Things You Should Know Before Receiving a Severance
Unexpectedly losing your job can sting. It’s a tough blow, one that can have a huge impact on day-to-day life. Instead of heading to the office every day, job hunting becomes the new norm.
Losing your job might not just affect your career, there are also financial factors to consider. No job means no paycheck, and for many that could mean problems making ends meet down the road.
One contingency that could potentially help alleviate some stress of losing a job is severance, which is offered by some companies when an employee has been laid off. Generally, severance is not available if a person has been fired. Before accepting a severance package, it’s important to understand what it is and how it works.
What Is Severance Pay?
Severance pay is a package of benefits that is sometimes offered in the event that an employee’s position has been eliminated. Severance packages could include things like a portion of the individual’s salary, medical or dental benefits, payment for unused vacation or sick days, or stock options.
Severance packages are generally made as an agreement between the employer and the employee (or potentially the employee’s legal representative) since the benefit is not legally required by the Fair Labor Standards Act (FLSA) .
Ideally, severance packages give recently separated employees some financial relief. If a person receives a severance package, they’ll generally receive a portion of their paycheck and potentially other benefits that could help them pay for necessities as they look for new work. Often, employees will be required to sign paperwork to receive severance. These documents should be read closely as they often detail the terms of the severance and may include conditions like the employee agreeing not to pursue legal action against the company.
How Do I Know If I Should Get Severance Pay?
Since severance packages are not legally required, it can sometimes be difficult to know if you should be getting a severance package. It will usually depend largely on your employer.
There are a few situations in which you could expect to receive a severance package. Employees who are working under a contract that includes a previously determined severance agreement will typically qualify to receive a severance package. Often, high-level executives will have contracts that outline severance agreements. Severance packages may also sometimes be negotiated as part of a collective bargaining agreement at a unionized workplace.
If a company has a clearly established severance policy, laid off employees could receive severance packages. It will generally be clearly outlined and have specific conditions for when employees qualify for severance and how severance will be calculated.
In the event of a mass layoff, the Worker Adjustment and Retraining Notification Act (WARN Act) provides some protection for employees. Under the WARN Act , employers with at least 100 employees are required to notify employees by writing at least 60 days before any closings and mass layoffs that will affect “50 or more employees at a single site of employment.” If a company fails to provide adequate warning, employees may be entitled to severance pay.
There are a few exceptions to the WARN Act (like for natural disasters and layoffs that occur “due to unforeseeable business circumstances”) so it is possible that not all sudden closures or layoffs are protected by this regulation.
How Is Severance Pay Determined?
How much severance pay is most often determined by the terminated individual’s length of the employment with the company. One often-used method is to offer one or two weeks of pay for each year of service to a company. While this is a popular option used to determine how much severance pay a person will qualify for, there is no standard requirement and each company will have their own policies.
How Is Severance Paid Out?
When severance pay is offered, it is generally received in either a lump sum payment or paid in increments over a specified amount of time. Depending on state regulation, severance pay could affect the unemployment benefits an individual qualifies for. Generally, severance pay (and compensation received through unemployment benefits) are considered taxable by the IRS .
Depending on the situation, you may be able to negotiate severance, but in some cases, options for negotiating may be limited. For example, if a company has written severance policies in place, especially if they were presented in the employment agreement, negotiating may not be possible.
If there are no written policies in place, it may be easier to negotiate a settlement package. It could help to be prepared with relevant information like the length of employment history and current salary. You might want to treat the discussion with respect and remain calm—rarely will anger or emotional outbursts result in a positive outcome. You also might want to be aware of where your company has wiggle room to negotiate. Some points of a severance agreement may be regulated by state law. Others, like insurance benefits, which are typically determined by the insurance company, may be out of the control of the employer.
During mass layoffs, negotiation might also be difficult since employers are typically offering standardized severance packages.
Options for Investing Severance Packages
In some cases, a severance package can be a useful tool to serve as a bridge to cover expenses until new employment is secured. If you find yourself in receipt of a lump sum severance payout which you’ll be tapping into for living expenses in the short term, consider putting the money in a cash management account like SoFi Money®. For those who have a plush emergency fund or are able to secure employment quickly after being laid off, a severance package could function as a small boost to savings.
Some may even be interested in putting a portion or all of their severance pay into an investment account, which could potentially allow the money to grow. SoFi Invest® could be an investment account worth looking into.
SoFi Invest offers both active investing and automated investing, so you can choose which could work best for your investment style. If you want to take a more hands-on approach, SoFi’s active investing platform offers flexibility and allows you to stay up to date on market news with convenient in-app updates.
If a lower maintenance approach seems more appealing, you could check out SoFi’s automated investing platform which can help you create a diversified portfolio in line with your personal goals and risk tolerance.
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