If you’ve been terminated or permanently laid off from a long term job your employer may offer you severance pay, also called a separation package. Severance pay can include a lump sum payment, a period of continued paychecks, continuation of benefits or other forms of payment. Companies aren’t required to offer severance pay, but those that do will have different sets of policies and guidelines for how severance is handled. For more information about severance pay read below. 

1. What is severance pay?

Upon termination, especially when employees are terminated through no fault of their own and/or have worked for the employer for a considerable amount of time, some companies have a policy of giving the terminated employee severance pay.  Severance pay is not required by the Fair Labor Standards Act (FLSA); how and whether an employer chooses to grant severance pay is at its discretion.

Each employer is different. The employer’s personnel manual or policies 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.

2. Who is eligible to receive 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. Employers who grant severance pay usually calculate it according to a set formula, based on the employee’s length of service. 

Even if your employer doesn’t offer severance pay, or you are not eligible based upon company policy, 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.

3. My employer wants to make a lump sum payment of my severance pay. How does that work?

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. A lump sum payment gives you immediate funds to invest or use. If you receive a lump sum, your other fringe benefits will usually cease as of the date of the payment. A lump sum payment is taxable, and the employer may withhold at a higher rate than usual if it puts you in a higher tax bracket, so you may wish to consider deferring part of the payment until the next calendar year to avoid having a greater amount withheld.

4. My employer has offered to pay severance by continuing my salary, even though I no longer work there. How does that work?

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 benefits, such as health 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.

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 generally 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. Can I cash out my vacation and sick pay when I leave the company to use as severance?

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.

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

6. What is a severance agreement?

A severance agreement is a contract that an employer may ask an employee to sign when they are terminated from a job. Severance pay is often offered in exchange for an employee’s release of their claims against the employer. Severance contracts that contain a release of all claims against an employer in exchange for severance pay or other benefits are legal, enforceable, and binding. However, an employer cannot require an employee to release their claims in exchange of payment for hours already worked or benefits already owed to the employee.

7. Are there federal laws that address severance agreements?

Yes. The National Labor Relations Board (NLRB) issued a decision in McLaren Macomb, 372 NLRB No. 58 (2023), regarding the enforceability of confidentiality and non-disparagement provisions in severance agreements for non-supervisory employees, irrespective of union status.  The Board ruled that an employer violates Section 8(a)(1) of the National Labor Relations Act (“NLRA”) by offering a severance agreement to employees that includes confidentiality and non-disparagement terms restricting the exercise of the employees’ NLRA rights.