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severance package

The most important component of a severance package is, of course, the severance pay. It, in turn, is typically one or two weeks of pay per year of service, though it’s much more than that for executives. Most of us probably think of severance packages as a right. But in most situations, they are a privilege. No federal law mandates them, though there are laws governing severance pay when layoffs come without warning and that require access to  group health insurance plans. Whether the parting of ways is voluntary or not, a company that offers a severance package is doing so as a courtesy – and to buy some goodwill. Read on for more about what you should expect in a severance package and how to negotiate one for yourself.

What Is in a Severance Package?

As just noted, the central element in a severance package is the severance pay. It’s generally one or two weeks per year of service, but depends on company policy. Some employers may pay more to people who have long tenures or high-level jobs.

Another important component of a severance package is the continuation of health benefits. According to the Consolidated Omnibus Budget Reconciliation Act (COBRA), employers must offer access to their health insurance plan for 18 months after termination. But the law doesn’t say the employer has to continue paying whatever portion they covered when you were an employee. So one thing to look out for – and possibly negotiate – is their continuing to pay their share of your health insurance costs. Otherwise, the cost of COBRA coverage can be prohibitively expensive.

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 there’s no legal requirement to offer severance pay, it’s up to employers to determine a reasonable amount to provide. Consequently, severance pay can vary widely, depending on a number of factors. If you were entry level, worked there briefly or were fired with cause, it’s quite likely you’ll receive little to no severance. On the other hand, if you were upper management, worked there a long time or you were laid off (rather than fired), you may reasonably expect to receive some severance.

Many employers base severance pay on the employee’s years of service. In some industries, the standard is one week’s pay for every year the employee worked; in other industries, it’s a month of pay per year. Top executives at large companies may have a  “golden parachute” – sometimes millions of dollars in severance pay – written into their contract. For instance, Marissa Mayer reportedly received $23 million of severance pay at the end of her brief tenure as CEO of Yahoo.

Some employees, typically executives or other high-level employees, receive their severance in regular installments. Lower-level employees are more likely to receive a lump sum after their last paycheck.

Do Employers Have to Pay Severance?

severance package

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. Additionally, 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.

The Bottom Line

severance package

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. SmartAsset’s free financial advisor matching tool will connect you with up to three qualified advisors in your area. Just answer some questions about your financial situation and goals, and the tool will find local advisors that fit your needs. Get started today.

Photo credit: ©iStock.com/hoozone, ©iStock.com/PeopleImages, ©iStock.com/tolgart

Hunter Kuffel, CEPF® Hunter Kuffel is a personal finance writer with expertise in savings, retirement and investing. Hunter is a Certified Educator in Personal Finance® (CEPF®) and a member of the Society for Advancing Business Editing and Writing. He graduated from the University of Notre Dame and currently lives in New York City.
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