Should You Accept a Severance Package Offer?

Your soon-to-be former employer just offered you a severance package. Maybe you resigned. Or perhaps your employer initiated the separation. All that matters now is that you’ve got a limited time to decide whether to sign the agreement that comes with the severance. There are undoubtedly several benefits to signing it and taking the severance package. However, it’s important you understand that doing so typically means giving up some legal rights.

If you’ve been presented with a severance agreement, consider having a qualified employment attorney review it. They can explain its practical implications and potentially help you negotiate better terms.

In this article, we’ll review some of the basics you’ll want to keep in mind as you proceed. But first, let’s review what a severance agreement is.

What Is a Severance Agreement?

A severance agreement is a contract between an employer and an employee who is leaving the company. It generally outlines the conditions under which the employee will receive certain benefits after their employment ends. These benefits usually include a severance payment and can include other things as well.

For example, a severance package may include continued health insurance, unused vacation pay, and outplacement services to help the soon-to-be former employee find a new job.

The agreement also often includes terms that will govern the parties upon separation. As a result, we often hear the terms “separation agreement” and “severance agreement” used interchangeably. You’ll typically need to sign one of these to receive the severance benefits or package.

Signing usually means that you agree not to take legal action against the employer for certain claims related to your employment.

Common Provisions

A typical severance agreement will include far more terms and conditions besides waiving your right to sue. We frequently see language in these agreements addressing the following areas:

• Severance pay: The amount of money offered to the employee and how it will be paid
• Benefits continuation: Details about the employee’s eligibility for continued benefits, like health insurance coverage under the federal Consolidated Omnibus Budget Reconciliation Act (COBRA)
• Release/waiver: Agreement to release or waive potential claims against the employer for things like wrongful termination, discrimination, and harassment
• Non-disclosure: Confidentiality or non-disclosure clause requiring the parties to keep certain proprietary company or employee information private
• Non-solicitation: Provisions restricting the employee’s ability to take the employer’s clients and/or employees
• Non-compete: Prevents the employee from competing with the employer or working for a competitor
• Non-disparagement: Mutual non-disparagement clause prohibiting both parties from saying bad things about each other on social media and other forums

The contents of these agreements can vary widely. This is partially because state and federal law govern the requirements and enforceability of these agreements.

Is Severance Pay Required by Law?

In most cases, severance pay is not required by law. However, there are a few exceptions:

• Some state laws require severance in specific situations, like when a company closes a plant.
• If a company has promised severance in an employment contract or handbook, they may be legally required to provide it.
• Federal law requires some companies to give notice or pay before mass layoffs.

Generally, though, it’s voluntary. Employers who offer it usually do so as a goodwill gesture or to avoid future legal disputes.

How Much Severance Pay Should I Get?

The amount of severance pay someone should get isn't set in stone. It often depends on several factors:

• Length of employment
• Job level
• Company policy
• Industry standards

Generally, severance pay is calculated based on the number of years an employee has worked for the employer. A common formula is to offer one to two weeks of pay for each year of service. For example, if you worked there for five years, you might get five to ten weeks of severance pay.

The average maximum severance pay for non-executive employees is around 26 weeks. Executives might receive more, typically between six and 12 months of pay. Larger companies tend to offer more generous severance packages. Still, some people might get a month's pay, while others could receive several months or even a year's salary.

The most important takeaway here is that severance pay is often negotiable. So, you’ll want to discuss your specific situation with an employment lawyer to strategize for the most favorable outcome.

Other Types of Severance Benefits

In addition to severance pay, employers might offer company perks or benefits as part of your severance package. These may include:

• Stock options or retirement benefits: Some employers might let you keep or cash these benefits out early.
• Outplacement services: Some packages provide assistance like career counseling and job search support to help employees find new employment.
• Unused vacation time: Employees may receive payment for any unused vacation or sick days.
• Training and education: Sometimes employers provide funding for education or training to help employees’ skills and marketability for future employment.

These additional benefits are often designed to support employees and ease their transition.

Are There Any Downsides to Taking a Severance Offer?

Severance packages can indeed be helpful. But you’re typically forfeiting several legal rights when you sign the accompanying agreement. Plus, there may be other downsides to consider, such as:

• You’ll give up your right to sue the employer for various claims.
• You may feel limited by the non-disparagement clause.
• The severance payment might be less than what you'd earn if you stayed at the organization.
• The non-compete clause or non-compete agreement could make your job search harder.
• Accepting severance might make you ineligible for unemployment benefits in some cases.
• A lump sum payment could push you into a higher tax bracket.
• You might have to leave your job sooner than you wanted to be eligible for the payout.

The terms of these agreements vary widely. So, the downsides will be unique to your specific situation. Still, you’ll want to carefully weigh the pros and cons involved.

Can I Still Get Unemployment Insurance Benefits?

Oftentimes, yes. Whether you can get unemployment benefits while receiving severance compensation depends on your state's laws. In some states, you can collect both at the same time. In others, you might have to wait until your severance runs out before getting unemployment.

If the severance payout is a lump sum, it usually doesn't affect unemployment benefits. However, periodic payments could delay or reduce your unemployment benefits if your state treats severance pay like wages. Of course, some states don't count severance against unemployment at all.

How Long Do I Have to Decide?

This also can vary. Generally, employees are given 21 days to review a severance agreement. This period allows you to consider the terms carefully. If the severance offer is part of a group layoff, you might have 45 days to decide.

These periods derive from the federal Older Workers Benefit Protection Act (OWBPA), which applies to workers who are 40+ years old. Still, we often see employers adhering to these as general guidelines for workers of all ages.

The OWBPA also gives employees seven days after signing to revoke their decision. Employers often extend this revocation period to all employees as well.

State law and/or company policy may also dictate terms affecting this consideration period.

How to Negotiate Severance Compensation

Negotiating severance may seem scary, but it’s quite common. If you’re planning to do your own negotiations, you’ll want to keep these tips in mind:

• Prepare by researching industry standards
• Come equipped with a list of your achievements and contributions
• Stay calm and professional
• Request more than you expect to leave room for compromise
• Consider non-monetary benefits like health insurance or job search assistance

Just remember that the conditions to which you agree are ultimately of value to the employer. You may be surprised at their willingness to work with you.

Getting Legal Advice

However, you may want to involve an attorney experienced in the federal and state employment laws that apply to your specific situation. Under the protection of attorney-client privilege, you can share the details of your employment and separation with them. They’ll review the proposed separation or severance agreement and explain your options to you.

They may uncover red flags that can provide you with leverage in the negotiations. They can also give you an idea of which terms might be most worth negotiating. In many cases, they can equip you with information and prepare you for the severance negotiations. They can also do the negotiating for you.

Either way, it’s critical you fully understand the rights and legal claims you’re giving up before signing. At a minimum, you’ll want to have a good lawyer review the proposed agreement, which can be pretty painless.

Findlaw’s directory of dedicated employment attorneys easily connects you with local legal professionals. Just click on your state and narrow your search results by city if you’d like. You'll find contact information and reviews of attorneys in your area who are ready to help.

This is a good time to enlist an attorney's help. The terms of these agreements can have a lasting impact on your life and career.