Understanding Employment Severance Packages

Employment Severance Packages

A severance pay or package is usually given to employees upon employment termination as a prerogative of an employer. The amount of a severance pay is sometimes based on the period of time employees have worked for the company. Employment severance packages may include pay for benefits (for example, unused vacation time) of employees leaving the company.

There are times in which severance packages may be given to employees who resign, regardless of the situation, or are terminated. Policies regarding employment severance packages are usually found in the employee handbook of a company.

Employment severance package agreements usually specify that the employee will not try to collect on unemployment insurance or file a wrongful termination lawsuit against his/her employer and if the employee does so, then he/she has to give back the severance money.

In addition, the giving of severance package by employers is granted at their discretion, and not mandatory.

Along with the remaining regular pay of an employee, an employment severance package may include, but are not limited to, the following:

Additional payment on the basis of the amount of time of one's service to the company

Payment for unused sick leave or vacation time

A payment in place of a notice period that is required

Dental, medical, or life insurance

Retirement benefits (such as 401K)

Stock options

Help in looking for new work (for example, assistance in creating a resume or access to employment services)

Determining the Amount of Severance Pay

How does an employer determine how much severance pay to grant to an employee? This is one of the important questions about severance pay.

For employers, a rule of thumb is to pay one week's salary for each year of the employee's service to the company. Many policies about severance pay give a limit or a minimum and maximum payment, for instance, a minimum of three weeks and a maximum of 27 weeks.

Severance pay is taxable and it may be given out in regular payments similar to a paycheck. However, the majority of employers pay in a lump sum.

Are There Laws Governing Employment Severance Packages?

In the Fair Labor Standards Act or FLSA, employment severance packages are not required. Severance package is a matter of agreement between an employee and an employer. One that may help employees who did not get severance packages under their plan that is sponsored by their employer if the employer said that it offers one is the Employee Benefits Security Administration or EBSA.

When employment severance packages are paid in lump sums on an entirely voluntary basis, it does not comprise benefit plans that is covered by the Employee Retirement Income Security Act or ERISA. When an employer has a procedure or policy about payment of severance packages, the procedure or policy can comprise an employee benefit plan under ERISA, meaning, the severance package program has to be described in a summary plan and formal plan description.

Because employment severance packages are not mandatory, it is a good idea to ask for some legal advice from an expert attorney.

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