Severance Pay and Unemployment
Being laid off from your job through no fault of your own is stressful. Fortunately, access to severance pay can help soften the blow and help you through your period of unemployment. After receiving severance pay, you may wonder if you are allowed to file for unemployment benefits. Learn how receiving severance will affect your benefit eligibility.
💡 What Is Severance Pay?
Severance pay is money paid to an employee when they are terminated. It can be a part of a severance package and is usually paid in a lump sum.
💡 What Are Unemployment Benefits?
Unemployment benefits are payments made by the government to eligible unemployed persons.
The Unemployment Insurance Program was established by the federal government in 1935 and operates under guidelines established by federal law. However, the program is administered with the cooperation of state governments, which have considerable control in determining eligibility requirements and the amount of cash payments.
How Severance Pay Affects Unemployment
Like any source of income, severance pay can reduce your unemployment benefits for the week or weeks in which it is distributed. For this reason, how you receive your severance pay has a significant impact.
In general, the amount you are eligible to receive in unemployment is calculated as a percentage of what you were making when you were employed. Severance pay will be deducted from what you are eligible to receive and can lower your total benefits.
Lump-Sum Payment vs. Weekly Payments
If severance is distributed as a lump sum, it will only affect unemployment for the week it was received.
If severance is distributed in weekly, biweekly or monthly payments, it will affect unemployment each week it is received.
If you plan to file a claim for unemployment benefits, a lump-sum severance payment will be to your advantage because it will only affect your claim for one week. It also requires less paperwork during your weekly certification process.
Why Do Employers Offer Severance Pay?
Severance pay softens the blow of involuntary termination for the affected employee. Employers may offer severance pay voluntarily as a gesture of goodwill or because it is stipulated in the employee’s contract or union agreement.
Sometimes, an employer may offer a severance package because they want something in return.
In exchange for a generous severance payout, the terminated employee may be asked to:
- Waive the right to sue the employers
- Sign an NDA (non-disclosure agreement)
- Sign a non-compete agreement
What Is Included in Severance Pay?
Traditional severance is a lump sum payout that typically includes one to two weeks’ salary for every year worked. If you have been with the company for a long time, this can be substantial.
Other perks can be included in a severance package—extended insurance benefits or equipment like a company car or computer, among other things.
Who Is Entitled to Severance Pay?
If you are a member of a union, severance pay may be guaranteed to you through your contract. Some non-union workers also have severance guarantees in their contracts. When severance is stipulated in your contract, your employer is obligated to pay you based on those terms.
If you are not guaranteed severance, you might still receive it either as a gesture of goodwill from your employers or because your state requires it.
In several states, employers that perform mass layoffs are legally required to provide severance to the affected employees.
Outside of these circumstances, severance pay is not legally required.
Is Severance Pay Taxed?
The IRS views severance payments as a form of supplemental income and is taxable for both income-tax withholding and FICA, the Federal Insurance Contributions Act tax that funds social security and medicare.
What To Do if You Are Terminated
If you are laid off or dismissed from your job, make sure you take notes during the meeting and review any paperwork you are asked to sign carefully. It is not recommended that you sign any agreement during the termination meeting. Instead, take time to review the severance agreement, any waivers and your existing contract carefully.
For Those Over 40
The federal Older Workers Benefit Protection Act protects older workers who are offered severance. That law requires employers to give workers over age 40 at least 21 days to consider severance agreements and then another seven days to revoke them. There are additional protections if you were laid off in a group or two or more.
For Those Under 40
Younger workers typically have two weeks to review severance agreements before signing. This length of time is considered reasonable in most cases. You might be entitled to other protections if you were laid off in a group of two or more.
For Those of All Ages
Employees of any age should consider hiring an employment law attorney, especially if the circumstances surrounding your termination involve harassment, discrimination, known illegal activity or other sensitive complaints.
A lawyer will know which state and federal laws govern your case and help you make sense of broad or complicated packages.