(NEW YORK) — Continued recession fears and a cascade of tech industry layoffs have drawn renewed attention to severance packages, the compensation offered to some departing employees.
Severance packages, which range widely in size and duration, offer newly unemployed workers a financial buffer as they face an uncertain job market.
But laid-off workers may not fully understand the terms of a severance package, or could feel pressure to accept the terms without looking them over closely, legal and career experts told ABC News.
As employees depart a company, they should be fully informed of the details of a separation and negotiate for the best outcome they can get, the experts added.
“If employers give money, there’s a carrot in front of employees,” Matt Blit, an attorney at employment law firm Levine and Blit, which handles severance cases, told ABC News. “Employees typically sign without even reading them.”
Here’s what you need to know about severance packages:
Why do companies offer severance?
Companies are not required by law to offer severance.
They provide ex-employees with financial and other benefits to blunt the damage caused by a termination that may be unrelated to a worker’s performance, experts told ABC News.
The move also helps companies minimize the public relations backlash that can result from layoffs, they said.
“It sends a message about how you take care of your people,” Alexandra Levitt, a career expert and author of the forthcoming book “Deep Talent,” told ABC News. “Severance is a very important part of that.”
In exchange, workers who accept severance agreements are often required to forgo publicly criticizing the company or bringing legal action against it, the experts said. In some instances, the agreements also stipulate that ex-employees cannot work at rival companies or seek business from the same clients, they added.
“Companies pay severance so that they never have to worry about an employee ever again,” Blit said. “Companies are not in the business of giving away money.”
What’s in a typical severance package?
Experts on severance cautioned there is no common template used for the agreements, leaving the onus on departing employees to ensure they understand a package before accepting it.
“There’s no such thing as a standard severance agreement,” Blit said.
Still, severance packages usually include some or all of a common set of offerings: financial payment, continued access to health care and other benefits, job-search assistance and mental health support.
A company may offer some benefits in lieu of others, the experts said. The wide variation between severance agreements highlights the importance of reading the terms or asking a lawyer to examine them.
“There are so many different angles that employers take,” Blit said.
How severance pay is calculated
The calculation behind the financial compensation offered in severance agreements varies from stingy to generous.
Favorable severance agreements offer one month’s worth of salary for every year of tenure with the company; while more frugal packages provide just one week’s worth of salary for each year, experts said.
If a laid-off employee worked for a company for five years, for instance, his or her compensation at the upper end of the range would amount to nearly a half year’s worth of pay.
In some cases, companies offer a base amount of compensation and an additional sum tied to one’s tenure. Google, which laid off 12,000 workers earlier this month, provided each employee with 16 weeks of severance pay, plus an additional two weeks for each year of tenure.
A federal law, called the WARN Act, mandates that large businesses give 60-day notice when undertaking a mass layoff. Some states, like Illinois and California, impose stronger versions of the nationwide law.
When layoffs must comply with such laws, companies either tell employees about the layoffs before they go into effect or keep workers on the payroll for two months afterward. If laid-off workers remain on the payroll, that compensation can be received separately from the pay offered in a severance package.
If a worker is set to receive a bonus, some employers pay a portion of that payout in the severance package, Blit said. Conversely, some employers demand repayment of a worker’s signing bonus if he or she is terminated before reaching a given tenure threshold, he said.
“If an employee signs on to get a $5,000 bonus and gets terminated within the first year, he may have to give that money back,” Blit said. “You can owe the employer money back.”
When do companies pay severance?
Companies typically pay severance in a single lump sum or over a series of payments that mimic how an employee received his or her salary, experts said.
Under some severance agreements, ex-employees must stop receiving financial compensation if they find a new job, giving reason for some employees to opt for a lump payment.
But the size and timeline of a severance payment carries different tax implications, which can significantly affect the take-home pay enjoyed by a departing worker, experts said.
How is severance taxed?
Severance is taxed in the same manner as wage or salary income.
If payment is received in a large sum, therefore, the recipient faces the higher taxes associated with the elevated tax bracket in which that payment falls.
“You have to be careful looking at a huge sum, keeping in mind that it’s going to be taxed at the same rate as income,” Levitt said. “It’s not a windfall — it’s taxed like any other income.”
Ex-employees who take the income as a continuation of their salary payment will end up paying less in taxes, Blit said.
By comparison, the tax payment required for a lump sum is “astronomical,” he said.
Can employees negotiate severance?
Severance experts encouraged departing employees to negotiate over their severance agreement since they have little to lose and potentially much to gain.
Laid-off workers can push for more compensation or a longer payment timeline, or they can try to exchange non-monetary benefits for monetary ones, Levitt said, adding that newly terminated employees should be sure to remain on good terms with their former employer.
“You don’t have to be rude about it, but you can see if there’s room for negotiation and just do your best,” she said.
When asked whether laid-off workers should negotiate over the terms, Blit said, “Always.”
When employers offer outplacement services, or job-search assistance, laid-off workers should try to exchange that benefit for its equivalent monetary value, he added.
“A lot of employers do provide some outplacement services – I find what employers typically provide to be kind of worthless,” he said. “I usually tell clients to get the money value of it.”
The negotiation over severance should resemble the initial push and pull over a newly hired worker’s salary and benefits, Levitt said.
“There’s negotiation at the start of engagement with an employer and negotiation at the end,” Levitt said.
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