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Severance Pay

An employer may grant severance pay to an employee after termination of employment. The kind of severance pay and the eligibility of the employee, after the termination, are usually determined by the length of employment. However, the employer is not obliged to pay severance. There is no federal law that regulates severance pay, and it is usually a matter of agreement between the employer and the employee.

The company is obliged to pay severance only under certain conditions:

  • If there is a written contract at the time of appointment (hiring) that states severance will be paid.
  • If it is mentioned in the company’s policy handbook that severance will be paid.
  • If there is a long history of the company routinely paying severance to departing employees.
  • If the employer has orally promised to pay severance. (But without a written agreement, don’t count on it.)

Many employers do give severance pay to either some (long-term) or all discharged employees. The pay may vary from two weeks to six months of salary, or more, depending upon the length of the employee’s service. The employer may pay it all in a lump sum or via scheduled paychecks at the current salary rate, plus any unused vacation pay or, sometimes, sick pay and floating holidays.

The employee can negotiate for severance pay depending upon his/her service record. Those employees who have left their jobs due to an inhuman working environment can negotiate for more severance pay. It is better to check with the human resources (personnel) department for the company’s official policy document and also the employee handbook to see what policies, if any, exist. That should give the employee a yardstick by which to judge the severance package he/she has been offered.

Types of severance payments

a. Lump sum payment - As the name suggests, the total amount agreed upon and entitled to the employee is paid at one time. He/she need not go through any further conversations or correspondence with the employer. After the full amount due is received, the employee can relax and need not wonder, “Will I get all my money, and when will I get it?”

The lump sum provides money to use for living expenses and (if high enough) to invest. However, other benefits will, as a rule, cease. The ex-employee should take into account the time it might take to get another job and get back on a payroll, because once the lump sum amount is spent, he/she cannot ask for more money.

b. Salary - The employer may agree on salary continuation for a certain period of time. The discharged employee may still be on the payroll and receive paychecks at the same frequency as a regular employee. Other benefits, such as medical insurance or life insurance, usually continue for these ex-employees. However, state law does not permit unemployment insurance during the continuance of the salary. After the employer agrees on salary continuation to the ex-employee for a brief period, the information is given to the payroll person in human resources or the personnel department, and the employee’s senior who agreed to severance pay has nothing more to do with it after that.

c. Period Payments - Employers may issue severance paychecks over a scheduled time frame. For example, 35% initially, then 35% some time later, and the balance later on. But such arrangements are often not foolproof. It is advisable not to approve of such pay arrangement; it is always better to have a dependable salary continuance.

d. Unused vacation pay and sick pay - There are only a few states with laws that give ex-employees the right to benefit from unused vacation pay or sick leave pay. It is better to go through the company’s policy guide and the state’s relevant law before asking for it. If employers allow vacation pay to accumulate, in some states they must offer the accumulated vacation pay when employment ends. These states include:

  • California
  • Illinois
  • Iowa
  • Louisiana
  • Maine
  • Massachusetts
  • North Carolina
  • Oregon
  • Rhode Island
  • Tennessee

Whether or not unused vacation pay is given also depends upon the reason for the employee’s termination. If the employee is fired for misconduct, he/she might have to forgo unused vacation pay.

Even regarding sick pay, it depends upon the state’s law (however, most states don’t have such a provision) as well as the employment agreement and the company’s policy. However, unused sick pay is never covered under a severance package.

e. Stock Options - If the employee has been terminated for just cause, he/she has to forfeit the option to purchase shares at the price set. In case of wrongful termination or any other reason, the time to exercise the option is for a limited time period. Generally, the employee’s right to exercise stock options ends or is limited with the termination of the employment and depends upon the employee stock option plan.

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