Severance Pay Package
The job market is tighter than ever, and news reports of layoffs are more frequent. While most employers provide a severance package to employees who are laid off, not all do so. A 2023 study by talent mobility company Randstad RiseSmart found that just 25% of U.S. companies offer severance pay to those leaving their jobs. The severance pay is designed to ease the transition for workers and help them find new positions. But what exactly is included in a severance pay package?
Severance payments can take many forms, including a lump sum or regular installments that are paid over a period of time. They may also include unreimbursed business expenses and unused vacation and sick days. The amount varies by employer and is often based on an employee’s years of service. Companies can even create their own formulas to calculate severance pay, taking into account seniority and the employee’s rank within the organization.
Some countries have laws requiring employers to pay severance packages, such as the Netherlands or Austria. In Australia, severance pay is mandatory for employees who are laid off for “restructuring or downsizing.” The maximum amount of severance pay an employee can receive is 16 weeks of salary. However, the minimum severance pay is four weeks of salary and starts after one year in the company.
What Is Included in a Severance Pay Package?
In the United States, severance pay is not required for most employees. Instead, most employment contracts stipulate that an employer can terminate an employee at any time, for any reason, except for a breach of contract or discrimination. Employers aren’t required to provide severance payments for any terminations, including those deemed “at will.”
For employees who have worked at a company for a long time, severance packages can be substantial. According to a 2021 survey by talent management firm Randstad RiseSmart, a majority of employers surveyed (64%) offered severance pay lawyer to employees who were laid off. That number increased from 44% in 2019.
While a company’s discretion to provide severance pay isn’t guaranteed, if it offers a package, it usually includes some type of financial support for the worker. Depending on the state and the company, this could be enough to help a laid-off employee find a new job. The size of a severance package can be a big factor when it comes to tax implications. A lump sum payment may push a laid-off worker into a higher tax bracket, so it’s important to discuss this with the employee’s employer to determine how much they are willing to pay. In some cases, the severance package might be able to be spread out over two years, which can reduce the tax impact. This will not be available to all employees, though, and can be difficult for low-income workers. In these instances, a worker may be better off with a smaller lump sum or no severance pay at all. The best thing for a laid-off worker to do is to consult with an experienced attorney.