In most cases, a company is not required by law to pay severance. When an employee leaves a company, the Fair Labor Standards Act (FLSA) requires that the employer pay his or her regular wages through the completion date and for accrued vacation time. It does not, however, require severance to be paid. Generally, severance pay is paid by agreement between an employer and an employee or employee representative, such as a union. However, the Worker Adjustment and Retraining Notification Act does require employers to either give a 60-day notice of a mass layoff or pay 60 days of salary and benefits.
Additionally, certain employment contracts, employee handbooks, and union contracts require severance. Sometimes severance is given as an incentive to quit or retire. In most cases, an employer paying severance will require that you sign a release that frees the employer from all potential liability, including discrimination claims, in the future.
If you are over 40, you will be asked to sign a separate release for age discrimination lawsuits that could be brought under the Age Discrimination in Employment Act (ADEA). Under federal law, you will have 21 days to decide whether to sign the release and accept severance pay. If more than one employee is terminated around the same time, the layoff is considered a “group layoff.” This means that if just one employee is over 40, each of the laid-off employees must be given 45 days to consider the agreement.
How Is Severance Paid?
At larger companies, giving severance as a lump sum payment or a brief continuation of salary is common and negotiable. Receiving it as a lump sum is preferable if you want to be able to collect the full amount of unemployment compensation going forward after the severance is paid. If severance is paid over time, the amount of unemployment compensation will be reduced until you stop receiving severance payments. However, if the payments are spread out, it is more likely that your employer will continue paying for your health insurance.
Under the Consolidated Omnibus Budget Reconciliation Act of 1995 (COBRA), you are likely to be entitled to continue the medical coverage you had under your employer’s plan for up to 18 months, but you probably will have to pay the premiums yourself. You may be able to negotiate for your employer to continue paying your health insurance premiums for a certain period of time.
In general, severance at these companies averages 2.5-3 weeks of pay per year of service for top and senior executives who are involuntarily separated. However, it is 1.4-1.8 weeks of service for others. The number of years may be capped. Additionally, you should be aware that it is considered taxable pay that can result in your qualifying for a higher tax bracket.
As part of your severance negotiations, you may want to recoup unreimbursed travel expenses and payment for unused vacation or sick time. You also can ask to keep your unvested interests, such as stock, stock options, deferred compensation, or company matches to a 401(k) plan. You may want to ask for a prorated share of your bonus for the year, if you are typically given bonuses.