Severance pay is a monetary payout an employer offers employees who are being let go through no fault of their own. Common reasons for severance packages include a layoff, job elimination or a mutually agreed upon reason for separation. If you receive a severance package, you can also collect unemployment, but you must follow your state's guidelines carefully. These guidelines also depend on the type of severance package you receive: a lump sum or graduated payments.
Lump Sum Severance
A lump sum severance package pays the full amount of the severance pay all at once. The amount of severance is usually based on the employee's income at the time of termination, length of employment and overall performance while on the job. Traditionally, severance pay is one to two weeks' pay for each year worked, but companies can create a severance package as they see fit.
Senior employees or employees with a lengthy employment history with a company might be paid a severance package in installments. The severance package is calculated the same way as the lump sum payment, but instead the amount is paid to the employee in weekly or monthly installments. This method is most often used by companies that are eliminating a large portion of their work force, ceasing operations altogether or for several employees with larger severance packages.
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How severance pay is treated in regards to unemployment varies by state. Some states require unemployed workers to exhaust all severance pay before collecting unemployment. Other states allow unemployed workers to collect jobless benefits while receiving severance pay but deduct the amount of severance from the benefit payment. Check with your state unemployment office to determine how severance pay affects unemployment compensation.
Although a severance package is a voluntary benefit offered by employers to their employees, certain guidelines can still apply. For example, if a company offers a severance package at the beginning of employment, it is legally required to honor the agreement at the time of separation. Also, some companies attempt to force employees to choose between a severance package and unemployment. However, since the state determines whether an unemployed worker is entitled to jobless benefits, these agreements are rarely enforceable. If your company attempts to do this, contact your local unemployment compensation office or an attorney for advice before signing any documents.