Severance

This page addresses the following topics:

1. What is a separation package?

2. Severance pay

3. Lump sum payment

4. Salary continuation

5. Vacation and sick pay

6. Stock options

1. What is a separation package?

Most companies give terminated employees a letter or other document outlining what they are entitled to upon separation. Other companies require employees to take the initiative to find out their benefits. There can be many ingredients to a separation package.

2. Severance pay

Although employers are not required to do so by law, many give severance pay to some or all permanently laid off or terminated employees. Severance pay is usually calculated according to a set formula, based on your length of service. For example, one employee may qualify for an amount equal to one or two weeks of salary while another may qualify for as much as a year's pay.

You can try to negotiate for more severance than the company offers, especially if you have been with the company for many years, have an excellent service record, or have provided unique services such as being a team leader or bringing in large clients to the company. Sometimes employees who have quit their jobs because of intolerable working conditions can also negotiate for more severance pay than would normally have been provided.

Each company is different. Its personnel practices manual may or may not have a written policy on severance. Or its policy may state that severance will be paid on a case-by-case basis. If you receive severance pay, there are implications - which are discussed in later chapters - for income tax, unemployment compensation, and potential legal action.

Each method of severance payment-salary continuation or lump sum payment-has its good points and its bad points. Either way, most everything you receive in severance or settlement of legal claims is taxable. Because of a new law passed in 1996, any money recovered for employment discrimination or wrongful discharge claims, whether back pay, compensatory damages, or punitive damages, is taxable to you as income in the year you receive it. You might consider deferring part of the payment until the next calendar year to avoid being put in a higher tax bracket. Your employer will withhold from the payments whatever amount is due in taxes.

If you have a choice between the methods for payment of severance, give the following points some thought.

3. Lump sum payment

A lump sum payment is a one-time payment in full of the amount of severance pay that you and your employer have agreed to. After receiving the payment, you need have no further contact with your employer. You do not have to worry that your former employer may somehow make a mistake with payments or cease paying altogether. A lump sum payment gives you immediate funds to invest or use, for example, to hire a professional outplacement service or pay bills.

If you receive a lump sum, your other fringe benefits will usually cease as of the date of the payment. You should also take into account how long you think it will take you to find another job. If you accept a lump sum payment representing 10 weeks' pay, for example, you might not have any further income. You will not be able to ask your former employer for more.

4. Salary continuation

When an employer agrees to salary continuation, the employee ordinarily remains on the payroll for a specified length of time and receives pay at the end of each pay period as if he or she were still working. During this time, the employee's fringe benefits, e.g. medical insurance, ordinarily will continue. You can ask for continuation for a set number of weeks, or until you find another job. Generally, state laws will not permit unemployment compensation during the period of salary continuance.

Do not confuse salary continuation with periodic payments. Some employers may want to pay out the severance or settlement amount over time, perhaps 25% immediately, 25% six months later, 25% six months after that, and the final payment after six more months. Don't agree to such an arrangement unless you absolutely have to. Salary continuation is a fairly dependable method of payment of a settlement because the payments are regular. Once an employer agrees to salary continuation, the information is given to payroll personnel who send the actual checks. The manager or supervisor who authorized the payments has nothing more to do with it.

However, if the employer agrees to pay periodically over a long period of time, there is room for error and oversight. Missed or late payments are not uncommon. Such uncertainty can sabotage your financial planning and lead to unnecessary conflicts.

5. Vacation and sick pay

Contrary to popular belief, there are very few states with law giving you the right to "cash in" your unused vacation or sick time when you leave employment. Most companies that do have a policy regarding payment for unused leave differentiate between employees who leave voluntarily, those who are laid off, and those who are fired for misconduct. If your employer's policy provides for payment of leave, and you are accused of misconduct, you will either have to negotiate with your employer for payment or sue in court for "breach of contract." Unless the amount of unpaid leave is substantial, legal action is probably not worth the investment of time and money.

6. Stock options

Your right to exercise stock options is most likely limited by the termination of your employment. Often, you will forfeit the right to exercise the options-that is, to purchase-shares at the price set in the option if you were terminated for cause. If you were terminated for any other reason, the time you have to exercise the options will be very short.


This is a selection from Job Rights and Survival Strategies by Paul H. Tobias and Susan Sauter.