What to Expect in a Severance Package

Image by Adrian Mangel © The Balance 2019

Are you losing your job? Have you been offered a severance package? While there is no legal requirement that a business must offer severance, many companies will provide it to employees after their employment is terminated. If you're in this position, you'll probably want to know if your package is reasonable, and, if not, can you negotiate a better deal? 

In general, severance pay is usually based on length of employment. For example, it could be a week's pay for every year of service or any other amount determined by the employer. When provided, it is given as either a lump sum or paid over a number of weeks.

A severance package may also include health insurance coverage for a certain period and continuation of other employee benefits coverage.

There is no requirement in the Fair Labor Standards Act (FLSA) for severance pay. Severance pay is strictly a matter of agreement between an employer and an employee. The employer has no legal obligation to give severance pay to a departing employee.

Why Some Companies Offer Severance

Losing a job is often unexpected for employees, and a severance package offers some breathing room by providing a paycheck, and potentially, other benefits.

However, employers do not offer severance packages merely to be nice. In order to receive the severance package, employees will often need to sign paperwork saying they will not speak negatively about the company. They may also need to agree not to pursue legal action or seek work with a competitor.

Typical Severance Benefits

If severance payments are not specified in the current collective bargaining agreement, a company is under no obligation to provide severance benefits to employees represented by a labor union.

When negotiated, a typical severance benefit for an hourly (union represented) employee is one week of pay for each year of service to a maximum of 26 weeks. For non-union employees, severance benefits are typically two weeks pay for each year of service—up to a maximum of 26 weeks. As well as salary, companies may offer outplacement counseling.

Company Severance Policies

When a company has a formal severance pay policy, it will include:

  • Purpose. The company will establish the purpose of the severance plan, which is generally to provide assistance to employees while they seek other employment.
  • Conditions for paying severance. A severance policy will also lay out under what circumstances an employee will be paid severance (e.g., involuntary termination, layoffs, etc.) and circumstances under which severance will not be paid (e.g., involuntary termination for cause, etc.).
  • Groups covered by the policy. Sometimes the company will limit the policy to certain classes of workers. For instance, salaried workers may receive severance but hourly employees will not. 
  • How severance pay is calculated. The employer sets the policy regarding employees receiving a week's salary for each year they were employed, or if another calculation ​will be used. The policy will also set guidelines for pay for such things as unused vacation time, sick days, personal days, etc.
  • How severance is paid. Employers can pay severance in a lump sum, or via regular pay periods for the specified duration. The payment method may affect the payout of unemployment benefits, depending on your state.
  • Documents to sign. A company may require employees to sign documents, such as a legal release, Hold Harmless Agreement, etc., before releasing severance pay.
  • Employer's rights to modify an agreement. A company's severance policy will likely offer some protection for the employer, giving them the exclusive right to amend or terminate the severance policy. Also, the severance policy may stipulate that in the event that the company is sold, acquired, merges, etc. severance will not be paid unless an employee is involuntarily terminated.

Negotiating Severance Pay

If the involuntary termination is part of a group reduction in force, it is unlikely that an employee would be able to negotiate a different severance arrangement.

The information contained in this article is not legal advice and is not a substitute for such advice. State and federal laws change frequently, and the information in this article may not reflect your own state’s laws or the most recent changes to the law.