Severance Pay: All Your Questions Answered – Freesumes

So you’ve been laid off. That sucks, but a little less if your employer offers you a severance package. Find out how much severance pay you can get after termination and what the requirements are for qualifying (with bonus negotiation tips!). 

What is Severance Pay?

Severance pay is discretionary monetary compensation provided by the employer to a terminated employee. The exact sum depends on the employment contract type, tenure, position, and other contractual terms. 

Legally, employers aren’t obliged to offer severance pay when conducting layoffs unless there’s a bargaining agreement between an employer and a union forcing them to do so. Only 25% of US companies offer severance pay to all employees, according to a 2023 benchmark study.  

To determine if you’re entitled to a severance package, check your employment contract or reach the HR department. 

Is Severance Pay Taxable?

Yes, severance pay is taxable in the US. It will be included in your W-2, and appropriate taxes will be withheld by your employer. You can find extra information about taxation on the IRS page. 

How Is Severance Pay Typically Calculated?

When severance pay isn’t imposed by the bargaining agreement, employers can determine employee eligibility criteria and the total compensation package. Generally, severance packages are only offered to full-time, payrolled employees, not independent contractors or part-timers. Also, you may need to be employed for at least 12 consecutive months to qualify or hold a position above a certain pay grade. 

The US Office of Personnel Management provides some general guidelines on how severance pay can be calculated: 

• Upon separation, the employee is entitled to one week of pay at the basic rate for the position held at the time of termination 

• Each full year of creditable service beyond 10 years is worth two weeks of basic pay for the position held at the time of separation

• For every full 3 months of creditable service beyond the final full year, 25 percent of the otherwise applicable amount will be applied.

Generally, most companies offer 1-2 weeks of pay for every year of employment. But severance packages may be more lavish in certain industries. For example, C-suite members in the financial industry received over $6.9 million in severance pay in 2023. 

Big Tech companies, responsible for the wave of massive layoffs through 2023-2024, also offer their former staff good compensation. According to Venturebeat, Google employees got 16 weeks of severance, plus an extra two weeks of pay for every year at the company. Salesforce staff received 5 months of pay (as a minimum), six months of health insurance benefits, and a minimum of two months of career resources. 

Under Elon Musk’s chairmanship, X (former Twitter) also promised employees 3 months of severance pay and extra benefits. But some employees only received one month of pay and were pressed to accept a non-disparagement agreement. Unfortunately, some employers may include sneaky clauses in your severance pay agreement, so it’s important to always read the fine print before signing off. 

When is Severance Pay Due?

Severance pay is due upon your termination. Typically, it’s either paid out along with your last paycheck or within 30 days after termination. The exact timeline will be stated in the contract. You may also mutually agree to delay the start date of severance payouts if you’d like. Some states also allow you to apply for and collect unemployment benefits alongside severance pay. But you will need to meet certain conditions to qualify. 

Does Severance Pay Stop if You Find Another Job?

No, in most cases, you’re entitled to severance pay regardless of whether you have a new job lined up. That’s unless your contract explicitly states that all payouts will terminate once you sign on with a new employer. In such cases, you always have the option to delay your start date a bit to collect the remaining payout. 

Can You Negotiate Severance When Laid Off?

Absolutely! As long as you’re eligible for the severance pay according to the company bylaws, you can and should negotiate your severance package. In the worst case, you’ll end up with the starting offer. In the best, get some extra perks to sustain you throughout your job search. 

Here are several tips for negotiating severance pay with an employer:

• Do some research: A good negotiator comes in with strong, data-backed arguments. If the company previously laid off staff, try to learn how much they were paid. You can reach out directly to former colleagues. For publicly traded companies, check the EDGAR database from the SEC. Businesses must disclose severance payouts in corporate filings. 

• Collect all dues: Don’t leave any money on the table. Ask if the company will compensate you for any unused vacation or sick days. Inquire about the vesting schedule for your shares (if you hold any) or allocated equity in the company. Finally, you may also be entitled to a lump sum payment to your retirement plan.

• Ask for extra perks: Apart from negotiating the duration of base pay compensation, you can also talk about the extras like extending healthcare benefits for another several months or offering paid outplacement services (aka professional help with job search). 

• Take a pause before signing. Study the offer. Read all the clauses and fine print. If your employer asks for non-disclosures or prohibits you from making disparaging or denigrating statements in the future, you have more power to negotiate. 

Finally, if you have doubts, consult with an employment attorney about your rights and the contractual conditions of the agreement.