Require Severance Pay
Regardless of whether they’re fired for cause or laid off in a mass layoff, many employees are entitled to severance pay. Severance pay is a package of cash and continuing benefits, including things like vacation time, health insurance and stock options. It isn’t legally required, but companies may offer it to help severanced employees find new jobs and cover moving expenses.
A severance agreement typically includes an employment contract, waiver of claims and release. If you’re being paid severance, you should carefully review the terms and understand what you are giving up by signing it. An experienced severance pay lawyer can assist you in evaluating the terms and negotiate a better deal if necessary.
While no federal law requires employers to give severance packages to terminated workers, some states do have laws that require companies to provide severance packages in certain situations, such as when closing a plant or laying off a large number of employees, according to NerdWallet. These state laws typically mandate a minimum amount of severance pay, such as one week of salary for each year of service.
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What States Require Severance Pay?
However, the amount of severance pay can vary widely across different states and even among different companies. For example, one state requires companies to pay out unused vacation time following a layoff, while another doesn’t require this and only requires that the company pay out accrued sick leave.
Employers also can decide whether or not to include other perks in the severance package, such as outplacement services. These are intended to help outgoing employees in their search for a new job by providing them with services such as resume writing, career counseling and interview coaching. While these are helpful, some employees decline them and opt for a larger lump sum payment instead.
Some states, such as North Dakota, require a company to explicitly list the federal and state employment law claims an employee is releasing in a severance agreement, as opposed to simply listing all claims. This is important because it prevents an employee from inadvertently waiving known claims that they have against their employer.
Generally, severance payments are taxed in the same way as regular paychecks. Depending on how the severance pay lawyer is structured, the employer can withhold the same federal and state income, Social Security and Medicare taxes that it would from a normal paycheck. However, if the severance pay is structured as what the IRS calls supplemental wages, it could be taxed at a lower rate than a regular paycheck.
Companies can also choose to pay severance in a lump sum or in installments over a period of time. A lump sum payment is often preferred, because it reduces the risk of a claim being filed for unemployment benefits later on. Additionally, receiving severance pay in multiple installments can lower your overall taxable income.