2020, that may be forgiven if funds are used to keep employees on payroll during the pandemic. 

While most companies offer a severance agreement, they are not always required to do so; laws can vary depending on the state.

Staying Ahead of the Game

One of the best times to alleviate the setback of a job loss is during the initial interview for the position. Discuss whether the company offers severance and how it's provided. Stay prepared at all times for a job termination by keeping a track record of your performance and accomplishments to help in the negotiation process. Also, stay informed of any updates to your employer's workplace policies, especially the severance agreement.

Finally, employees who are among a few dismissed have more of an opportunity to negotiate the terms within the agreement. In a mass layoff, a standardized package may be offered, and an employer is less likely to deviate from this contract.

The Bottom Line

If you are laid off from your job, it's just as important to negotiate on your way out as it is to negotiate on your way in. Because a former employer likely has an interest in making the process as civil as possible and maintaining its reputation as a good workplace, you'll often have some room to bargain.

Do some research to find out which severance benefits you can reasonably expect from your company, and then do your best to maximize them. If you consult with an employment law attorney, they may also have a sense of what has been offered to others in your former company. Remember, you have nothing to lose, and you'll never know what you might get unless you ask.