In today’s unpredictable and competitive employment market, one common concern among employees everywhere is severance pay. Although many people believe that professional jobs automatically come with severance pay, this is not always the case. For those who are job hunting or are concerned about being fired from a professional job, it is important to understand how severance pay works and when it is applicable.
Severance Pay And The Law
Not all companies are not required by law to provide severance pay. If an employee leaves a job voluntarily, the Fair Labor Standards Act mandates that the worker must be paid his or her wages through the date of completion. Also, the worker is entitled to be paid for any vacation accrual. A severance sum is not mandated by the FLSA. Employers may offer severance pay if they choose to do so. It may be offered to employees on a certain level or all employees of a company. If severance is paid, it is often paid through an agreement between the employee and the employer or a union.
In the event of a mass layoff, employers are required by the Worker Adjustment and Retraining Notification Act to notify workers 60 days in advance. If the employer does not or cannot provide notice within that period, the employer is required to pay the workers their regular salary and benefits for 60 days. For example, a company that is closing in 30 days and must lay off workers would still have to pay the workers for 30 days beyond the closing date. If a company promises severance pay in its employee handbook or through an employment contract, the company is required to honor its commitment. Employees who receive a severance benefit are usually required to sign a contract from the employer that liberates the employer from any future legal claims or liabilities.
Another common requirement that accompanies severance release forms is an age discrimination release form. Anyone who is over the age of 40 is usually required to sign this form since some people file lawsuits under the Age Discrimination in Employment Act. Employees who are over the age of 40 and are presented with a severance option have 21 days to decide whether or not to accept the offer under federal law. However, employees have 45 days to consider the offer if more than one person is being laid off at the same time and at least two of the workers are over the age of 40. This is because more than one person being laid off at a time is considered a group layoff.
How Severance Is Paid
Most large companies offer severance in the form of one lump payment. In some instances, severance is calculated based on continuing salary for a certain period. When this is the case, severance may be distributed in several payments. A lump sum is the best option to accept if an employer offers multiple choices for payment. When payments are received in multiple increments, some employers provide a larger payment upfront followed by diminishing payments until there is nothing left to pay.
One benefit of receiving multiple payments is continuing health insurance. In some instances, an employer will pay the severed employee’s health coverage until severance pay runs out. Employees can ask about this before accepting a payment structure. Although workers are often allowed under the Consolidated Omnibus Budget Reconciliation Act to continue receiving health benefits from a former employer for up to 18 months, they are usually required to pay the premiums themselves. Many group plans have expensive individual premiums. Some workers who know that they will be laid off may be able to negotiate with an employer to have the company continue paying for health benefits for a certain period.
When calculating severance pay, employers usually base it on the worker’s salary and invested years. For example, many large companies that employ top-level executives offer about three weeks of severance pay for every year of work. This means that an executive who worked for a firm for 10 years may receive a severance package that includes between 25 and 30 weeks of pay. For lower-level employees, severance pay is usually equal to less than two weeks of pay for every year spent at the company. In many instances, severance pay comes with a year number cap. This varies from one company to another and may also vary based on an employee’s position.
Severance pay is taxed. Receiving a lump sum could put a person in a higher tax bracket. Many workers benefit from contacting a tax professional before accepting a payment option when they are presented with more than one choice. When being laid off, workers can also try to recoup reimbursement for travel expenses, sick time or unused vacation time. Additional benefits such as 401(k) contributions and others may be kept by the employee.
About Jeremy Goldstein
Jeremy Goldstein is a partner at Jeremy Goldstein, LLC. His firm serves the greater New York City area. Mr. Goldstein earned a bachelor’s degree in history from Cornell University in 1995. He earned a master’s degree in history from the University of Chicago in 1996. In 1999, he earned his law degree from the New York University School of Law. Jeremy Goldstein volunteers his time as a director at Fountain House in New York. The non-profit organization helps men and women receive treatment for mental health issues.
In the past, Mr. Goldstein served as a partner for 14 years with another firm. He gained valuable experience in executive compensation with a focus on issues related to mergers and acquisitions. Additionally, he has extensive experience in executive compensation in relation to corporate governance. Jeremy Goldstein is also a member of several prestigious associations related to corporate governance and executive compensation.
Jeremy has contributed before on our blog. Read his opinions on stock options for employees: https://thereisnoconsensus.com/jeremy-goldstein-explains-knockout-options-help-employers/