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Different Types of Severance Pay

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Types of Severance Pay

When a company has to terminate workers in large numbers, it may offer a severance package to help the departing employees get back on their feet financially. The package might include severance pay, continued insurance coverage or career consultation services. In addition, it might include perks like employee discounts or payout of unused vacation time. Companies aren’t required by law to offer severance packages, but they often do. Some employers also require that severance contracts stipulate that the former employee won’t sue for wrongful termination or attempt to collect unemployment benefits.

The amount of severance pay is often based on an employee’s tenure at the company. For example, a company might offer two weeks of pay for every year of work, or four weeks of pay for middle managers and executives. But that’s not a rule; it depends on how generous an employer wants to be, and the industry norm.

Employers are often concerned that severance pay might lead to resentment among other employees who haven’t been laid off, and might even turn into lawsuits, says Farnaz Kashefi, an employment attorney in Los Angeles. “So they tend to be very careful about how much severance they give and when they are going to give it,” she says.

Severance payments are usually taxed, just as regular wages and salaries are. The lump sum may push you into a higher tax bracket, so you might want to consult with your accountant before accepting the payment. You might also be able to arrange to have the money paid over several years to minimize the tax impact.

Different Types of Severance Pay

Generally, companies aren’t required to pay severance to their employees, although they may honor the terms of an employment contract or employee handbook that specifies it. In some cases, such as when the company is letting go workers in mass layoffs, the Worker Adjustment and Retraining Notification Act (WARN) requires companies to provide 60 days notice of plant closings or mass layoffs and pay employees through that period.

But even if the company doesn’t have an explicit policy on how to get severance pay, it may choose to do so anyway as a sign of goodwill and to try to make it easier for their departing employees to find new jobs. Some states, such as California, have laws requiring companies to provide severance pay to certain employees, including unionized ones.

If you’re considering taking a job that comes with severance pay, research the company’s competitors to see what they are offering. You can then use that information to negotiate a better payout. You might also offer to sign a non-compete or confidentiality agreement in exchange for a more generous package.

In the realm of employment, severance pay stands as a crucial component that often bridges the gap between the end of one professional journey and the beginning of another. It serves as a financial cushion for employees facing termination, offering support during the transitional period. However, the landscape of severance pay is diverse, with various types tailored to different situations and organizational policies. From traditional lump-sum payments to more nuanced packages, here’s an exploration of the different types of severance pay.

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