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 such features when they depart from an organization as well. 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 the 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.
  • Severance agreements are not required by law, but employers tend to offer them as gestures of goodwill or to be competitive in their industries.
  • 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.
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Planning Your Severance 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 multiple pages long. Ask the lawyer which state laws govern severance agreements and if certain stipulations exist regarding timing and payment amounts. Also, talk to the local placement and recruitment agencies to determine how long it may take you to get a new job at the same level and salary.

What to Negotiate

Let's take a look at some of the terms you should negotiate once you've made sense of the agreement.

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.

If your lump-sum severance payment is considerable, it could push you into a higher tax bracket. If that's the case, you could ask that the payment be spread out over two years to reduce the tax bite.

Insurance Coverage

Try to extend your health, life, and disability insurance coverage. The Consolidated Omnibus Budget Reconciliation Act (COBRA) allows for the continuation of the health insurance policy you had with your employer for 18 months (and longer in some months). The policy is usually costly since you are now having to pay your employer's portion of the premiums as well as your own. However, as part of the American Rescue Plan Act of 2021, the government has waived all premiums from April 1 through Sept. 30 in 2021 for people who have lost a job or had their hours cut.

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 remains 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 equipment, such as a laptop, and have the employer acknowledge this in writing. Some other perks 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 Coronavirus Aid, Relief, and Economic Security (CARES) Act, signed into law in March 2020, made unemployment insurance (UI) available for Americans affected by the coronavirus pandemic—who, for example, had been quarantined or had their hours reduced. The legislation also made UI benefits available to part-time and self-employed workers.

The American Rescue Plan, signed into law on March 11, 2021, extends the unemployment benefits put forth in the CARES Act. This $1.9 trillion stimulus package provides Americans with a $300 weekly supplemental unemployment benefit on top of their regular UI benefit until Sept. 6, 2021.

Furthermore, benefits through the Pandemic Unemployment Assistance (PUA) program, which covers the self-employed, gig workers, part-timers, and others who are typically ineligible for regular unemployment benefits will be available until Sept. 6, 2021.

Please note, however, that a total of 25 states have elected to end the $300 federal supplement early. The best way to confirm the status of your unemployment benefits is to check with your state's unemployment office. The Department of Labor lists the contact information for all fifty states' labor offices on its website.

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 before you even start the job. When considering an offer, 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 group reduction in force may or may not 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. Still, numbers carry weight, and employees can band together to ask for a revision in terms.

Severance Package FAQs

What Is an Appropriate Severance Package?

There is no single definition of an appropriate severance package, as they vary greatly by industry and company. However, severance packages typically include pay through the termination date and for any accrued vacation time, unreimbursed business expenses, and an additional lump sum—typically, one to two weeks for every year worked. Ex-employees may receive additional benefits, such as reimbursement for outplacement or job-hunting expenses. By law, employers of a certain size must offer the opportunity to continue health care coverage under the company's plan, at the ex-employee's expense.

Why Would a Company Offer a Severance Package?

Though not obligated to by law, companies typically offer severance packages as a gesture of goodwill and recognition of an employee's service. A severance package reduces the sting of termination. A company may also offer one to stay competitive in its industry. Finally, severance packages are provided to forestall lawsuits, as employees often sign a release, agreeing not to seek further compensation or pursue legal action, as part of the separation agreement.

How Are Severance Packages Calculated?

Often, severance packages are calculated based on how long the employee has worked for the company. Employers develop their own formulas, using the time of service—for example, two weeks of severance pay for every year of employment. Calculations may also be based on the employee's rank or position.

Should I Accept a Severance Package?

Accepting a severance package is entirely up to the individual employee. Usually, it is the only way to receive any money beyond what you are owed in terms of wages, vacation pay, and expenses from your employer.

Severance packages often demand you sign a release waiving any right to sue the company or pursue further claims against it. So you might not wish to accept a severance package if you think you have been wrongfully terminated or discriminated against, and you might want to take legal action in the future. You might also decline the severance package if you feel the terms are too onerous: It includes a non-compete clause, for example, preventing you from working for another firm in your field.

Never accept a severance package without examining it carefully, asking questions, and making sure you are fully satisfied with all the terms and conditions.

Can You Negotiate a Severance Package?

You can always try to negotiate a severance package. You generally have 21 days to sign an agreement, so take your time to review all the provisions, to get a sense of what is standard in your industry in general and at that company in particular, and for those at your management level or with your years of experience.

Elements of a severance package that might be up for negotiation:

  • Amount of severance pay
  • How severance is paid (installments or lump sum)
  • Coverage of healthcare plan costs
  • Exact date of termination
  • Vesting in a retirement plan or stock options
  • Outplacement or job-training services

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. (You also need to consider how most effectively to use any severance lump-sum payment, to avoid a large tax bite on it.) If you consult with an employment law attorney, it may help you get a sense of what is standard in your field or profession, or among employers of that size.

Don't hesitate to ask questions—or for more. Remember, you have nothing to lose, and you'll never know what you might get unless you request it.