Severance Pay & Severance Packages

Severance Pay

When companies downsize or lay off employees, they may offer those being let go a package of some sort to help soften the blow. These packages can vary widely and can include a lump sum payment, a payout for unused vacation or sick time, and even outplacement assistance. However, what a company chooses to do will depend on its budget and its ability to afford such payments.

For instance, some companies set a maximum amount of severance pay per individual and do not exceed that figure. In other cases, a company may be able to extend benefits such as health and life insurance or retirement plans for some time after an employee leaves.

Regardless of how a company chooses to determine the value of a severance package, it is important that they do so in advance. This will give impacted employees time to review the terms and decide if they can accept them or if they would prefer to negotiate for more. Additionally, this will help prevent potential legal complications down the line.

Many states have laws in place that dictate the minimum amount of severance pay a company must pay an employee upon termination. For this reason, many companies stick to a formula when offering severance packages. They often base this formula on the number of years an employee has been employed by the company and other factors such as seniority or job title. The typical severance package includes 1 to 2 weeks of salary in addition to any unused vacation or sick time.

Severance Pay & Severance Packages

In many cases, a severance package will also include the option for departing employees to continue their health and other benefit coverage. This will allow employees to avoid any lapse in coverage as they search for new jobs and provides them with the peace of mind that they have financial security. Additionally, this will foster a positive employer-employee relationship as it shows that the company cares about its employees beyond their tenure with the organization and is invested in helping them find new opportunities.

For companies that are unsure how to determine a fair and competitive severance package, they can do some research online or ask friends and associates who have worked at similar organizations for information on what their peers receive. Companies can also work with their attorneys to ensure they are in compliance with state and federal laws regarding define severance pay packages.

Severance pay is typically taxed in the year it is received and withholdings such as federal income, state, social security, and Medicare will be deducted just as they would for a regular paycheck. For this reason, it is beneficial for employers to present the severance package at the onsite meeting during which impacted workers are notified of their impending departure. This can make the process much smoother and will reduce confusion for employees in the aftermath of a reduction event.