Severance Pay
Whether it’s a layoff or simply a company downsizing, firing employees is an unpleasant part of business. Some employers, however, choose to provide severance pay (also called retiring allowance) to departing workers in order to soften the blow of being let go. Severance packages often include compensation and extended benefits like outplacement services or even health coverage. The specific terms of severance are outlined in an employee’s contract and vary from company to company.
Companies are not required to offer severance pay, but it can help mitigate the financial impact of termination and make it easier for outgoing employees to find new jobs. It can also protect the company from legal action by disgruntled former employees.
Laid-off employees who feel underappreciated or undercompensated may post negative reviews of their former employer on Glassdoor, Facebook and other social media platforms. In addition to hurting a company’s reputation, negative reviews can also cost a company money by deterring potential job applicants.
What You Need To Know About Severance Pay
The amount of severance varies by industry and company, but it’s usually based on a worker’s years of service. A severance package might include a lump sum payment and extended benefits like unused vacation or sick days or previously unreimbursed business expenses, explains Sahara Pynes, an employment attorney in Los Angeles. She says that a typical severance package is 1-2 weeks of salary per year of service.
It’s possible to negotiate a severance package, and you should take advantage of the time your employer gives you to decide whether or not to accept it. During this time, you should ask for more than the “standard” package or what is typically offered by companies of your size and industry. Clark suggests looking at the severance packages of similar businesses in your industry or region to get an idea of retiring allowance what you might be able to expect.
A key consideration is how your severance package will affect unemployment insurance. In many states, severance pay counts as income and can reduce your unemployment benefits. Check with your state’s labor department or an unemployment benefits hotline to learn more.
The proliferation of remote work arrangements has introduced new considerations into the realm of severance pay. As geographical boundaries blur and employees work from diverse locations, employers must ensure that severance packages account for remote work realities, such as access to healthcare benefits across state lines, remote job search resources, and the portability of retirement savings and other financial benefits.
If you’re a salaried employee, you’ll likely have to report your severance package as income, and it will be taxed according to your federal and state taxes. If you receive a lump-sum payment, you can typically use it to cover the difference between your federal and state taxes or save it for retirement.
