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?
Employers have to pay severance in two situations. One is if your employment contract specifically provides for severance pay, and the other is if you are part of a layoff that had no warning.
The rest of the time, companies are generally offering severance in exchange for the former employees’ signatures on an agreement not to speak negatively of, or pursue legal action against, the company.
Severance helps employees stay on solid ground while they look for a new job. It’s a common courtesy for employers to provide it. So a company that routinely doesn’t pay severance could develop a bad reputation, potentially hamstringing their ability to recruit top talent.
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
Losing your job can be extremely difficult, especially if you didn’t see it coming. A severance package can soften the blow, and help you transition from jobholder to job seeker. Unfortunately, though, you don’t have a lot of leverage in negotiating the terms of your severance package. If your employer offers one that seems unfair, you’ll need to do some research to make your case. You’ll also need to prioritize your asks.
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 up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one 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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