What to Know About Severance Pay

August 13, 2023

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13 min read

Severance pay is a helpful financial buffer for those laid off from their job.

Severance pay is a concept that confuses many people, usually because it can vary wildly person-to-person by company and state.

Still, it doesn’t have to be a complex mystery.

Regardless of if you’re expecting a severance package, learning about severance pay is a good idea for any employee. We’ll overview what it is, what the packages can look like, and what benefits you can reap if you’re offered one.

Key takeaways

  • Severance pay refers to the resulting amount of money a company offers an employee after their employment ends. 
  • The amount of severance pay an employee receives can vary based on factors like the employee’s position, how long they worked for the company, and their experience. 
  • Not all businesses or companies offer severance pay as it’s not legally required. 
  • A severance package can offer more than just a continuation of an employee’s regular salary.

What Is Severance Pay?

Severance pay is an amount of money an employer grants their employee after their employee’s time there ends. For example, you could get this type of pay from your employer when:

  • You’re laid off from your job
  • Your employer is downsizing 

It’s even possible to be offered severance pay when you decide to retire. 

How much severance pay do I get?

The amount of severance pay you get can depend on a lot of factors. Usually, the most important factor is how long you’ve worked there. So, for example, the longer you work at a job, the more potential pay you could get. 

An employee’s experience can also play a role in the amount of money they receive

If you get severance pay, there are two primary ways you can get it: either in a lump sum or in installments that are spread out over a period of time.

Severance pay vs. separation pay

There’s often confusion between severance pay and separation pay. Whereas severance pay is an amount of money offered to you if you’re laid off, separation pay refers to a company’s persuasion to you to leave your position on your own accord. 

Severance pay and unemployment

When severance pay is on the table, employees also often file for their state unemployment benefits. However, whether or not you’re eligible for unemployment can depend on your severance pay. 

Things that can affect your eligibility for unemployment include laws specific to your state and how you received the payout. Here’s an example. 

Depending on where you live, your unemployment benefits might not be affected if you got your pay as a lump sum. However, if your employer allows a salary continuation as part of your severance package, your unemployment benefits could be decreased or delayed. 

Severance pay and early retirement

Severance pay can also be linked to early retirement. For example, let’s say you’re an employee who has a long tenure. 

If the company you work for needs to cut costs, they might offer you an early retirement offer. It’s not uncommon for these types of offers to include severance pay. If they do include that pay, it’ll most likely be based on how many years you worked there. 

In early retirement offers, it’s also common for the payout to be higher than in an average severance package. 

What’s a Severance Package?

A severance package is a specific type of severance pay that can come in many forms, like unused sick time or salary continuation. 

If you’re wondering about your own potential severance package, you can often find information pertaining to your situation in an official contract with your employer. 

Typical severance package

Because severance packages can vary pretty wildly, there’s not really a typical severance package. Still, lots of companies go about severance packages the same way and it’s usually based on how long you’ve worked at the company. 

For example, you could get anywhere from one to four weeks of pay for however long you worked there. As far as typical severance packages go, there’s a pretty good chance you’ll be paid two weeks for every year you worked for your employer. 

Why Does Severance Pay Exist?

Severance pay exists to help people financially while they prepare for retirement (if they retire) or while they look for another role, depending on the situation. 

Plus, severance packages can act as a way for businesses to protect themselves. By requiring employees to sign a release, companies can shield themselves from any potential lawsuits that may crop up. 

Another reason companies offer this type of pay is to avoid negative reactions (especially during significant layoffs and downsizing). For example, Sears made an announcement in 2018 that it would lay off employees paid by the hour — without any severance pay. 

At the same time, Sears announced its plans to give millions of dollars in yearly bonuses to executives, which sparked intense condemnation of the company. 

How to Find Your Next Role

If you’ve been let go due to downsizing or have otherwise left your job, chances are, you’ll be looking for a new job. While searching for new opportunities can be overwhelming and stressful, it doesn’t have to be. 

To find your next role, start by updating your resume, CV, and LinkedIn profile. After that, you’ll be ready to apply for new positions. 

When you’re looking for a job, there are tons of online job boards that post new positions regularly. These are easy to use because you can also apply filters. For example, maybe you only want to look at roles in Arizona. You could also filter by industry, like communications or accounting. 

Once you’ve scored a job interview, the battle is halfway over. But job interviews can either make or break your chances of a new position. 

If you have a job interview coming up, don’t risk it by winging it. Instead, try out a mock interview simulator like Yoodli.

Yoodli, an AI speech coach, has the ability to analyze your interview responses and provide you with actionable tips on how to improve. For example, you can get valuable insights into how fast you’re talking (so you know if you need to slow down or increase your speaking pace) and even your word choice and body language. 

You can explore Yoodli’s existing bank of interview questions to practice or you can input your own specific interview questions. This can be helpful if you have a set of questions specific to the company you’re applying for, like Target interview questions.

If you just received severance pay, it might be time to brush up on your interview skills.

This mock interview simulator will also ask you intelligent follow-up questions using generative AI to best help you prepare. 

You can learn more about Yoodli’s AI-powered follow-up questions through this brief overview video below:

If you just received your severance pay, it might be time to brush up on your interview skills with Yoodli.

Severance Pay Examples

Although many people think this type of pay is the same at every job, this isn’t true. There are multiple types of severance pay examples, including:

  • Uncontested unemployment benefits
  • Vacation time and/or unused paid time off (like sick time)
  • Extended health insurance coverage
  • Salary continuation 

Let’s take a closer look at these severance pay examples. 

Uncontested unemployment benefits

One severance pay example is uncontested unemployment benefits. When

For example, once you’ve left your job, you have the opportunity to file for unemployment benefits from your state. However, there’s also a chance your employer will “contest” your request. In other words, your employer can object to your claim. 

Still, that doesn’t mean every employer will challenge your claim. Some severance packages actually include an agreement from your employer to not contest your claim when you file for unemployment benefits.

Vacation time and/or unused paid time off

Another source of severance pay is vacation time and unused paid time off. For example, if you’ve built up paid time off, that could be included in your severance package. 

Although it totally depends on your employer, paid time off could include: 

  • Holiday pay
  • Sick days
  • Vacation time

Still, keep in mind that this isn’t the case everywhere. Some states don’t require your employer to pay for any time off that’s accrued during your employment. 

Health insurance coverage continuation

Many people don’t think of health insurance coverage when they think of severance pay, but extending an employee’s health insurance coverage is a really common example. Thanks to the Consolidated Omnibus Budget Reconciliation Act (COBRA), you could be given an extension of your health insurance coverage.

COBRA was created to help employees who’ve left their role and want the chance to keep their health insurance coverage even though they don’t work for their employer anymore. 

COBRA offers the continuation of health benefits in special circumstances, because of situations such as a:

  • Job loss, which could be involuntary (like if you were laid off during downsizing) or voluntary (like if you retired)
  • Transition from one job to the next
  • Divorce from a spouse
  • Decrease in how many hours you worked
  • Death

There are other things considered “life events” that could also affect COBRA benefits. Some of the benefits COBRA offers include:

  • The extension of health insurance coverage
  • Coverage for dependents, like your partner, kids, or a former spouse
  • Being able to avoid not having health insurance for a period of time

Still, if you’d like a health insurance coverage extension through COBRA, there’s a chance you’ll have to pay up to 102% of your plan’s cost. That percentage comes from not only the whole premium (out of pocket), but also an administrative fee of 2%. It totally depends on your employer, but some include the COBRA premium as part of your package. Other employers might pay a percentage of the premium.

Keep in mind that COBRA isn’t permanent; it’s just a temporary solution. Usually, you can stay on COBRA for about 18 to 36 months, depending on your situation. 

Salary continuation 

Salary continuation is one of the most common examples of severance pay. With salary continuation, you’ll get paid your usual salary by your employer for a particular length of time following your employment. 

As mentioned above, how much pay you get can depend on various factors, such as: 

  • How long you worked at the company
  • Your specific position or role
  • Your level of experience

Other types of severance pay examples 

In addition to the severance pay examples listed above, there are some other things an employer can add to your severance package. 

Other types of severance pay examples include things like:

  • Extending other benefits, such as vision, dental, or even life insurance
  • An official statement overviewing the kinds of information you can share with employers who may hire you in the future
  • Helping you with your job search 
  • Giving you the chance to keep company assets, like a phone your employer gave you during your time with the company

Severance Pay Calculator

If you’re trying to calculate what your pay looks like, make sure you consider the factors that affect your payout, including: 

  • How long you worked for your employer
  • Your position
  • Your experience
  • Why you’re leaving
  • What type of employment status you have, like salaried or hourly

If you’re an employee who’s paid by the hour, consider how long you worked there and how many weeks of your regular wages you’ll get. Here’s an example. 

Let’s say you make $440 every week. If you’ve worked there for five years, we can calculate an estimate of your severance pay by multiplying the amount you make per week, $440, by the number of years you worked there, five. In that case, you’d get about $2,200 in severance pay.

If you’re a salaried employee, calculating your pay might look like this.  

Let’s say you make $64,000 annually and your severance package includes two weeks of regular pay (so, somewhere around $1,230). If you worked there for five years, you’d get around $6,150. 

How to Use Severance Pay

You can use your pay in a whole host of different ways. Still, most people choose to use their package as a sort of buffer while they search for another role. 

Financial stability is always important, but especially so if you’re looking for another job. If you’re in this boat, try not to just live off your severance pay or use it as a vacation. Instead, use it as a financial cushion while you find the next opportunity. 

You can update your resume, write cover letters, and send in applications to roles you might be interested in. You can even tap into resources from your old job, like coworkers who might know of other open positions elsewhere. Your coworkers can also write you letters of recommendation while you search for a job. 

Common Severance Pay FAQs

Before we wrap up, here are the most common severance pay questions people ask. 

Can I get severance pay if I’m fired?

Although it can depend on the employer, people who are fired usually don’t receive any severance pay or packages. It’s not impossible, though.

Is severance pay taxed?

Yes, severance pay is taxable. This includes any accrued sick time, vacation time, or other paid time off. 

Severance pay is taxed in the year you get it. Plus, depending on how you receive it, your pay might be liable to tax withholding. 

So, for example, your severance pay will probably be affected by your employer’s withholding amount if you get severance pay from your employer as part of your typical wages. The withholding amount itself depends on what tax bracket they’re in.

On the other hand, if the severance pay isn’t paid along with your usual wages, it’ll be taxed at a flat rate. Typically, 22% is the flat rate you can expect. 

How is severance pay calculated?

As mentioned above, although it can vary, the amount of severance pay you get is usually affected by how long you were at the company, what position you worked in, and what your salary was. 

It’s pretty typical for companies to offer a few weeks of regular pay for each year you worked with the company. 

Do all businesses offer severance pay?

Contrary to popular belief, businesses don’t have to offer severance pay. Lots of people figure that severance pay is a non-negotiable package they’ll automatically get, but it’s not required for companies to offer this type of pay. 

The only time a business legally has to offer an employee severance pay is if it specifically says in the employee’s contract that they’ll receive severance pay if they’re laid off. Another case is if the company’s employee handbook assures employees they’ll get severance pay. Plus, if the business you work for promised to give you severance pay, they legally have to uphold that decision. 

However, even if you don’t end up getting severance pay, you’ll still be paid all the way through your final day of work. You’ll also get any vacation time that’s accrued. This is a legal requirement through the Fair Labor Standards Act (FLSA).

What states require severance pay?

In the U.S., businesses aren’t necessarily required to provide former employees with severance pay. The laws vary state-to-state

For example, some states have a next payday requirement where they’re required to pay the employee by the next payday. These states include:

  • Delaware
  • Idaho
  • Indiana
  • Iowa
  • Kansas
  • Kentucky
  • Louisiana
  • Maine
  • Mayland
  • Michigan
  • Nebraska
  • New Jersey
  • New York
  • North Carolina
  • North Dakota
  • Ohio
  • Oklahoma
  • Pennsylvania
  • South Dakota
  • Tennessee
  • Virginia
  • Washington
  • West Virginia
  • Wisconsin
  • Wyoming

Other states require companies and businesses to pay the former employee any available severance pay immediately, including:

  • California
  • Colorado
  • Hawaii
  • Illinois
  • Massachusetts
  • Missouri
  • Montana

In other states, there are no regulations around severance pay. States that don’t have laws for severance include:

  • Alabama
  • Florida
  • Georgia
  • Mississippi

Still, there are tons of exceptions and it’ll depend on your respective situation. 

The Key Takeaway

Navigating severance pay and packages can be confusing, but it doesn’t have to be. Although not all businesses are required to give their former employees a severance package, they’re very common in the U.S. 

Starting a job hunt can also be a challenge, but brushing up on your interview skills with Yoodli is a great way to gain some extra confidence and give you an extra edge over other candidates. Regardless, try not to use your severance pay as play money; instead, view it as a buffer until you find your next role.

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