Severance Pay and Termination Pay
Severance pay and termination pay are terms often used interchangeably, but they are different in the eyes of the law. Both are compensation an employer may offer upon an employee’s departure from a company, but the rules and regulations surrounding each type of pay vary.
While most employees who lose their jobs are not happy about it, many find out they can receive financial stability from a severance package. This payout typically includes a lump sum of money as well as benefits, like continued health insurance and career consultation services (also known as outplacement). While some employers are legally required to provide severance pay, others decide to do so as a way to boost morale during times of mass layoffs or when a business is closing.
When determining how much severance pay to offer, a business must consider its overall annual payroll, as well as the salary level of the departing employee. The standard is usually one week of pay for every year of service, with senior managers and executives receiving a larger amount. However, not all businesses are required to provide severance pay and even those that do have specific criteria that must be met for an employee to be eligible.
Depending on the industry and the company, a severance package can also include extra benefits, such as vacation and sick leave or stock options. A severance package can be very valuable for the fired employee and could make the difference between accepting a new job or not.
Is Severance Pay and Termination Pay the Same?
In general, the terms of a severance package are set out in an employment contract or other applicable agreement. Unless otherwise specified, the lump sum of severance pay is considered wages by the IRS and must be included in the employee’s taxable income for the year it is earned. The employer will usually withhold the same federal and state income, Social Security, and Medicare taxes from these payments just as they would for a regular paycheck. However, if the amount of the severance package pushes the employee into a higher tax bracket, negotiating to have the payment spread out over two years can be beneficial.
If an employee is eligible to collect unemployment benefits while receiving define severance pay, it is recommended they negotiate the amount of the severance package so they can claim the full benefit. Leaving a job with a large sum of money can have long-term financial consequences, and it is important to be prepared for the future.
If an employee’s job offer does not include a severance package, they should negotiate it before accepting the position. However, it is important to note that talking about severance packages in an interview can actually hurt the candidate. It can be seen as a red flag to potential employers and make them question whether the candidate is reliable or not. For this reason, it is best to only discuss severance packages in private conversations with financial and legal professionals.