What is a Severance Package?
You've just been notified of your last day of employment. Your supervisor hands you a severance agreement and release, and your mind is flooded with questions about your severance package. If you are an employee at will, your employer can terminate you at any time, without notice and with or without severance.
After the shock, here are nine things you should consider when reviewing a severance package agreement and managing the transition from one company to your next opportunity.
1. Last Paycheck vs. Severance Package
For most people, the first questions that come to mind are "what's in my last paycheck?" or "what severance pay will I receive in my agreement?"
Last Paycheck - This usually covers all the time worked until your termination date, accrued vacation time payouts due, statutory deductions, and your benefit elections. In some cases, you may be eligible for an accrued sick leave payout or a bonus payout depending on your company's policies.
Severance Agreement - This contains the severance pay and benefits that employers elect to offer beyond your last payment, commonly known as the severance package.
2. A method behind the madness?
Employers recognize how difficult layoffs are on both affected workers and retained employees; it is not an action taken lightly.
- Employers must establish a documented, justifiable business reason for the layoff and its effect on various protected classes, such as age, gender, race, and national origin. Executives and HR professionals typically agree on a formula of how to offer a severance agreement that is fair and equitable given the circumstances.
- Many use years of service to apply for severance benefits and provide one to two weeks of pay for each year of service on average.
As you look over your severance agreement, most employers will spell out their methodology and provide an overview of how your individual severance pay was calculated.
Typical Agreements include:
- Your severance pay terms
- Your vacation pay terms
- Cobra (Benefits) Information
- Return of Property
- Non-compete Clause
- Confidentiality Agreement
- Unemployment Information
- A General Release of Claims and Covenant Not To Sue
3. Financial Aspects to Consider
The money components of a package can include:
- Severance pay based on terms of service
- Commission, Bonus, and deferred compensation payouts due
- Rights under a pension, profit sharing, and 401(k) plan
- Stock option statement and exercise schedules
- Restricted stock and acceleration schedules
- Loan Repayment terms
- Unreimbursed business expenses*
* Note: Many employers expect expense sheets to be submitted and completed as part of the release process. Make sure you know when these are due to your employer.
4. Am I eligible for unemployment?
Yes, employees who have been terminated due to a workforce reduction are eligible. Most agreements include the key information you need to apply for unemployment. However, most states don’t allow you to collect unemployment while you are also collecting severance pay, so be sure to check with your local unemployment agency for specific information. Look for contact information and instructions on how to apply in your agreement.
5. What about health benefits?
A key concern of most employees today is health benefits. Upon termination, most employers will offer you the opportunity to continue the group medical and/or dental insurance coverage the company offered to its employees under the federal law known as COBRA (Consolidated Omnibus Budget Reconciliation Act, 29 U.S.C. (COBRA). If you elect COBRA, your company will continue to pay the employer's portion of your healthcare premiums for a period of time (employer continuation period). You should ask when your benefits end, when COBRA begins, how long it runs (typically 18 months), and what the premiums will be if you elect to continue after your employers' continuation period.
6. What about the Non-compete clause?
One of the biggest sticking points for employees is the non-compete portion of their agreement. In fact, most companies have employees sign non-compete and confidentiality agreements as part of the employment offer and on-boarding. This section of the agreement is typically a reminder of what you have already signed.
Look over the non-compete in terms of three areas: geography, scope of the agreement, and duration. Many employers are sensitive to employee issues during layoffs and will try to narrow the scope to direct competitors, limited geographies, or timeframe. As you review your agreement, check what you signed at the time of hire. If you find yourself in a situation where you are concerned you are a risk of violating the agreement, check in with your former employer. Many HR professionals will work out non-competes on a case-by-case basis.
7. I'm over 40, how does that change things?
People over 40 are a protected class, which means you are covered by the Age Discrimination Employment Act (ADEA). As part of this federal law, people over 40 have 21 days to consider the general release form and have a 7-day period in which they can revoke the release. To comply with legal requirements, employers must provide information concerning the job titles and ages of the individuals affected by the layoff, as well as the ages and job titles of other employees not selected. This is an opportunity for employees over 40 to confirm that age was not a factor in their termination.
8. Post-Termination: what now?
Many employers want to help with the transition process. Over 70% of U.S. companies will engage the services of outplacement companies to help you search for new employment. Outplacement services can help professionals with:
- Resume writing and editing
- Interviewing Preparation
- Target company searching
- Networking Services
- Office Services
As you transition, ask your employers' policies on letters of recommendation, getting personal files off your computer, and using your company voicemail or email for a period of time. These are areas where employers may be more flexible.
9. Benefit of Networking
More than 60% of people find their next job through someone they know. In tough times, make sure people know you are looking for new opportunities. As more employers cut budgets, they rely on employees to refer candidates. Leverage your network to be tapped into those opportunities as they arise.