Severance Package: What It Is And Examples

By Kristin Kizer - Dec. 21, 2020

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Losing your job feels awful. You’re hit with a one-two punch of anxiety and shock. What just happened? And what’s going to happen? Suddenly, you’re thrown out of the secure comfort of a regular paycheck. There’s one thing that might make you feel a little bit better: a severance package.

What is this miraculous thing called severance? We’ve got all the answers to your severance questions and a few tips on how to get severance pay.

What Is a Severance Package?

A severance package is sometimes referred to as the layoff payoff. This is more than just a clever twist on words – it’s a key to defining what severance is.

If your employer has to lay you off, they might offer you a severance package, which will include extra pay. This is required in some states when there is a mass layoff or a business closing.

In other situations, it’s strictly complementary and optional. If you were terrific in the negotiating aspect of your job hiring process, it might be something you included in your original work contract.

Basically, a severance package is pay and some other benefits to help you out in the event of your termination. The package includes more than severance pay, although that might seem like the most important part. A severance package can include:

  • Additional pay, typically based on your length of employment

  • Payment for unused accrued time off (holiday, vacation, sick time, etc.)

  • Any retirement benefits you’ve accrued or information on how to handle those accounts

  • Stock options are sometimes offered

  • Information about continuing your insurance benefits, typically on a COBRA plan

  • Employment assistance to help you find a new job

  • Sometimes career and emotional or mental health counseling is offered

What Is Severance Pay?

Severance pay is just an additional financial payout for people who have been terminated. It’s not your last paycheck or other money you’ve earned due to vacations and sick time you haven’t used. Severance pay is extra money meant to ease your transition from your old job into a new one.

Who Gets Severance Pay

There are a few situations and places that require severance pay, but they are typically related to employees not getting enough notice of a layoff or an entire company shutting down. The Worker Adjustment and Retraining Notification (WARN) Act covers these situations and can be useful, especially with questions around COVID-19 shutdowns.

If you are laid off, but your company stays in business, then they’re not required to give you severance pay. If you are fired, and there’s a good reason for it, your company isn’t required to provide you with severance pay, and they’re probably not going to.

But if you’re laid off as part of company-wide or department-wide layoffs, through no fault of yours, there’s a pretty good chance you’ll see some kind of severance pay. Employers understand that this type of move is hard on employees, and they don’t want to leave them in a bad situation.

Some people are good at thinking ahead, and they negotiate severance packages before they even step into the door of their new job. This is rare, but it happens. Obviously, the terms of severance will be worked out beforehand, and this will determine when you’re eligible and how much you’ll get.

The key to understanding severance pay is knowing that it’s almost always optional. The Fair Labor Standards Act (FLSA) requires employers to pay you for any time you’ve worked, but they don’t require an offer of severance pay.

So, the blanket answer to “Who gets severance?” is that nobody is entitled to it unless it falls under the WARN Act. But many employers offer it to people when there is a layoff situation. The only way to guarantee you get it is to have it written into your employment contract.

How Much Severance Pay Do I Get?

Severance pay is not a set amount or payment for a certain number of hours. Typically, it’s either a couple weeks of income, or it’s based on your time with the company. For instance, say you are with the company for 20 years and Jim was with them for two years. When there’s a mass layoff, and you’re both laid off, you can expect a much higher severance package than Jim.

The closest thing you can find to a rule of thumb in this area is that people get one week or two weeks for every year they’ve worked for the company. While this might be a nice way to estimate your benefits, it’s not a law, and it’s not something every company follows.

Why Some Companies Offer Severance

So, if not all companies have to offer severance pay, then who does and why? Well, as we explained above, FLSA does not require employers to give you severance. But then the WARN Act steps in and does require it in certain situations.

You can count on the WARN Act stepping in to help you if your company employs more than 100 people and is planning on a mass layoff. Then, you are supposed to get 60-days notice that your job is being terminated. If you don’t, you’re legally required to receive severance pay.

If your company is in Rhode Island, Idaho, Maine, or Massachusetts, then some state laws require severance pay if the company closes or there is a mass dismissal. Companies in these states don’t have a choice when this situation occurs, and they must pay all employees a severance.

Another reason companies offer severance is not very common, but it happens. It’s when a company wants to avoid problems with the employee. Whether the employee is a bad egg, and the company fears they will tell trade secrets, or there’s some possible discrimination on the employer’s side, severance may be offered. In these situations, the employee is asked to sign some papers preventing lawsuits and sharing secrets, and they, in turn, get a severance package.

The final reason why some companies offer severance is the most common one – it’s because they feel bad and want to do right by their employees. Layoffs are hard for everyone. The employers don’t want to do that to their valued employees, but they’re usually in a bad financial position. The employees are suddenly without a job or income, and severance can help.

Severance Pay Is Negotiable

One thing to remember: in most situations, when you’re being offered a severance package, it’s negotiable. The human resources department may not be keen on negotiating, but you might be able to get them to offer more.

If the layoff blindsides you, then getting your wits together and switching to negotiating mode can be challenging, but you can do it. Before you sign any separation agreement, ask to have some time to review it. This will give you time to get your ducks in a row.

If you knew it was coming, then your best bet is to begin planning your negotiating strategy as soon as possible. You might be able to get more pay, longer insurance extension, additional job hunting assistance, and maybe even a new position if you’re willing to move with the company.

What to Do Before Being Terminated

Not everyone knows that layoffs are coming, but if you have any advance notice, it’s time to start preparing:

  • Updated resume. The first thing you should do is start updating your resume.

  • Begin job search. Then begin looking at job boards to see what jobs are available. Whether you get a severance package or not, you’re going to need a new job.

  • Fill in gaps. If you need additional training for the job you really want, look into how to get the training, education, or experience you need.

  • Review finances. On average, it takes about nine weeks to get a new job. This is highly flexible and can depend on a lot of factors. But look at your finances to determine if you have enough money to survive nine weeks without a job. Do you need more severance? Now you have a little fuel for your argument.

  • Benefits. Make a list of the benefits you want. Some companies are more willing to negotiate extended benefits than they are to talk about money. Longer insurance coverage can be beneficial, but so could a bigger retirement payout or stock options.

  • Mentally prepare. Even when you know it’s coming, it’s still an emotional sucker punch when you lose your job. Preparing for it can help you get through. Remember that it’s not just you. It has happened (or it will happen) to most people at some point in their lives. You will get through it.

  • Don’t quit. You might get angry at the situation or be very frustrated. But in this situation, it’s best to let the layoff happen. Some people wonder if it’s best to quit or get fired, but this is different; it’s a layoff. This won’t reflect poorly on you as an employee and quitting can mean you won’t get any severance options.

Final Thoughts

When it’s time for your termination meeting and severance discussions, try to keep emotion out of it and stay in a business state of mind. Ask for time to review all paperwork before signing it. If you need help, consulting with an employment law attorney can help and might be worth it.

Finally, keep things as positive as possible because you’re going to want this job and some of your managers as references for a new job. Or, maybe they’re being let go too and will ask you to work for them once they land a new job. You never know.

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Kristin Kizer

Kristin Kizer is an award-winning writer, television and documentary producer, and content specialist who has worked on a wide variety of written, broadcast, and electronic publications. A former writer/producer for The Discovery Channel, she is now a freelance writer and delighted to be sharing her talents and time with the wonderful Zippia audience.

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Topics: Guides, Life At Work