The practice of offering severance packages is uncommon in the United States due to most positions being at will. Severance agreements are a way to ensure that employees stay financially healthy even after they no longer work for the company. It’s a way to show goodwill and maintain a positive relationship with former employees.
Key Takeaways:
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Severance packages are an agreement between the employer and the employee.
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Most severance packages are based on how long the employee worked for the company and will compensate them more heavily than newer employees.
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They can include monetary compensation, usually based on salary, an extension of benefits, and continued use of company property.
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Severance agreements are rare in the United States due to most employment being at-will.
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The Fair Labor Standards Act does not require employers to offer severance packages.
What Is a Severance Package?
A severance package is an agreed-upon compensation package that an employee gets if they leave the company involuntarily. In the United States, they are most often used in layoffs so that the company can show appreciation for the work their employees put in before they had to let them go.
As the majority of employment in the United States is at-will, severance packages are uncommon. A few states require them, but they are the exception rather than the rule. Union-based employment often has severance packages to help employees stay on their feet until they’re able to find another job.
There aren’t any federal requirements in terms of severance packages, though some states have laws about them. That means that what is included in them can vary wildly from one business to another and even among individual employees.
They may also have additional agreements included in them, such as non-competes, a loss of liability, or non-disclosure requirements.
How Do Severance Packages Work?
Severance packages can vary greatly. As there aren’t any rules about them under the Fair Labor Standards Act, severance packages end up being individual agreements between the employer and employee. That means that how much is paid and what benefits are included vary from company to company and person to person.
The majority of the time, severance packages apply during layoffs or firings. Voluntary resignations and being fired for the cause can obviate a severance agreement, depending on the contract.
Severance packages can have several different purposes. They can:
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Show appreciation for an employee’s service. Most employers that offer severance pay want to help take care of the people who work for them. This is especially true if the employee was with the company for a long time, but budget constraints or restructuring causes the need for layoffs.
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Keep the employee and their family financially stable. While legally, it’s not the employer’s responsibility to help with this, it’s morally correct. It allows the now former employee to be more judicious in their job search and to not struggle to make ends meet until they land a new job.
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Maintain goodwill. If a severance agreement is offered when an employee is onboarded, it can help them to feel more secure in their position. And if it’s offered when they’re laid off, they’re much more likely to maintain a positive relationship with the company and even recommend it as a place to work.
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Extend helpful benefits, such as health insurance. In the United States, most people’s health insurance is tied to their job. Extending their health insurance benefits – or even covering them – while they’re searching for a new position can make a huge difference in how secure they feel.
Other services can also be extended, such as retirement benefits. Employees could be allowed to not transfer the funds right away, and the company can even continue to pay into the account for a period of time.
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Be used as an incentive. This can work in several different scenarios. It can be an incentive to work for a particular company – in terms of job security – or an incentive to leave. Voluntary severance is when an employee is offered a severance package if they resign.
There are a few reasons for voluntary severance. One is if the company already has to do layoffs, they can offer severance so that employees can resign themselves, and the company doesn’t have to pick people. If an employee is struggling, it can also be a way to let go of them without firing them.
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Be used as a payoff. Many severance packages have other obligations attached to them. For instance, if an employee accepts one, they may be barred from suing the company, or they may be locked into a non-compete or non-disclosure agreement.
This can be beneficial to both parties in terms of a sort of settlement or be used unscrupulously.
What Is Included in Severance Packages?
As there are no legal requirements in the majority of states for a severance package, what’s included in a severance agreement can vary wildly. However, there are some standards and some typical benefits that they can include.
Severance packages can include:
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A payment. Most severance agreements contain a provision to offer the soon-to-be former employee money. The amount is typically based on the employee’s salary and the amount of time they’ve worked for the company. The standard is one to two weeks’ pay per year the employee was at the company. However, there’s often a cap.
This can be paid in two different ways:
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Lump sum. Many severance packages will grant the amount of money in a lump sum. That means that it will be paid all at once, and the obligation will be met.
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Over-time. The other option is to pay it over a period of time. As in, the employee will continue to be paid as if they’re still working for the company for an amount of time stated in the contract. Some businesses will cease payments once a new job is found, but that has to be stated in the contract.
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An extension of benefits. This can be in addition to the monetary compensation or instead of. Ideally, for the employee, it would be both, but a continuation of benefits can still help them stay afloat while they search for a new job.
What they are can vary, but often include:
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Health insurance. Many good severance packages will allow the employee to continue to access the company’s health insurance. If the company has the budget for it, it can even cover the cost of it for a period of time.
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Retirement benefits. The employer can offer to maintain the employee’s retirement fund for a period of time so that the employee doesn’t have to transfer the money out of it right away. They can also continue to pay into the retirement fund if they so choose.
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Continued use of company property. This can be continued use of the company car for a period of time, or even having ownership of a company computer or phone transferred to the employee. This is often contingent on the seniority of the employee and the value of the items in question.
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Job hunting services. An additional service the employer can offer is paying for a service to help the employee find a new job. Especially in the case of a layoff, it can help the former employee find new employment quicker, as well as a job that caters more to their individual skills and interests.
Severance Package FAQ
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Do you get severance pay for a voluntary resignation?
No, severance pay isn’t granted for voluntary resignation in most cases. Most severance agreements are based on the employee losing their position involuntarily, usually through a layoff. Many won’t pay out if the employee either resigns or is fired for cause.
The exception to this is voluntary severance, where a severance package is offered as an incentive to resign. These are often used in place of a layoff or if the company doesn’t have grounds to fire an employee but doesn’t feel that they’re a good fit.
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Can you still get unemployment benefits if you get a severance package?
There isn’t a clear yes or no answer to whether severance packages prevent you from getting unemployment. The answer is based on the laws in the state that you work in.
Some will allow you to collect both simultaneously, others will allow you to get unemployment once the severance payments end, and others require you to choose one or the other.
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Is severance pay a requirement?
No, severance pay isn’t a requirement in the United States. The Fair Labor Standards Act doesn’t require it, meaning that it’s up to the employer and employee to negotiate any possible severance agreement. Some states have laws on the books about it, and a few may require it for certain positions, but that’s not the rule.
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What is voluntary severance?
Voluntary severance is when an employer offers an employee severance pay if they resign. This can be done during layoffs so that the employer doesn’t have to choose who to let go of, or it can be part of a restructuring or sending an employee that didn’t quite work out on their way.
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Author
Di Doherty
Di has been a writer for more than half her life. Most of her writing so far has been fiction, and she’s gotten short stories published in online magazines Kzine and Silver Blade, as well as a flash fiction piece in the Bookends review. Di graduated from Mary Baldwin College (now University) with a degree in Psychology and Sociology.
