Everything You Need to Know about Severance Pay

You just landed your dream job. And between celebrating over cocktails and splurging on that high-end laptop bag, you're definitely not thinking about losing the job you just scored. 

But, layoffs happen. And even though thinking about unemployment is a total buzzkill, brushing up your knowledge of severance pay could ease the blow of a layoff. 

Knowing what severance pay is, how it works, and how your company handles it helps you unemployment-proof your finances. Plus it puts you in a better position to negotiate your severance package down the road.

Yes, you are seriously adulting now. Here's everything you need to know about severance pay. 

What is severance pay?

Severance pay is a payment (or multiple payments) an employee receives from their employer if they're laid off. A severance package could also include non-monetary benefits, like health insurance for several months or keeping company equipment, like your cell phone or laptop. 

Usually, as a condition of the severance pay, you’ll be asked to sign a form releasing the company from future legal claims. Signing means that you agree not to sue your employer for things like harassment, discrimination, unpaid wages, or wrongful termination. Sometimes you'll also have to sign a confidentiality, non-compete, or non-disclosure agreement. 

While severance pay sounds pretty sweet, keep in mind that it isn't required by law. Instead, it's a benefit of your workplace and voluntary for your employer. 

The only time severance pay is required by law is if a company has more than 100 employees and is laying off at least 50 people. Then, your employer is required to give at least 60-days notice. If they don't, you're entitled to 60 days of severance pay. 


Who gets severance pay?

Severance pay is typically for people who lose their jobs through no fault of their own. In other words, they're laid off for reasons outside of their control. 

Sometimes an employee may receive severance pay if they're fired, especially if the company wants to ensure they won't be sued later. 

People who quit their jobs don't usually receive severance pay unless they agree to resign instead of being fired. In these cases, the employee may be able to negotiate severance pay. 


How much is severance pay? 

How much severance pay you receive is entirely up to the company and your negotiating power. Sometimes your employment contract will outline how much severance pay you’re entitled to. Other times severance packages are negotiable.  

When calculating your severance pay, employers usually consider how long you’ve worked for the company and your position. An example of a typical severance package is two weeks of salary for every year you’ve worked at the company. 


How do I receive my severance pay?

Severance pay can be paid in one lump sum or multiple payments over time. Which one is better? That depends on where you live and if you’ll be applying for public unemployment benefits

Laws about severance pay and unemployment benefits vary state by state. It's a good idea to look into your state laws to see if you can collect unemployment benefits while you collect severance pay. If not, a lump sum payment would make it easier for your receive unemployment benefits. 

What if I don’t like my severance package?

You can 100% try to negotiate your severance pay and additional benefits. I say try because, while negotiating a severance package is common, it doesn’t mean your employer is going to budge. 

If you’re up for the challenge you can negotiate:


Do I pay taxes on severance pay? 

While receiving severance pay might seem like a sparkly unicorn in a sea of crappy life things, you should know that your severance pay is taxable. 

Just like your salary, you pay income taxes on your severance pay and payment for unused sick and vacation time. 

How do I know if I get severance pay?

The first place to look for details about your severance package is your employment contract. If your company offers severance pay, this document should outline the conditions of severance pay, how it’s calculated, and the payment terms. 

If you don't see information about severance pay in your contract, contact your HR department and ask how your employer handles severance pay. 

If your company doesn't offer severance pay, not all hope is lost! Employers can provide severance pay on a case by case basis. If you do face a layoff, meet with your HR department and talk with them about what they can offer you to ease your job transition. 

Here are some things to mention when asking for severance pay:

These points could help you get the severance package of your dreams. 


Is severance pay the answer to all my unemployment woes?

Probably not. While severance pay helps ease the transition to unemployment, it won’t instantly make your finances unemployment-proof. Instead, consider severance pay one part of a three-part unemployment plan. 

Part two is public unemployment benefits, which are available for people who lose their job through no fault of their own (like a lay off). Rules about unemployment benefits differ from state to state. Check with your state's unemployment office about what benefits you're entitled to and how severance pay affects your benefits. 

Part three is starting your own unemployment fund, which is money you put aside for unemployment. Unlike severance pay and state unemployment benefits, you have complete control over your unemployment fund. You decide how much you’ll need and what to save every month. 

If saving isn’t your jam, Otherhood can help you get your unemployment fund underway. We create a customized savings plan based on your personal expenses and make savings stress-free by withdrawing money directly from your paycheck as a pre-tax deduction. You can even sign up for an employer match, saving exactly what you need, faster. 

Now that you're a severance pay master, you can focus on the more essential things about your new job... like if you should get that laptop bag in hot pink or neon yellow. #Choices


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