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Severance Packages

What is a Severance Package?

In employment settings, a severance package may be offered to an employee in connection with their termination. Usually, it includes pay or some benefits, which may vary from individual to individual.

Although many employers offer severance packages, there are no specific severance package laws that make them mandatory. The employer is only legally required to provide unpaid wages or unpaid employment benefits if the terminated employee is entitled to them.

Additionally, there is no standard for determining what is included in a severance package. Similar to other employment agreements, severance packages may be negotiable. They may vary based on the particular employee or the employer's policies, and may include different items. Many times, a severance agreement will require an employee to sign an agreement not to sue the employer for wrongful termination in order to accept it.

There are only two situations in which an employer may be legally required to provide severance pay. A small number of states require employers who are closing a facility or laying off a large number of workers to pay a small severance.

A second situation may be when an employer led an employee to believe they would be paid a severance, which may be shown by:

  • A written contract that states severance would be paid by the employer;
  • An employee handbook or personnel policy that states employees would receive severance pay;
  • A company history of pay severance to previous employees in the same position; or
  • An oral promise by the employer that severance would be paid.

What Is a Typical Severance Package for a Layoff?

While the details of severance packages may vary, they are often based on the length of employment. For example, in the severance package, the employee may offer a week's pay for every year an employee has worked for the company. However, there is no standard severance package and an employer may offer whatever amount they wish, so long as it does not violate any laws.

Additionally, some employers may offer different severance packages based on the seniority level of an employee. For example, a company may offer its executives or managers a higher severance package than an entry-level employee.

It is important to note that severance pay or severance packages do not always come in the form of money. Instead, a company may:

  • Extend the employee's health benefits past termination;
  • Cover some future medical expenses;
  • Provide the employee with outplacement services; or
  • Offer various other employee benefits.

In some cases, a severance package may include both cash payments and benefits. It is important to remember there is no average severance package and the terms will depend on the employer's policies or preferences and any other pre-negotiated terms between the employer and the employee.

What is a Typical Severance Package for a Layoff?

Although the details of severance packages can vary, they are usually based upon the length of the individual's employment. For example, in a severance package, an employer may offer a week's worth of pay for each year the employee works for the company.

There is, however, no standard severance package. Employers may offer whatever amount they desire, so long as it does not violate any laws.

In addition, an employer may offer different severance packages based upon the seniority levels of employees. For example, a company may offer managers or executives higher severance packages than entry-level employees.

It is important to note that severance packages or severance pay are not always provided in the form of monetary compensation. Instead, an employer may provide severance in the form of:

  • Extending the employee's health benefits past termination;
  • Covering some future medical expenses;
  • Providing the employee with outplacement services; or
  • Offering various other employee benefits.

In certain cases, severance packages may include both monetary payments and benefits. It is important to note that there is no average severance package and the terms of the package will depend upon the policies or preferences of the employer and any other terms which were pre-negotiated between the employer and the employee.

Can I Negotiate the Terms of a Severance Package?

In many situations, companies will have employment policies which provide the manner in which the severance packages will be determined. These types of employment policies will typically include provisions that provide:

  • When employees are entitled to severance pay;
  • How severance pay is calculated; and
  • What the severance package includes.

The details of the severance package may also be addressed in the employment contract between the employer and employee. In these situations, an employer is legally obligated to offer an employee severance pay according to the terms of the employment contract.

In certain cases, negotiation of the severance package may be possible. If negotiation is allow, there are several factors which will likely be discussed during the negotiations with the employer, including:

  • The employee's number of years with the company;
  • The role or level of the employee within the company;
  • The size of the company; and
  • The details of the severance package as provided in the employment contract or company policy, if any.

Employees are always encouraged to consult with a severance agreement attorney for negotiations related to severance packages. A lawyer can advise an individual about applicable laws, review their contract, and assist them in obtaining the best possible severance package.

Will My Severance Package be Taxed?

Yes, an employee's severance package pay is subject to taxation. This is because severance pay is considered wages.

Because of this, it will be subject to the normal withholding and employment taxes an employee would see on their regular paycheck. Although this taxation may seem odd because this pay was not earned for work which was performed, the severance payment will still be taxed.

It is important for employees to be aware that employers are not required to clearly pay the pay as severance pay in order for it to be considered severance pay.

How is Severance Pay Taxed?

When employees are terminated, they might be offered a severance package. Generally, a severance package will include:

  • Pay;
  • Extended benefits; or
  • Both.

As noted above, severance pay is considered income and is subject to taxation. Because this type of pay is considered wages, it will include the normal withholding and employment taxes that the individual sees on their regular paychecks. These standard deductions may include:

  • Federal income tax;
  • Social Security;
  • Medicare;
  • State income tax; and
  • Court-ordered garnishments.

What are Some Common Severance Package Disputes?

As with any type of employment agreement, a severance package can be the basis of legal disputes or conflicts. These may range from a minor dispute to a company-wide violation that affects a large number of employees.

Common severance package disputes may include:

    • Discrimination against an employee based on their age, sex, nationality, or other characteristic. For example, if an employer denies a severance package based solely on an employee's race;
    • A conflict that involves some type of fraud or misrepresentation in the severance package or payment was negotiated. For example, if the employee was tricked into signing an agreement that contained different terms than those discussed during negotiations;
    • A disputes over the amount of pay, types of benefits, or other severance package terms;
    • An issues with non-payment of the severance pay or withholding of the benefits that were promised to the employee; or
  • Various other conflicts.

These types of disputes are often complex and involve multiple areas of law. In many cases, they will require legal action to resolve.

What if I Receive Severance Pay Upon Termination?

One common manner in which severance pay is offered is at the time of the termination of an employee. For example, an employee may have an employment contract which states that they are entitled to severance pay if they are terminated.

It is important to note that, although severance pay is not mandatory under the law, an employer may offer it anyway even without company policies or employment contracts in place. 

What if I Receive Severance Pay After Filing a Lawsuit?

If an individual has sued their former employer for wrongful termination, they may not receive their severance pay until several years afterward. An employer may offer a former employee severance pay after they file a lawsuit in order to settle the dispute and to avoid having to go to trial.

If this occurs, an employee will still be taxed on the severance pay because, as noted above, it is considered to be earned wages. If, however, a former employee settles a wrongful termination lawsuit, not all of that settlement may necessarily be viewed as severance pay.

Instead, some of the settlement for the lawsuit may be viewed as payment for non-wages, which may include emotional distress or discrimination. If this occurs, any non-wage portion of the settlement will not be subject to the same withholdings as severance pay.

Instead, this income should be reported on a Form-1099.

If I Accept a Severance Package, Can I Still Sue?

Many severance package agreements contain a clause that requires an employee to waive their right to sue the employer for wrongful termination. In most cases, the employer will not provide any type of severance pay until this is signed.

In general, it is legal for an employer to provide a severance package in exchange for the employee's release of the right to sue. A court will usually uphold a severance agreement. There are, however, certain situations where a severance agreement may be held unenforceable.

If an individual has accepted severance pay, and then sues for wrongful termination, they may be required to pay back the severance pay if the court determines the agreement was invalid. However, if no such waiver exists, an individual will generally be permitted to sue their employer in court regarding a severance package dispute.

What Is a Waiver of a Right to Sue after Termination?

A severance agreement, sometimes referred to as a “waiver of a right to sue,” is a type of contract that an employee may be asked to sign by their employer after the employee has been terminated or laid off during the downsizing of a business.

The effect of signing such a waiver, however, means that the employee will no longer have a right to sue their employer for wrongful termination. Instead, the employee will receive some sort of benefit (usually a severance package) in exchange for giving up their right to sue. In other words, the employee will have no means of legal recourse against their employer. Thus, they will not be permitted to recover any type of legal remedy from them in court.

As an example, suppose your employer ignored the procedure for firing employees at your place of work. After you receive your termination letter, your employer then asks that you sign a waiver of a right to sue in exchange for a severance package. If you sign the document, you will not be allowed to file a lawsuit against them for wrongful termination in court.

On the other hand, if you refuse to sign the document, then you may be able to recover monetary damages from your employer if you are able to prove that you were wrongfully terminated from the company. For instance, if your employer did not follow the steps to terminate a worker at your company or blatantly breached the termination provisions of your employment contract.

In such a case, so long as you do not sign the severance agreement, you will still have a right to sue your employer for wrongful termination. Ultimately, the choice will be yours alone on whether you want to file a lawsuit against your employer or if you prefer to take the offered severance package and give up your rights to sue after being terminated.

This decision is not one that should be made lightly. This is because you are essentially agreeing to release a valuable right that may be able to get you more money than you would receive if you simply walk away and opt to take a severance package.

Therefore, if you have been asked to sign a waiver of a right to sue and are having trouble deciding which option is better for you, then you should speak to a local employment attorney immediately for further legal advice. An attorney will be able to provide you with important information that can help you make an educated decision about your particular situation.

Can My Employer Make Me Agree Not to Sue in Exchange for Severance Pay?

There is no law that says that an employer is legally required to offer a severance package to an employee who has been laid off or terminated from a company. However, many employers will offer an employee who is in such a situation the chance to sign an agreement in exchange for severance pay regardless. In fact, it is a commonly employed tactic among businesses to save employers the cost of litigation and it is legal.

For instance, employers are well aware that their employees have a right to sue them for wrongful termination or other related employment claims in certain situations. To avoid having to pay a large monetary damages award, it is often cheaper for the employer to offer an employee a severance package that ensures the employee will be forced to abandon their right to sue.

Again, this process is considered to be legal. While an employer cannot force an employee to give up this right, they are still legally allowed to offer it to them. The decision will be in the employee's hands from that point forward.

Thus, it is important that an employee understand their rights and what they will be giving up once they sign a waiver. Employees who are unsure of how to handle this type of situation should contact a local employment attorney immediately.

When Is a Waiver of a Right to Sue Invalid?

As discussed above, it is generally legal for an employer to ask an employee to sign a waiver of a right to sue in exchange for a severance package. However, there are two situations in particular when a waiver of a right to sue will be considered to be invalid or illegal. In most cases, a waiver of a right to sue will typically be found to be invalid or illegal in the following two situations:

  • Unknowingly or involuntarily: An employee will still be permitted to sue an employer if it is discovered that the employee was forced to sign a waiver of a right to sue. Such actions may result in an inequitable or invalid waiver. An employee will also be allowed to sue if they voluntarily signed the waiver, but did not realize or comprehend what it was they were actually signing (e.g., they did not know they were giving up their rights). In such a scenario, the waiver will be deemed invalid and therefore unenforceable.
    • In order to prove this, the employee must be able to show that they signed the waiver either while they were under duress or as the direct result of another wrongful action taken by their employer. For example, if an employer intentionally drafts a waiver using vague terms and confusing legal jargon.
  • Employment discrimination: An employee will also be permitted to sue an employer for employment discrimination, regardless of if they signed a valid waiver in a knowing and voluntary manner. Employment discrimination claims may occur when an employer terminates an employee based on their race, sexual orientation, gender, age, or because of a disability.

Can an Employer Withhold My Paycheck or a Severance Package If I Don't Sign a Waiver of a Right to Sue?

An employer is not legally allowed to withhold an employee's final paycheck. The reason for this is because the employee has already completed the work and thus is entitled to be paid for any work that was previously performed before they were terminated. An employer who refuses to give an employee their final paycheck can be sued for this action because it is illegal.

In contrast, an employer is not legally required to offer a laid off or terminated employee a severance package. As such, an employer is legally permitted to withhold severance pay from an employee who refuses to sign a waiver of a right to sue document. However, there are some exceptions to this general rule of thumb wherein an employer may be bound to offer severance pay to an employee.

For example, if a company policy or employee handbook states that any employee who has been terminated or laid off must receive a severance package. An employer may also be required to provide a severance package when an employment contract specifically says that one will be offered or if an employee is a member of a labor union and there is a collective bargaining agreement in place that has a condition regarding severance pay.

In addition, an employer also cannot force or threaten an employee to sign a waiver of a right to sue. Again, this decision will be left up to the employee and any conduct that takes away their choice, such as signing a severance agreement under duress, coercion, and/or undue influence, will be considered to be illegal.

How Can A Lawyer Help Me With My Issue on Severance Package?

It is extremely important to have the assistance of an experienced workers compensation lawyer for any severance package issues. It is essential to consider how a severance package may affect your legal rights and your ability to bring a claim against your employer. If you believe you are being wrongfully terminated, you should contact a severance agreement lawyer. If you have been asked to sign a waiver of a right to sue after recently being terminated by your employer, then you may want to consider speaking to a local wrongful termination attorney for further legal guidance as soon as possible.

A lawyer will be able to review your case, any relevant or applicable documents, and represent you during court proceedings, if necessary. Every situation is different and a lawyer may be the difference between a successful case and an unsuccessful case.

Call our office today at 212-994-7777 or complete the convenient online contact form to set up a consultation.