How to Determine Your Severance Pay

Recognize that severance is optional. By law, employers are not obligated to offer severance pay. However, it can be part of an employment contract, or an employer might choose to offer it upon termination even if it's not in the original agreement. Severance can be paid as a lump sum or in periodic installments.

• Note that severance pay is different from “unemployment insurance.” Unemployment benefits are paid based on a percentage of your prior wages, with state-specific maximums. These benefits are funded by your employer.
• If you need help calculating your unemployment benefits, check out Calculate Unemployment.

Understand the concept of a waiver and release. Employers may offer severance pay to employees in exchange for limiting their risk of future lawsuits. Offering severance does not imply wrongdoing by the employer, but some employers provide it when they believe an employee might take legal action. In return for severance, the employee must sign a waiver releasing the employer from future legal claims.

• These waivers absolve the employer of legal responsibility, as long as the employee signed it voluntarily and with full knowledge. However, you cannot be prevented from filing a discrimination complaint with the Equal Employment Opportunity Commission, though you may be restricted from filing a personal lawsuit.

Learn what’s included in a severance package. A severance package isn’t just a monetary payout. It can include a variety of other benefits, such as:

• Health and wellness coverage
• Letters of recommendation
• Uncontested unemployment benefits
• Relocation expenses
• Retention of company property, such as cell phones and laptops

Check if severance is typical in your field. If you’re in the process of negotiating an employment contract, it’s helpful to know if severance pay is common in your industry. You can look for examples of contracts or consult with a legal expert who specializes in employment law in your sector.

• To find an attorney, visit your state's bar association, which typically offers a referral service.

Review your employment contract. If you’ve been laid off, it’s important to check your employment contract to determine if you’re entitled to severance. The contract should outline how your severance will be calculated.

• Severance is often based on your length of employment. For instance, hourly employees might receive one week of pay for each year they worked at the company.
  • For example, if you’ve worked for five years, you’d be entitled to five weeks’ pay at your current rate.
• Salaried employees may receive at least two weeks of pay for every year they’ve worked at the company.
  • To calculate, divide your annual salary by 52 to find your weekly pay. Then multiply by the number of weeks. If you earn $39,000 a year, that’s $750 per week. After 10 years, you would be entitled to $7,500 in severance.

Inquire about the possibility of ‘cashing out’ unused sick and vacation time. You may not have an automatic entitlement to receive payment for unused sick leave, vacation days, or personal time. In fact, very few state laws mandate that an employer must offer this. It's important to check your employment contract for any policies on cashing out these benefits. If no such rules are stated, ask your employer if they will compensate you for the time you've accrued.

Negotiate for severance pay. If your contract doesn’t include a severance clause, you can attempt to negotiate for one. Take time to evaluate any initial offer from your employer before agreeing to it. If you’re over 40, federal law gives you 21 days to consider a severance package.

• When making a counteroffer, explain why you need additional compensation. Career experts suggest you can mention recent major expenses, like buying a home. This might prompt your employer to increase the severance offer just to secure your agreement and get you to sign the release waiver.
• If you have a family member with a serious illness, you could negotiate for extended health benefits, such as an extra six months before transitioning to COBRA coverage.

• If severance pay is offered as part of a termination package that requires you to sign a waiver and release, it’s crucial to consult with an attorney before signing. Once you sign the release knowingly and voluntarily, any future discrimination lawsuit you file will likely be dismissed by the court.