What's The Deal With Severance?

Illustration by Louisa Cannell
In the best of all possible worlds, leaving a job happens on your terms. When you give notice, you ideally do so having already lined up your next job or activity, and with enough money in the bank to tide you over during "funemployment." Being fired or laid off is a different matter, especially if the decision comes out of the blue.
For many Americans, having enough money to cover a $400 emergency expense is difficult. According to a 2016 report from the Federal Reserve, 46% reported "that they either could not pay the expense or would borrow or sell something to do so." Factor in a layoff and the situation becomes direr than even paycheck-to-paycheck living. That's why getting paid severance can be such a boon.
Advertisement
Getting paid severance can happen for some employees, in some cases, some of the time. The money is tremendously useful — but it can also come with several stipulations. Here's how it works, and how to make sure you get it if you can.
1 of 5
Employees typically qualify for severance when they lose their job for reasons beyond their control, such as reductions, company restructuring efforts, or mergers, explains Valerie Keels, the head of D.C. office services at Gavi, the Vaccine Alliance, and a human resources special expertise panelist at the Society for Human Resource Management (SHRM). She says that companies with an official severance policy must document it and make the information available to employees.

"Severance is not legislated on a federal level, so more often than not, packages are not offered unless it is on a case-by-case basis," explains Sylvia Francis at The Regional Transportation District in Denver, CO, and a special expertise panelist for SHRM. "Not all companies offer severance packages, and when they do it is often based on position-senior level positions."

Aside from top-level employees, workers who are part of collective bargaining agreements might also have an employee agreement or contract that includes a severance package, adds James M. Paul, co-chair of the American Bar Association (ABA) Subcommittee on the Family and Medical Leave Act, and a shareholder with the Ogletree Deakins law firm. Workers who are covered by union contracts might be provided with severance or payment upon termination.

For everyone else outside of these situations, getting paid severance is a much more nebulous issue. "One would obviously not qualify for severance for terminations caused by misconduct, poor performance issues, or other reasons tied to employee behavior," Keels says — but it's important to remember that not many people "qualify" for it at all. Legally, no one is owed or entitled to severance, and there is no common way of going about it that jilted employees can refer to or rely on.

Mass company layoffs may lead to a package, but if the problem is about an unstable work atmosphere or managerial issues for example, a payout could also be on the table. That's where things can get tricky.
2 of 5
"What people don't realize a lot of times is that employers will offer severance at the end of employment to get an agreement signed that has a release of liability," Paul says. "If someone's employment is not working out or they're being involuntarily terminated for a layoff or whatever reason, an employer may offer severance. They'll say, We'll offer severance, but you have to sign this agreement," he continues. "Of course, this agreement is going to have language [saying] that the employee releases all claims he or she might have against the company. A lot of times, the employer calls it severance and the employee thinks it's severance. In reality, it's kind of like a settlement agreement."

In other words, a package might walk like severance and talk like severance, but it's more like a nondisclosure agreement.

The employee may not actually have a valid claim, Paul clarifies, but many employers will naturally want to nip a litigious ex-worker's actions in the bud by offering payment after firing them, in exchange for the employee relinquishing her right to "allege or bring a claim."

To be valid and legally binding, the request can't be a smoke-and-mirrors affair. Drafting the right language can sometimes be very complicated, Paul says, but the employee must understand what they're signing.

"A lot of times, for either federal or state laws, you have to give the employee up to a period of time to think about it," he notes. "Certainly, they have to have the ability to take it home, or have the opportunity for an attorney or spouse look at it. They can't be rushed or forced to sign it."

But once someone has enough time to read the agreement and understand it, once they say "Yes, I'm going to take x amount of money in severance in exchange for agreeing not to pursue any type of claim," the deal is done.
Advertisement
3 of 5
Keels and Paul say the standard severance package tends to be a dollar amount on a "sliding scale," tied to weeks or months of pay, per years of service.

"Since it's not required by law, it is a matter of policy and culture and varies from company to company," Paul says. "A very basic, average formula a lot of companies use would be one week per year of service. But the longer you work somewhere, the more severance you would get."

That might mean a company's standard is one week per year of service up to five years, but employees who are with a company for longer than that may receive two weeks of severance per year worked. At other companies, the bar might start higher at two weeks per year of service — or the package could be one month's pay no matter how much time you've worked there.

"It also depends on the job a person was in," adds Paul. "If they were in the C-suite — the CEO or CFO — those positions often have employment agreements that spell out lots of benefits, including severance, or what the terms would be for parting ways." For example, Marissa Mayer reportedly received $3 million cash in severance when Yahoo was acquired by Verizon.

Some people may also be also to get non-monetary severance as part of their package. Ex-employees' group health insurance will often continue for the duration of a severance period, or they can receive a stipend that pays for Cobra coverage of the full amount.

"If the employer was paying all or most of the amount, it's quite a big bill, but you [could] continue on the employer's health plan for up to 18 months or longer if you have a serious health condition," Paul says.
4 of 5
According to Francis, whether you can negotiate a severance package depends on the circumstance. She says people who are being let go due to layoffs and reductions-in-force are generally given uniform offers, so there's little — or no — room to negotiate there.

Other instances when the employee and management can have more direct, amiable negotiations are when both sides have a comparable dollar amount in mind, or just want to make the problem go away. (The latter occasion would typically lead to signing some version of the agreement Paul previously mentioned.) If a company is trying to encourage an employee to leave on an individual basis, negotiation may be involved.

"Where one might have negotiating power is when a severance policy exists and the circumstances around the employee's dismissal is suspect. For example, discriminatory practices by the organization, retaliation from a supervisor, having the termination characterized as a layoff [but] only one person is let go, etc. In these cases, it's probably best for the employee to seek legal counsel."

Paul says that when an attorney gets involved, they would be the party to engage more directly with the employer and/or management moving forward. For example, if a client wants more money or wants to bring up a claim, their attorney might put together a letter saying: Thanks for your offer, but Mary has been employed here for 20 years. It was all great until her new boss, Bob, got hired and started sexually harassing her, writing her up, and firing her. Two months is not going to do it. We have a right to file a claim, and we will do that unless we can resolve it here and now.

"Sometimes there's legal leverage if you threaten a claim or have a contract [that] specifies your commissions," he says. (For example, if there's a dispute over being owed pay or a bonus stipulated in an offer letter or employment agreement.) On the other hand, he adds, there are also situations in which an employee might hold off on the nuclear option of hiring a lawyer.

"There might be non-threatening ways to negotiate, especially if you have a good relationship with your employer. You might say, 'Thanks. I really appreciate that you went to bat for me and got two months, but do you think you could get me four? I don't have a job lined up yet, and I might have to go back to school.'"

Being able to work through these delicate conversations happens on a case-by-case basis.
5 of 5
Starting a new job with a conversation about what could happen if/when you leave is like signing a prenuptial agreement before marriage. It might seem cynical, but considering the worst-case scenario can be a way of protecting everyone involved. Employees who think they have some leverage at the outset are better positioned for these kinds of negotiations.

"Severance payments are typically not something an employee would ask for when being hired," Keels says. "First, it's not good form to be thinking of the provisions for your departure when joining an organization unless one is a CEO negotiating a contract. Second, if the organization does not already have a severance policy, it's unlikely they would consider that as a negotiable item."

Most entry-level employees have little room to make this kind of demand during the interview phase. Paul does note, though, that it is a "very common thing" for mid- and higher-level employees to be upfront about the impact of accepting a big opportunity, as well as discussing an exit plan, during the offer-letter phase.

"The employer usually puts all of the terms in there that they're offering to the employee. It often won't talk about severance or what happens if things don't work out, so one thing an employee can do, depending on their level, is respond by saying: 'Look, I'm making a big decision. I'm excited and I think this is going to work out, but unless I have some guarantees or promises in here, I can't take the risk.'"

Again, if you're applying for an entry-level position and you're one of 100 people, you won't have a ton of ground to stand on. But think about whether you have a special skill or special education and a potential employer has heavily recruited you. Or, maybe you're being asked to relocate and move yourself — and family — to a new city. In those cases, Paul says it's understandable to ask for terms in an offer letter or contract that protect you against walking into your new job one day, being asked to pack up your things, and not having severance.

"During that offer letter negotiation period, you very well could or should raise questions like: Can we reevaluate after six months? If you're not happy and I'm not happy, can we make a point to meet? Or, if it's not working out and one or both of us want to part ways, can we put in a provision that I get two weeks, or one month of severance?" he says.

As you move through your career, it's natural to expect just as much from your employer as they expect from you.
Advertisement

More from Work & Money

Watch

R29 Original Series