A severance package is a collection of pay and benefits offered by an employer to an employee upon termination . While it is a common practice, especially in large-scale layoffs, it is important to understand that federal and state laws do not require employers to provide severance pay . It is a matter of agreement between the employer and the employee, often outlined in an employment contract or an employee handbook .
What’s Inside a Typical Package?
Severance is more than just a final check. A comprehensive package often includes several components designed to bridge the gap to your next role.
1. Severance Pay
This is usually calculated based on your length of service. A common formula is one to two weeks of pay for every year you worked at the company . For example, if you were with a firm for five years, you might receive 10 weeks of salary. Executives and middle managers often receive higher amounts .
- Lump Sum vs. Salary Continuation: You may be offered a single large payment or a continuation of your regular paycheck for a set period. Be aware that a large lump sum could temporarily push you into a higher tax bracket .
2. Health Insurance (COBRA)
One of the most valuable parts of a severance package is the continuation of health benefits. Under the Consolidated Omnibus Budget Reconciliation Act (COBRA), you are generally entitled to continue your employer's health plan for up to 18 months .
- The Cost: Normally, you must pay the full premium plus a 2% administrative fee . However, as part of a severance negotiation, you can ask the employer to continue paying their portion of the premium for a few months .
- The Timeline: You typically have 60 days to decide whether to opt into COBRA, and the coverage is retroactive to your termination date .
3. Unused Paid Time Off (PTO)
Check your last pay stub for unused vacation or sick days . Many states require employers to pay out accrued vacation time in the final paycheck, though this varies by local law .
4. Outplacement Services
Many companies provide career counseling, resume help, or job placement assistance . Even if you don't feel ready to jump back into the job market, Kelly Lannan advises taking advantage of these resources immediately .
Negotiating Your Exit
Many employees don't realize that a severance agreement is often negotiable. When you are presented with a "separation agreement," you are usually given time to review it before signing .
- Don't Sign Immediately: Take the paperwork home. If the language is complex or the agreement is extensive, consider consulting an employment attorney .
- Leverage Your History: If you were a high performer or have been with the company for a long time, use that as a basis to ask for more pay or extended benefits.
- Ask for Specific Perks: You can negotiate to keep company equipment (like a laptop), extend a gym membership, or keep a company car for an extra month .
- The "Neutral Reference": Ensure the agreement states that the company will provide a neutral reference to future employers, confirming only your dates of employment and title .
Special Considerations for Finance Professionals
If you work for a broker-dealer or investment adviser, your termination involves a specific document called Form U5 (Uniform Termination Notice for Securities Industry Registration) .
- The 30-Day Rule: Your firm must file this form within 30 days of your end date .
- Reason for Termination: The form discloses why you left. It is crucial to review this, as it becomes part of your permanent record in the CRD and can be seen by future employers via BrokerCheck .
- Continuing Jurisdiction: You remain under the jurisdiction of regulators for at least two years after your registration is terminated .
Checklist for Reviewing Your Severance Agreement
| Item | Description | Verified? |
|---|---|---|
| Termination Date | Is the official last day correct? | [ ] |
| Severance Amount | Does the math align with your years of service? | [ ] |
| PTO Payout | Are all accrued vacation days accounted for? | [ ] |
| COBRA Subsidy | Will the employer pay for any portion of health insurance? | [ ] |
| Equity/Bonuses | What happens to unvested stock options or pending bonuses? | [ ] |
| Non-Compete | Does the agreement restrict where you can work next? | [ ] |
The "Quitting" Warning
It is tempting to quit if you hear rumors of impending layoffs, but this is often a financial mistake. Quitting voluntarily usually makes you ineligible for both unemployment insurance and a severance package . Unless your situation falls under "constructive dismissal," it is generally better to wait for a formal layoff to secure these benefits .
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