You found our ultimate guide on severance packages.
A severance package includes every form of compensation firms give employees after their employment contract ends through dismissal or termination. Examples include monetary compensation and other benefits like continued health coverage, vacation pay, and outplacement services. The severance package may be a goodwill gesture from the employer to help workers deal with unemployment. Offering severance as part of an employee’s benefits package is one way for companies to stand out as competitive places to work and attract and retain talented personnel.
This guide is related to layoff best practices and employee attrition.
This article contains:
- severance package definition
- elements of severance packages
- examples of severance packages
- severance package negotiation tips
Here we go!
Severance package definition
Simply put, a severance package is a payment made to an employee after their employment ends. Severance packages include monetary compensation and other perks an employer provides to an employee who leaves the company involuntarily through layoff or termination. Severance pay is frequently included in the package and depends on the employee’s job position and length of service. The company can offer the total compensation at once or in a series of installments called salary continuation payments.
In addition to cash, severance packages might extend the duration of the employee’s health insurance or other benefits. In addition, outplacement, a service that assists former employees in making a successful career transfer, is often part of the severance package. Severance agreements, also known as employee termination agreements, are often necessary for workers to receive a severance payout. By signing the severance agreement, the employee is agreeing not to sue the company for wrongful termination or further severance compensation.
Severance packages vary greatly in size and scope depending on the company, and even the employee, since issuance comes in response to a wide range of conditions. For example, a C-suite executive with extensive high-level corporate knowledge may get a more significant severance compensation as an incentive to sign an NDA. Conversely, a new hire who has only been with the organization for a short time may earn a considerably more modest package.
Elements of severance packages
Even if your firm already has a severance plan in place, it is a good idea to revisit it periodically to ensure it adequately addresses your business’s requirements and your employees’ expectations. The primary objective is to design a plan that is affordable for the company and beneficial to the departing employees. Severance packages may contain the following elements.
1. Severance Pay
Employees, including executives and senior management who are let go for other reasons, often get severance money. The amount of money granted depends on the employee’s position and duration of service. Although the exact numbers might vary from company to company, typically, a senior employee can expect anywhere from one to four weeks’ pay for every year of service. For instance, for every year of employment, an executive may earn a month’s salary, whereas an entry-level worker might only receive a week’s compensation. CEOs may get even bigger paychecks. Naturally, your company’s ability to provide severance compensation will depend on its financial situation. Unused vacation time, sick days, and other paid time off that an employer offers but is not obligated to by law may also be part of the severance packages. Companies can provide this payout in a flat amount or as salary continuation installments over a certain period.
Most businesses nowadays have a formal, documented severance pay policy for their employees. Rather than individually negotiating severance packages with each leaving employee, companies with preexisting policies may apply uniform terms. Furthermore, according to Employee Benefit Adviser, a written policy is essential if the firm wants its policy controlled by the Employee Retirement Income Security Act, which provides the corporation with considerable legal benefits. To be considered an ERISA-governed plan, your severance pay policy must specify who is eligible for severance pay, the events that trigger severance pay, and the format for calculating severance pay. If ERISA controls your severance plan, you must comply with several regulations, including filing an annual report with the Department of Labor.
2. Health Insurance
Companies are obligated to let dismissed workers keep their health insurance coverage under the employer plan for up to 18 months in accordance with the Consolidated Omnibus Budget Reconciliation Act of 1995. However, the business is not obligated to cover the cost of the premiums. The firm can choose to pay the COBRA premiums as part of the severance package, often for three to six months. Therefore, the worker may continue to get health insurance benefits throughout their job search. A severance package can include the continuance of benefits other than medical insurance, such as life or accidental death and disability coverage.
3. Retirement Benefits and Stocks
Some firms include a portion of an employee’s unvested interest in a pension, IRA, or 401(k) as part of a severance package. What happens to your 401(k), pension, and stock options when you leave your job varies by jurisdiction and company. Employees can ask for a copy of the policy and have their lawyer review them.
If the firm has an employee stock option plan, then it can convert unvested stock options to cash or vest them quickly as part of your severance settlement. However, the organization can grant impacted workers more time to take action if necessary since these programs often require employees to execute stock options within six months.
4. Outplacement Service and Career Transition Support
Outplacement is an employer-funded program that helps laid-off workers find new employment as quickly and easily as possible. Depending on the outplacement firm your organization works with, a typical outplacement program could include career counseling, resume evaluation, job search tools, and skills testing. Choosing an outplacement firm that maximizes your return on investment requires thoughtful consideration of the requirements of both your business and your workers.
You should consider the services impacted workers need and how they might want to get those services for the best results. Instead of making an appointment and driving to an office to meet with a career coach, clients of virtual outplacement firms may just log on to a website and have a conversation with a coach whenever and wherever it is most convenient. You should also look at your business’s financial situation and long-term objectives. The reduced cost of virtual outplacement makes it possible for organizations to provide the service to a greater number of workers, which might be useful if one of your goals is to maintain the reputation of your brand by providing outplacement services to all of your employees.
5. Employer Reference
The severance package allows employees to stipulate how their employer handles references and recommendations. The employer may offer to provide the departing worker with a neutral or favorable reference or even a letter of recommendation. However, many organizations have a policy just to confirm a worker’s employment at a company, which means you should ensure the severance is in line with the company’s standard practice.
6. Miscellaneous Benefits
Businesses can give additional, one-of-a-kind benefits that the impacted staff would appreciate, and providing these benefits may be relatively simple. Here are some other examples of severance packages:
- Permitting workers to retain any company-issued devices that they used in the course of their employment, such as a phone or laptop
- Continuing payments of educational benefits if the worker is still participating in the program
- Allowing employees to keep using discounts or perks the firm offers, such as discounted or free gym memberships and employee support programs
- Canceling noncompete agreements
Since every worker has unique life experiences, the ancillary benefits included in a severance package should be according to the requirements of the departing employee.
Severance package negotiation tips
The following tips will help employees negotiate a better severance package with their employer.
1. Do Not Rush Into Signing the Severance Agreement
Employees often want to sign the severance agreements quickly and finish the process once and for all. However, it is advisable to be patient. Workers usually have some time to review the agreement before signing it. It is imperative that you read the agreement carefully.
Upon receiving your severance package, your employer may pressure you to sign the agreement immediately. Instead, inform them you need additional time to review the contract before signing it. You should wait until you have had time to deal with the emotional fallout of being laid off before signing any severance documents.
2. Learn to Negotiate Compromises
A severance package is more than simply a cash payout upon termination. In many situations, firms may include detrimental clauses that outweigh the offered monetary benefits. The moment you put your signature on that document, you give up all chance of suing your employer for discrimination if you later believe that your termination was unlawful.
In addition, the agreement might include a noncompete clause that prevents you from communicating with customers or companies in your field. Your ability to find a new career or make new contacts may take a severe hit as a result. Therefore, it is essential to know precisely what the company provides and how much they want in return.
3. Seek Professional Help
Suppose you are perplexed by the terminology in your severance papers. In that case, it may be worthwhile to call in a legal professional to look through them with you, even though lawyers are not cheap. If you do not believe you can afford an attorney, then you may use websites like NOLO and Law.com to learn more about the legal ramifications and determine whether or not the severance package is fair.
After reading your severance package, you should consult a professional, such as a lawyer or business mentor. You can review your severance package carefully to make sure you fully grasp all the terms and conditions. You may gain further understanding by getting an expert’s advice, which will help you figure out how to negotiate a better deal.
4. Review Your Contract and Offer Letter
Employees can review their initial offer letter to see whether there were any red flags. You should have a copy in your inbox, or if your firm has an HR site, there should be a digital copy. You can check if there are any severance provisions in the fine print. If there is a package, then you can check to be sure the company is compliant. Else, you might need to keep the information handy.
5. Decide Your Priorities
Setting your priorities before approaching your company to discuss your severance payout is advisable. You may be hoping for better perks and severance money. Having a clear picture of your ideal severance package might motivate you as you pursue it. You may use this detail to direct the negotiation and filter out potential offers that do not align with your objectives.
6. Analyze Your Results
It is advisable to think long and hard about your tenure with the organization and be as critical as possible. You can reference an excellent work record. Reviewing past yearly or quarterly evaluations on paper might help you negotiate a better deal now. Employees can review to know whether there is justification for the termination or bias. In this situation, it is best to tell yourself the truth and err on the side of caution.
7. Understand the Negotiating Limits
A severance package’s terms are not always open to discussion. For instance, both state and federal rules may affect insurance coverage, but you may be able to raise your ask for a flat payment to cover deductibles and co-pays. Knowing what is within your company’s sphere of influence can help you save face and precious negotiating time.
8. Realize That Compensation is Only One Element
When reviewing a severance package, it is important to consider other elements besides the offered payment. For example, you should check if the package includes paid time off accrued or a pending bonus. It is better to consider all the potential factors and investigate thoroughly. For employees who have accrued vacation or sick time, businesses must pay out that time in several jurisdictions.
Also, remember to account for taxes while making your argument and analyzing the numbers. It is possible that you may still have to pay taxes on any earnings you made after being laid off or fired, but only up to a particular threshold. In addition, any severance compensation you get may be subject to taxation as you negotiate.
9. Make Reasonable Requests
When negotiating, choose a fair request and counteroffer. Asking for more than is acceptable might backfire, so try to avoid the temptation. Instead, you should research the average severance payouts for professionals in your position or with your expertise. You may then utilize this data to make a reasonable and doable request. If your employer rejects your first negotiation, then you should prepare a counteroffer to move the process forward.
You have deliberated and researched, and now it is time to bargain. Like going into any other kind of negotiation, it helps to have a goal in mind. You should consider the total lump sum amount as well as any additional terms you would want to include or omit.
You should be seeking a fair bargain unless you feel you have a rock-solid discrimination case against your company. You will be fair and reasonable if you keep your expectations in check and back up your discussions with hard evidence, like your offer letter, references to state legislation, or typical severance package figures.
10. Leverage Your Accomplishments
When presenting your negotiation, remind your employer of your prior successes. You may be able to negotiate a greater severance payment by highlighting your years of service and dedication to the organization. During a meeting or in a negotiation letter, make a list of your accomplishments so you can reference them.
Conclusion
It is as crucial to negotiate your exit from a job as it was to do so in your entry. In most cases, you will have leeway to negotiate with a former employer since they want to keep the process amicable and preserve their company’s image as a decent workplace. You can learn as much as possible about the severance packages offered by your firm and negotiate to get the most out of them. Consultation with an employment law professional may assist you in determining what is typical in your industry or among businesses of your size.
Next, check out our guide to quiet firing.
Grace He