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What you should know about severance pay & packages

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7 mins

Are you familiar with Bobby Bonilla Day, which is celebrated, mainly by Bobby Bonilla, every July 1st?

Bobby Bonilla was a baseball player who negotiated one of the most incredible severance packages of all time. Included in his package was the stipulation that his former employer, the New York Mets, make annual payments to him of $1.19 million for 25 years, starting July 1, 2011, until July 1, 2036.

This article won’t guarantee you’ll get a severance package that lucrative, but you will be well-informed and may get more than you planned on if you’re ever laid off or fired (which happens at least once to 60% of American workers).

And we’ll answer some frequently asked questions about severance packages, including:

What is a severance package?

A severance package is a collection of benefits provided to you by an employer when your employment ends. This typically includes severance pay and additional benefits which are spelled out in the severance agreement that is usually offered to an employee on their last day on the job.

In addition to listing the financial terms of the severance package, the severance agreement may include clauses that the employee will not disclose any confidential company information, go to work for a competitor, sue the company, or bad-mouth the company publicly or privately.

How much is severance pay & how is it calculated?

Severance packages are usually calculated based on how long the employee worked for the company. Employers develop their own formulas, typically using the number of years of service as the determinant of the severance amount.

For example, most companies will include one or two weeks’ pay for every year worked. So, an employee earning $1,000 per week could get a check for $1,000 or $2,000 when their employment is terminated.

Employers are not legally obligated to provide a severance package for employees, and they can discriminate between classes of employees. For example, senior management might be paid four weeks’ salary when they leave the company versus two weeks for all other employees.

It is up to the employer whether they offer a severance package. However, most employers offer them to be fair to their employees, use it as a recruiting tool, or avoid potential lawsuits.

[ Related: A guide to employee turnover in the modern workplace ]

Is severance pay different when you're fired vs. laid off?

Yes, a severance package is different for someone who has been fired compared to someone who has been laid off from work.

If you’ve been fired, the reason why will be a significant factor for your employer offering you a severance package. For example, if you’re fired for stealing the company’s petty cash, don’t expect a severance package.

Conversely, if you’re fired because you weren’t suited for the job you were hired for and performed poorly, your employer may offer you a severance package because they made a hiring mistake and want to treat you fairly.

If your employment was terminated as part of a mass layoff or only your position was eliminated, you can expect a severance package either way.

How to realistically negotiate a typical severance package

Most people think of a severance package only in terms of getting a check from the company. However, there is much more to a severance package than money.

The central part of your severance package you want to negotiate is your insurance coverage. If you participated in your employer’s group health, life, or disability insurance programs, negotiating who pays the premiums can be worth a lot of money to you.

According to Humana, employers typically pay about 82% of single employee health insurance premiums and 70% of family premiums. When you leave your job and sign up for COBRA health insurance benefits to continue your current coverage (for up to 18 months), you’ll be responsible for paying the portion of the premium your employer previously paid. This will be in addition to what you’ve already been paying for your share.

However, you can ask your employer to continue to pay their share of the premium while you’re looking for another job. If they agree to do that, it can save you many thousands of dollars while you search for a new position.

Employer-sponsored group life and group disability plans are other benefits you can ask your employer to pay for when your employment ends. Most employers won’t agree to do this, but it can’t hurt to ask.

You can also ask your company to include these benefits in your severance package:

  • Outplacement services to help you find a new job
  • Company perks (keeping your laptop, company care, or company-sponsored club memberships)
  • A favorable announcement of your leaving the company
  • A letter of recommendation

Should you always accept a severance package?

Accepting a severance package is an individual decision that should be based on your personal situation.

If the termination of your employment was amicable, you believe it was fair, and you feel the severance package is reasonable considering your employment history, there’s probably no reason not to accept it. It may be the only way you receive your wages, vacation pay, and expenses owed to you by your employer.

But, if you believe you have grounds to sue your employer for something like wrongful termination or discrimination, you may want to hold off signing a severance agreement and negotiate further for additional compensation. In cases like these, you should talk with an employment attorney before signing anything.

You usually have 21 days to decide if you’re going to sign an agreement when it’s presented to you and 7 days to change your mind once you’ve signed it.

Can you collect unemployment if you get a severance package?

Severance pay should not impact whether you can and should file for unemployment insurance if you were laid off. You’re entitled to unemployment benefits regardless of how much your employer paid you as part of your severance package.

If your company lays you off, why not negotiate with them when you’re leaving like you did when you were going through the hiring process? You have nothing to lose by asking for more than what they’re offering, and they may agree just to keep the peace with you.

[ Related: What to do when you're suddenly unemployed ]

The information and content provided herein is for educational purposes only, and should not be considered legal, tax, investment, or financial advice, recommendation, or endorsement. Breeze does not guarantee the accuracy, completeness, reliability or usefulness of any testimonials, opinions, advice, product or service offers, or other information provided here by third parties. Individuals are encouraged to seek advice from their own tax or legal counsel.

— Published August 16, 2022
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