A newly unemployed person's guide to severance pay

If you have been laid off or let go, you may be wondering how severance pay actually works or when you get it.

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If you've been laid off or let go due to reasons that had nothing to do with your performance, you may be wondering how severance pay actually works. Or, more accurately, when you get it. But just who receives it and how much is received isn't black and white; in fact, the "rules" surrounding this post-employment compensation or gap pay are rarely standard.

I spoke with Muse In-House Counsel Eric Kluger for help with getting the low-down on this gray area. Kluger confirms that it's generally employees who are fired or laid off who are eligible for it. "At its core," he explains, it's a "payment or benefit" received upon leaving a company. Read on for a better understanding of how this all works.

Who Gets Severance Pay?

The hard news first: Severance pay isn't a given. Your company may be undergoing layoffs, but just because you're losing your job and not being fired for underperforming doesn't mean you're entitled to any kind of extra pay beyond salary through your last day and compensation for unused PTO days, per your company's specific policies.

However, under the WARN Act (Worker Adjustment and Retraining Notification), you have some protection. If your organization has over 100 people and is preparing to lay off a lot of people, your employer is required by law to give you 60 days notice of a company closing or a large departmental closing. If your employer fails to give you the required notice, then you are legally entitled to severance pay.

An individual employee who's fired without notice may receive it too, but it's highly discretionary. According to Kluger, a company may offer it in exchange for getting you to agree you won't sue for things like discrimination, unpaid wages, or wrongful termination. If the company's restructuring or eliminating your position due to budget cuts or other needs, and your dismissal is a result of these changes and not due to poor performance, this is another instance in which the organization might wish to offer you a parting compensation.

How Much Severance Pay Do I Get?

The compensation employees receive varies across industries and roles. It is usually determined by the amount of time someone has been employed, and Kluger provides the example that often it’s a week or two of salary for every year of employment.

How Does Severance Pay Work?

It's negotiable! That means what you see at first might not be the final number. Some factors that may come into play when your company comes up with that initial figure: how long you've been with the company, your position and rank, size of the company, and if your employer contract included language on severance. These are all factors you can consider if you're planning on asking for more.

While severance is typically monetary—delivered in one lump sum—it's not the only form a payment can take. For example, you may ask your company to foot your health insurance bill for a couple of months, or you may request to keep your laptop computer after it’s been wiped clean of company data. However, cautions Kluger, since it's not legally required, if you're a "fired or laid-off employee, you don't have a ton of bargaining power." Still, he agrees that the old adage, "everything is negotiable" stands true here. While you may not get the outplacement service or career coaching you ask for, there's little harm in asking. It's not as though your boss is going to rescind the initial offer simply because you tried to make a deal.

Keep in mind that receiving this money typically hinges on you signing an agreement of sorts. Kluger urges you to thoroughly read and understand what you're signing "because you may be giving up certain rights by accepting the package," including your ability to work for certain employers in the near future. While you might really want (and need) that paycheck, it's well worth having a legal professional look over the agreement before signing.

Is Severance Pay Taxable?

Unfortunately, yes. That lump sum you receive is subject to taxes as it is considered income. A couple of years ago, the Supreme Court ruled that it is taxable in spite of the fact that employees receive it after service for a company has been completed. The gap pay is responsible for payroll tax, Social Security tax, and Medicare tax. The amount that you're taxed, of course, depends on how much you receive.

Now, before you run out and spend this money on that trip to Europe you've been wanting to take, sit down and draw up a budget. Figure out how long you can survive on this if you don't line up a new job right away. (While you're at it, it’s worth looking into when and if you'll be eligible for unemployment—it can be a lot of paperwork to fill out.) And remember, a week of pay might not be a lot, but it's still (a little) better than being shown the door with nothing more than a crate full of your office items.

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This article was written by Stacey Gawronski from The Daily Muse and was licensed as an article reprint from March 15, 2016. Article copyright 2016 by The Daily Muse.
The statements and opinions expressed in this article are those of the author. Fidelity Investments cannot guarantee the accuracy or completeness of any statements or data.
This reprint is supplied by Fidelity Brokerage Services LLC, Member NYSE, SIPC.
The third-party provider of the reprint permission and Fidelity Investments are independent entities and not legally affiliated.
The images, graphs, tools, and videos are for illustrative purposes only.
Fidelity Brokerage Services LLC, Member NYSE, SIPC, 900 Salem Street, Smithfield, RI 02917.
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