Severance Pay – How Does It Work and Who Is Entitled to It?
Severance Pay – How Does It Work
Every day seems to bring more reports of layoffs in corporate America. That’s why it’s important for employees to understand how severance pay works and what they may be entitled to when leaving their employers.
Severance pay is compensation given to an employee if they’re laid off or fired for reasons that don’t have to do with their job performance. But the rules aren’t black and white and can vary widely based on company policy. We spoke to a legal expert and a talent mobility consultant to learn more about what it means to get severance pay, how it’s calculated and who’s entitled to it.
The answer to this question is largely dependent on the employer’s specific policies and whether it agrees to negotiate with the departing employee. In some cases, severance pay is automatically included in a letter sent to the employee upon termination. However, in most cases, it must be negotiated as part of the exit agreement or termination agreement. In addition, some states have continuation pay laws that require companies to continue salary and benefits for a certain period of time after termination under certain circumstances such as plant closures or mass layoffs.
Severance Pay – How Does It Work and Who Is Entitled to It?
Most employers who offer severance pay calculator do so in the form of a lump sum payment. However, some employers also provide other benefits as part of the package. Some common examples include continued health and dental coverage for a few months or even a year to allow for a smooth transition into a new job. Some companies also provide outplacement services to help employees find new employment, or assist with relocating if necessary.
The amount of severance pay an employee receives is often determined by how long they’ve worked for the company and what their current salary is. Generally, longer-term employees are entitled to higher amounts of severance pay than younger workers. In addition, some employers may factor in unused vacation or sick days when calculating severance payments.
Whether an employee is taxed on the severance pay they receive is also largely dependent on how it’s paid. If the company pays it as a portion of their normal wages, then the employee will likely be subject to the same withholdings they would experience on a regular paycheck. If the employer pays it as what the IRS considers supplemental income, such as a bonus or compensation for unused PTO, then the employee may be required to pay taxes on that extra money at a different rate.
Generally, employees aren’t legally entitled to severance pay unless they’re let go involuntarily, such as when a company is closing or has a major restructuring. However, if an employer is willing to negotiate a severance package in exchange for signing a release of claims or in a deal that’s part of an acquisition, then they may be more inclined to agree to it. Regardless, it’s best for employees to research what other employers in their industry are offering in severance packages before making a request.