The Basics Of Severance Pay
Only a few states have laws requiring an employer to pay terminated employees any kind of separation pay or severance. Yet, just about all large employers have policies on severance payments and they are typically outlined in a formal summary plan description.
Structuring severance payments by a written policy isn't gratuitous--it's in the company's interest to establish such a policy that they can claim to be "standard" because:
Although exceptions to standard policy are made, companies are understandably concerned about creating exceptions that could be construed as precedents for the future. To be considered for an enhanced, non-standard separation package, you'll have to demonstrate an employment history so unique your company will feel secure such a history won't be replicated at any point in the future.
- by doing so they can hold down costs because their standard benefits will invariably be conservative, and
- they can protect themselves from claims of unfairness because everyone is offered the standard policy.
Smaller companies tend not to have policies but instead craft departure packages on an individual basis--which could either be helpful or hurtful, depending on the largesse extended to you.
How much severance pay will you get?
A formula is generally used to calculate severance pay. The most common severance pay formula is one week's pay for each year of service, often with a cap of 26 or 52 weeks. More liberal formulas increase the multiple at five and 10 years of service.
Your employee handbook will give you an idea of the minimum benefits available and what the company will likely offer as a separation agreement. Summary plan descriptions (SPDs)--written descriptions of benefit programs that give the specifics of who qualifies for the program, what they get, when they get it and so forth--are legally mandated under the Employee Retirement Income Security Act of 1974 (ERISA), and most large companies have one on their severance pay plan.
If you don't have a copy of the severance SPD or any of the other benefit programs in which you have participated, request a copy in writing. If you have copies of the SPDs, check with the human resources department to ensure that the copies are the most current ones. By law, your employer must provide you with an SPD upon your written request; failure to do so will subject your employer to daily fines. When you review these plans, look for schedules of the amounts to be paid upon termination and exceptions to those schedules. (For example, an employee fired for misconduct, such as theft, may be precluded from receiving the benefits provided to employees terminated for lesser offenses.)
Lump-sum or continuing payments?
It may be a matter of complete indifference to your employer, but you should carefully consider whether you want your separation pay in a lump sum or carded over a number of months (or years, if you're so fortunate) as salary continuation. The benefit of receiving a lump sum is that you'll have all your money at once; it's yours to do with as you wish, and the question of having your payments stopped when you take a new job is avoided.
The benefit of salary continuation is that your employer can more easily continue you in benefits and other programs, because the process is similar to regular employment with a periodic paycheck. In addition, by spreading the payments over a longer period of time, you may moderate the tax bite. Payments received in a year when your income is lower will consequently be taxed at a lower rate--which may be the second year of unemployment if you're laid off in the latter part of the first calendar year.
The downside of receiving a lump sum is deciding what to do with it. Receiving a lump sum also takes you out of most benefit programs immediately, because you are no longer "on the payroll."
The downside of salary continuation is that some employers require forfeiture of remaining separation pay when new employment is secured. This is easier to enforce when your payments are made on a continuing basis. Also, if your employer's financial solvency is questionable, continuing payments puts your money at risk.
Taxation of severance pay
Many companies will automatically tax a severance or separation payment at a 28 percent tax rate. But some don't--they'll use the rate you have on file as your usual rate, which may be considerably higher. If you want to improve your immediate cash flow, have them tax your payment at 28 percent. Beware, however, that in April, the tax person cometh, and you'd better be ready to pay up.
Firing Back, Jodie-Beth Galos and Sandy McIntosh Ph.D.
Copyright © 1997 John Wiley & Sons