What is Severance Pay?
Severance pay is a lump sum payment a company offers to a departing employee as compensation for termination. It’s typically a fraction of the worker’s final salary, and is often tied to years of service at the firm. It can also include unpaid sick leave or vacation time and reimbursed business expenses. Employers are not legally required to provide severance pay, but they often offer it in order to avoid potential liability and defuse hard feelings, according to Fordham economics professor Giacomo Santangelo.
The size and amount of severance packages offered by companies can vary widely, depending on the company’s financial health, its reputation, its industry and how it wants to be perceived. However, even with no legal requirement, severance packages are often designed to be generous enough to help departing employees make the transition to life without a paycheck.
There is no standard formula for determining severance pay packages, but they are usually calculated on the basis of a few weeks of salary for every year of employment. Generally, higher-level positions and salaries lead to larger packages. Some severance packages are paid in one lump sum, while others are distributed over the course of several weeks, according to a schedule set by the company.
What is Severance Pay? Definition and How to Calculate It
Some companies also include other benefits in severance pay calculator, such as continuation of health insurance and other company-sponsored benefits or access to outplacement services. While these are often not considered part of a severance package, they may be included in a package if the company is offering a competitive package overall.
While it is up to individual employers to determine the level of severance packages they want to offer, they are generally subject to state and federal taxation. If a lump-sum severance package is large, it may push the departing employee into a higher income tax bracket and increase their tax bill significantly. For this reason, some workers choose to negotiate for a lower severance package if they are worried about the tax impact.
If you are being laid off, it’s worth trying to negotiate a larger severance package to ease the blow of losing your job. You can try to bolster your case by researching what competitors are offering in severance packages, and sharing this information with your manager or HR rep. Then, you can suggest that your employer match or exceed this rate to show that you are a valuable employee who deserves more than you might otherwise get at your next employer.
You can also use your situation as leverage by pointing out that you have significant expenses to cover in the near future, such as buying a home or paying for your children’s college educations. Be sure to ask your manager for their reasoning, as they are likely thinking about the company’s financial situation and how to balance this with a need to maintain morale and good relations with current and former employees. Be prepared to counter with your own reason for wanting more money than they are offering, and be ready to walk away if you can’t reach an agreement.
