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The core of any severance package is, naturally, the severance pay. Typically, this amounts to one or two weeks of pay for each year of service, although executives often receive significantly more. Many people view severance packages as an entitlement, yet they’re usually considered a benefit rather than a guarantee. Federal law does not require severance pay in most cases, though certain regulations apply when layoffs are abrupt and require the continuation of group health insurance. Whether a departure is voluntary or otherwise, companies offering severance packages often do so as a gesture of goodwill. Here’s what to expect in a severance package and how to negotiate one effectively.
Consider working with a financial advisor whose insights and guidance can help create an opportunity out of what at first seems like a setback.
What’s in a Severance Package?
The core of a severance package is often the severance pay itself, typically calculated as one or two weeks’ salary for each year of service, though this can vary depending on company policy. Some employers may offer more generous pay to employees with long service records or those in higher-level positions.
Health benefits continuation is another key part of a severance package. Under the Consolidated Omnibus Budget Reconciliation Act (COBRA), employers are required to allow former employees access to their health insurance plan for up to 18 months after termination. However, COBRA doesn’t require employers to continue paying the portion of premiums they covered during employment. It may be worth negotiating to have your employer continue contributing to these costs, as COBRA coverage can otherwise be costly.
Some severance packages may also include access to job training, a headhunter or outplacement services, information about filing for unemployment, rollover paperwork for your retirement savings plan or pension, and an agreement to not disparage the company or sue the company, which you must sign to receive your severance pay.
What Is a Reasonable Amount of Severance Pay?
Since severance pay isn’t legally required, it’s ultimately up to employers to decide a fair amount to offer, resulting in a wide range of severance practices. For instance, entry-level employees, those with shorter tenures or employees terminated for cause often receive little to no severance. In contrast, senior management, long-tenured employees or those laid off due to downsizing may reasonably expect a severance package.
Many employers calculate severance based on the employee’s years of service. Some industries follow a standard of one week’s pay per year of employment, while others might offer a month’s pay per year. For top executives at major corporations, “golden parachute” clauses in contracts can provide substantial payouts. For example, Marissa Mayer reportedly received $23 million when she left her position as Yahoo’s CEO.
Executives or high-level employees may receive severance in installments over time, whereas lower-level employees are more likely to receive a one-time lump sum payment following their last paycheck.
Do Employers Have to Pay Severance?
In most cases, employers are not required under federal law to provide severance pay when an employee is laid off or terminated. The Fair Labor Standards Act does not mandate severance, so whether a worker receives it generally depends on the employer’s policies, an employment contract, a collective bargaining agreement or the terms negotiated at separation.
An employer may still be legally obligated to provide severance if it previously promised the benefit through a contract or qualifying employer-sponsored plan. State laws can also affect what an employer owes, including rules involving final wages, accrued benefits or other termination-related payments.
Employees should also distinguish severance from notice requirements. Under the federal Worker Adjustment and Retraining Notification (WARN) Act, certain employers must generally provide advance notice before qualifying plant closings or mass layoffs. In some situations, severance or other payments may be used in connection with WARN obligations, but WARN itself does not create a general right to severance pay.
Because severance is often voluntary, employees may have room to negotiate the terms of a package. Compensation, continued health coverage, unused paid time off, bonuses, stock compensation and the wording of release or noncompete provisions may all be worth reviewing before signing an agreement.
Should You Negotiate Your Severance Package?
Your success in negotiating your severance package will depend on a number of factors. In many cases, an employer applies a uniform methodology to dole out severance to every employee they lay off. Again, this formula will usually depend on a combination of seniority and tenure. It’s quite likely that they won’t budge from this formula unless there are extenuating circumstances. This is particularly true of large-scale layoffs where they’re providing severance to many people.
If the company has a written severance policy, that’s another situation where the amount won’t be negotiable. In these situations, the policy was likely in your employment contract, so there wouldn’t be much point to negotiating.
If your employer doesn’t have a written severance policy, you may have better luck negotiating. Same goes if you’re not losing your job as part of a reduction in force. When negotiating, you should decide what you want most from your employer and structure your proposals around that. If your biggest priority is pay, demonstrate to your employer how the amount they proposed doesn’t adequately reflect the value you generated for the company. If you directly generated revenue, you can use your actual contributions to support this.
Pay may not be your biggest priority though. You could take slightly less pay in exchange for keeping your health benefits for a longer period of time. Additionally, you may want to propose taking less in exchange for a written guarantee from your employer that they will serve as a positive reference when you’re applying for your next job.
Bottom Line
Severance packages can provide important financial support after a job loss, but the amount and terms can vary widely. Employees should review how severance pay, benefits, unused compensation, taxes and legal provisions are handled before signing an agreement. Understanding what is negotiable and what the employer is legally required to provide can help workers make more informed decisions during a transition.
Tips for Finding a Financial Advisor
- Severance pay can help during unemployment, but your job search could very well outlast it. In these situations, an emergency fund can be extremely helpful. You can stash your emergency fund in a few different ways, ranging from a savings account to a CD ladder.
- A financial advisor can help you develop a financial plan that prepares you for anything life throws your way. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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