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What is Severance Pay?

What is Severance Pay?

Two Hundred dollar bills on top of two paychecks on a table

Most companies give terminated employees a document outlining the benefits they are entitled to upon separation. Other companies require employees to take the initiative to find out their benefits. There can be many ingredients to a separation package.

Although employers are not required to do so by law, many give severance pay to their terminated employees. Severance pay is usually calculated according to a set formula, based on your length of service. For example, one employee may qualify for an amount equal to one or two weeks of salary while another may qualify for as much as a year’s pay.

You can try to negotiate for more severance than the company offers, especially if you have been with the company for many years, have an excellent service record, or have provided unique services such as being a team leader or bringing in large clients to the company. Sometimes employees who have quit their jobs because of intolerable working conditions can also negotiate for more severance pay than would normally have been provided.

Each company is different. Its personnel practices manual may or may not have a written policy on severance. Or its policy may state that severance will be paid on a case-by-case basis. If you receive severance pay, there are implications – which are discussed in later chapters – for income tax, unemployment compensation, and potential legal action.

Each method of severance payment-salary continuation or lump sum payment-has its good points and its bad points. Either way, most everything you receive in severance or settlement of legal claims is taxable. Because of a new law passed in 1996, any money recovered for employment discrimination or wrongful discharge claims, whether back pay, compensatory damages, or punitive damages, is taxable to you as income in the year you receive it. You might consider deferring part of the payment until the next calendar year to avoid being put in a higher tax bracket. Your employer will withhold from the payments whatever amount is due in taxes.

If you, or someone you know, are facing legal issues in the workplace United Employees Law Group has the answers. Call Today for your free and confidential case review. Please feel free to CONTACT US with any questions about this blog or your exact situation.

Courtesy of Workplace Fairness. For more information regarding the article, visit http://www.workplacefairness.org/severance-pay


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