Layoffs can be a stressful time for many employees. Losing a job can make you feel powerless, anxious, and can require extensive lifestyle changes. You may worry about finding a new job, paying your bills, or needing to undergo training to switch careers. To ease this process, however, your employer may offer you a severance package, to support you through this transition. As amazing as severance packages can sound, there are some things you should know before you sign.
Are You Entitled to a Severance Package?
Generally, no. A company isn’t legally required to offer severance pay to departing employees. There are certain circumstances that can require a business to pay severance. There are a few states that require companies to pay a small amount of severance when a plant closes or a mass layoff occurs. They also must pay a severance package if they have previously agreed to do so.
There are other circumstances that may also help your recover a severance package. If it is written in the employee handbook that the company will offer a settlement to departing employees, you may be able to argue that it is an enforceable promise. If your employer also routinely grants severance pay to other employees, but not to you, it also may be possible to argue that the practice has created an enforceable contract.
Release of Your Right to Sue
Severance packages often include some form of compensation in exchange for an employee’s departure. They may include a lump sum compensation, continued benefits, outplacement services, or a combination of services and benefits. Severance packages allow a company to pay an employee some form of benefit to get an employee to agree to leave without filing a lawsuit or legal claim against the company.
Often, included in the severance agreement is a provision that waives the employee’s right to file a claim or otherwise take legal action against the company. If you sign the agreement, you give up your right to sue the company, even if you believe that you are being laid off due to discrimination, because you filed a workers’ compensation claim, or because you took leave you were entitled to under the Family and Medical Leave Act (FMLA). It is illegal to fire an employee for these reasons, and a lawsuit can be damaging to a company’s reputation. Sometimes, however, an employee will be offered a severance package in exchange for leaving the company quietly.
If you are offered a severance package and you feel that you are being laid off illegally, you should consult an experienced employment law attorney before you sign your agreement. They can advise you of your options and what your rights are. Your lawyer won’t be able to help you if you sign an agreement that does waive your rights to file a lawsuit, so it is important to speak to them first.
Non-Compete and Non-Disclosure Clauses
Your severance agreement may also include a non-compete or a non-disclosure clause. This can severely limit your ability to find work in the same industry. You may be barred from working for a competing company, or you may be forbidden from disclosing customer lists or recipes to a competing company. You may also find yourself unable to start your own business in the same industry. Some clauses may be fairer than others. Contact your attorney to have them review your severance agreement.
What is in Your Severance Package?
The benefits that are included in your severance package may vary, and you may be able to negotiate for a better package. You will need to carefully consider each benefit and determine if they are able to meet your needs. If you aren’t satisfied, be prepared to negotiate for a more suitable severance package.
You severance package benefits may include:
Extra compensation can vary greatly, but this is often included in most severance packages. Some employers may offer a standard amount, such as one or two weeks of pay, while others may calculate an amount based on your current salary and time spent working for the company. You may be able to negotiate for a greater amount of severance pay if you were an exemplary employee or were set to receive a raise before the layoff occurred. Factors like these can help you to increase your severance pay.
Accrued Paid Time Off
If you have accrued time off, such as paid vacations, holidays, and sick time, your employer may offer you the full amount or a percentage of accrued time off. Some may not offer any compensation for your paid time off. Check your state’s laws to learn if your employer is legally required to pay you for your time. You may be entitled to some amount of compensation for the time you have already earned. Your lawyer can help you fight for the compensation you are entitled to.
It isn’t as common for companies to offer continued insurance coverage as part of a severance package. Insurance is an expensive benefit, so it is important to consider what benefits you need before signing your agreement. You may be able to take over your plan and pay all associated costs, if you are able to afford it. You may be able to negotiate for continued coverage for a period of time, or you may need to purchase your own plan.
Ask your attorney if your state will allow you to collect unemployment benefits and a severance package, or if you forfeit your rights to unemployment benefits while your severance package is in effect. You may be unable to collect unemployment benefits until your severance package has run out. In other states, you may be able to collect both simultaneously, regardless of any contract you sign to the contrary. Your lawyer can help you collect the benefits you are entitled to.
There may be several ways that your severance pay can be paid out. There are pros and cons to different payment methods. Consult an accountant who is experienced with severance packages to learn about the financial implications of each type of payment.
- Lump sum: You may choose to take your severance benefits in one lump sum. This method may cause your severance pay to be taxed as a bonus or supplemental wages. This has a higher tax rate than your normal wages would be. However, if you need money soon, this may be the better option. Salary continuation can take several weeks to take effect.
- Salary continuation: If you choose to have your severance pay to be doled out the way your current pay is handled. This may mean weekly or bi-weekly paychecks. These are taxed the same as your current pay, however, it can also be considered income for the purposes of unemployment compensation benefits. If your benefits are equal to or more than your pre-layoff wages, you may not be eligible for benefits until your severance package ends.
Timeline for Your Decision
Your severance package should tell you how long you have to make a decision. Sometimes, this period may be a few days, but it may also extend for a week or two. If you are over 40 years old, the federal Older Workers Benefit Protection Act (OWBPA) requires your employer to provide at least 21 days to consider the offer. After you sign, the OWBPA also allows you 7 days to change your mind after you sign the severance agreement.
If you plan to negotiate a better settlement, it is important to work quickly. Contact your attorney and begin the process before the severance offer expires. If you plan to negotiate the terms of your severance package, you will need time to counter your employer’s offer and work towards a desirable severance agreement. Once the offer has expired, you may not be able to recover any form of compensation.
At Donati Law, PLLC, we understand the importance of negotiating for a fair severance package. You deserve to have your needs met while you transition to a new position after your layoff, and we are prepared to help you. Our Memphis employment lawyers are backed by more than 100 years of collective experience. We offer our clients high-quality and knowledgeable legal representation, with a passionate commitment to protecting our clients’ best interests.
Contact Donati Law, PLLC today for a consultation. Call (901) 209-5500.