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Generally, a severance package is made up of pay and benefits given by an employer to a dismissed employee. But contrary to some belief, a severance package is not given as an entitlement prescribed by law, rather it is an employer’s prerogative – which means this benefit is given as a token under the employer’s discretion.
While some companies may offer packages to departing employees, other companies offer nothing at all. Hence, severance packages may also vary in content. In any case, a severance package usually contains benefits meant to help an employee. In some instances, some employees even consult with lawyers to be able to negotiate for a better severance package.
In addition to the employee’s remaining regular pay, a severance package may also include some of the following benefits:
- Medical, dental or life insurance
- Retirement benefits
- Payment for unused vacation time or sick leave
- A payment in lieu of a required notice period
- Stock options
- Assistance in searching for new work, such as access to employment services or help in producing a résumé
- An additional payment based on months of service
Typically, severance packages are offered to employees who are laid off or those who retire. In some cases, they may also be offered to people who resign, regardless of the circumstances, or are dismissed or fired.
Employees may find the rules and policies governing severance packages in a company’s employee handbook. These policies are often based on local employment statutes and federal law.
Most severance contracts stipulate that the employee will not sue the employer for wrongful termination or attempt to collect on unemployment insurance. Otherwise, if an employee has plans to take legal action against his employer regarding his dismissal, he must return the severance pay or refuse to accept it.
An employee who gets a severance package offer has two options: to take a lump sum severance payment, or opt for salary continuation payments. However, before taking any of these options, he must take into consideration the following facts:
- If an employee needs immediate funds, he can take the lump sum option.
- A salary continuation payment option is better if an employee needs a health insurance.
- If an employee does not qualify yet for pension or retirement benefits, salary continuation may be a good choice.
- An employee must also consider the tax consequences of investing his severance pay. Depending on his investment, the money may be taxed as income or its earnings may be tax-deferred. On the other hand, a salary continuation option has lower income tax rate.
- Severance payments may also disqualify you from unemployment benefits. Typically, if you are receiving severance payments in the form of salary continuation and those payments equal or exceed your previous weekly wages, it qualifies as income.
To an employer, offering a severance pay as part of the package of a terminated employee may also be a difficult decision. At times, he may have to decide about the scope and the amount of benefits he must give to a dismissed employee. Some companies however have adopted a standard in calculating an employee’s severance pay.
How much really should an employee receive as severance pay?
Severance pay is normally contingent on several things, which include but are not limited to the following factors:
- Existence of an employment contract – Severance terms are written into many employment contracts and benefits may depend on what is written in the contract.
- The cause of one’s termination
- Length of service – Severance typically ranges from no pay to one or two weeks of pay for each year of service, with pay capped at a certain number of months.
- Size of the organization – Larger companies generally offers more formalized severance packages.
- One’s position in the organization – Executive-level or senior employees normally get anywhere from six months to one year of pay while management-level employees get anywhere from three to six months. Nonexempt staff might get anywhere from no severance to 12 weeks’ pay.
- Private, public, or nonprofit sector – Severance packages vary greatly, depending on the type of organization.