Job losses are an unfortunate fact of life. But that doesn't mean you can't turn lemons into at least a little bit of lemonade. The trick? A good severance package and payout that help you transition through unemployment into your next workplace.
But what is severance, really? What's included in a severance package, and how do you negotiate your severance payout so you get as much as possible out of your soon-to-be former employer when you're forced to leave your job? Here's how to become a negotiation pro.
The First Two Things to Do When You Get Laid Off
Losing your job isn't fun. It's emotional. You might feel like you did something wrong, even if it seems like half your work friends have been laid off alongside you.
It's common to feel overwhelmed, angry, sad or numb—or all of the above. You're adjusting to a big change, and losing your main source of income is probably putting your brain on high alert for an uncertain future.
That's why the first thing to do is take a deep breath. Maybe three.
The second? Gather information about your job and your layoff, and organize it. Get everything in writing—take notes if you've had to attend an in-person meeting—and find out about deadlines to decide on the next steps. (Typically, you get 21 days to review a severance agreement before having to sign, but it's a good idea to verify that.1)
Make sure you have the following, and ask HR for a copy if any are missing from your personal files:
- • Your original employment agreement
- • Any other relevant employment paperwork or company policies
- • Your layoff notice
- • Details about your severance package, if one is offered
- • The specific deadline for signing your severance package, if one is specified
What's not on this list? Signing on the dotted line of the severance agreement you've been offered. In fact, it's recommended that you wait to sign any agreements. Waiting gives you time to read everything through with a clear head and consult others for advice. It also gives you time to negotiate a better deal. If your employer shows you an agreement and asks you to sign, simply tell them you need time to review it and that you'll get back to them.
What Is a Severance Package?
When employers lay off or terminate workers, they often offer them severance packages. These are agreements that spell out each party's obligations at the end of the employment relationship. This includes any severance payouts—that is, additional money the company will pay you after you stop working—as well as benefits like health plans and requirements like confidentiality and noncompete agreements.
Severance packages have a lot of similarities with early retirement packages (aka buyouts), which also offer financial incentives to leave a workplace.
Do Employers Have to Offer a Severance Payout?
No, employers are not required to pay severance, either by state or federal laws.2 One exception is if your employment contract or company policies specify that you'll receive severance pay if you lose your job. Also, larger companies doing larger layoffs in specific scenarios must offer severance pay if they don't give employees at least 60 calendar days' notice.1 And some states require severance in specific cases, such as when an entire factory is closed.3
However, there are many reasons why companies offer terminated workers severance packages, even when they're not legally required to do so. They might do it to maintain a positive relationship, or to stay competitive in their industry.1
Another reason is that when an employee signs a severance agreement, they typically are signing away their right to take legal action against the employer in the future, such as for wrongful dismissal, wage theft or harassment. A signed severance agreement means a clean break between (former) employer and (former) employee, with no messy complications left to deal with.4
What's Included In a Severance Package?
Like employment agreements, severance packages can differ greatly from company to company and employee to employee. You might have heard of a “golden parachute," which is when high-level executives get a high-value severance package when they leave a company.5 We won't all get severance packages of that caliber, but that doesn't mean you shouldn't expect to get something out of losing your job.
The first thing included in a severance package is severance pay. This is a payout of funds beyond what an employer owes you for the hours you've worked. While there's no typical amount, estimates range from between one and three weeks of pay for every year you worked for the company.4
In addition to severance pay, your severance package might include some or all of the following:6
- • Payment for accrued paid time off (e.g., sick pay or vacation pay)
- • Health coverage that extends past your last date of employment
- • Retirement benefits or stock options (or details on how your existing plans might be transferred to you as a former employee)
- • Job coaching, counseling and other tools to help you find new work
- • Other kinds of benefits, such as tuition reimbursement
- • Physical items, such as the laptop computer you used for your work
Your severance agreement will also outline the details of how you receive your severance payout and other benefits. For instance, the agreement might specify that you'll get your payout as a lump sum, or as a sequence of payments. It will also give any relevant deadlines or time frames, such as when health coverage expires.
In addition, severance agreements often include sections on legal rights and obligations. These might include:7
- • A general release, whereby you agree not to take legal action against them in the future, in exchange for everything else in the agreement
- • A confidentiality agreement that specifies which parts of your severance package, if any, you're allowed to tell other people about
- • A nondisparagement agreement, which might restrict you from saying negative things about your former employer in certain places (such as on LinkedIn)
Tips to Negotiate Your Severance Package
To start with, it's worth repeating what we said up front: Don't sign anything right away.
Your employer and the HR department want to get everything handled smoothly and quickly. It's understandable—who doesn't want to get unpleasant tasks checked off so they can move on? But the fact that they want to get things done doesn't mean you have to rush.
1. Understand the situation
Let the company make the first step and show you their offer. Then, take some time to read it through to ensure you understand all the details, including a signing deadline. If anything is unclear, ask questions and get the answers in writing. Remember, you're not in a hurry. This is a "measure twice, cut once" kind of situation.
You might want to have a lawyer, mentor, colleague or friend look over the agreement to offer their opinion. A second pair of eyes—especially if they're expert ones—can catch things you might have missed. Lawyers aren't cheap, but in some cases, you don't have to pay an employment lawyer unless they win you more money.8 Find out your options before you decide whether to hire someone to help with negotiations.
Also, take some time to review your original employment contract and any other relevant company documents to see if they mention severance packages or what might happen during layoffs. Think about why you're being let go: Is the situation reasonable, or is it possible this is a wrongful termination?
2. Decide on your requests
Next, decide what you want to ask for. Remember that everything is up for negotiation. Know what your most important conditions are, and what are just nice-to-haves. Some things you might ask for include:
- • A bigger severance payout (of course!)
- • A longer time frame for healthcare coverage
- • Payment for accrued paid time off
- • Career coaching or counseling
- • Training or education reimbursement
- • Longer access to other employee perks, like a gym pass
Also, consider what the employer is asking of you. For instance, if your severance package includes a noncompete or confidentiality agreement, what are the conditions and how will that affect your ability to find new work?
One important thing to look at is how severance payouts are disbursed. A large payment in a lump sum can have tax implications, such as bumping you into a higher tax bracket. You might want to ask for monthly payments instead, or for a lump sum to be split across two tax years.
Another tip: If you're one of many coworkers who have lost jobs in a single round of layoffs, it might be worth comparing notes to see if you're receiving similar offers.
3. Make a counteroffer
While the company is probably not going to give you the sun, moon and stars, don't worry too much about being “realistic" in your first counteroffer. Write a draft for yourself—it can just be a list of bullet points—and then compose a letter in response to your employer's severance offer, outlining how you'd like to see it change.
Be sure to include valid reasons for what you're asking for. For instance, you might argue that they're not offering enough compensation given the number of years you've worked at the company. Or they might be offering a portion of your salary only, when a significant percentage of your income was coming from commissions.
Remember that while you may have strong emotions about the situation, those are unlikely to help with negotiations. Try to remain calm and professional when interacting with your employer. Then, find a good outlet for the rage—perhaps a nice kickboxing class?
4. Sign when you're ready
There might be some back-and-forth, but at a certain point, you'll have the best agreement you're going to get and it will be time to sign. At this point, you should understand clearly what compensation you'll have access to and when you'll get it. And if you've negotiated extra perks or benefits, make sure to take advantage. That might mean dealing with some medical issues while your health coverage still applies, or booking an appointment with the career coach included in your package.
What if you don't want to sign your severance agreement? That's always an option, especially if you think you might take legal action against your employer, but keep in mind it means you won't be able to receive any severance payouts. It's a good idea to consult with a lawyer in this kind of situation.
So You've Signed Your Severance Agreement. Now what?
Once your severance agreement is signed, it's time to think about the future. Here are some things to consider.
Calculate your severance payout
Your severance agreement will outline how much money you're entitled to and when you're going to get it. Make sure you understand if your employer will be taking any deductions such as income tax off the payment amounts, and how much cash you'll really have in hand. HR should be able to give you these details.
Make a new budget
There's a good chance you're going to see your income drop until you can find a new job. Even if you ended up with a lump-sum severance payout, now might not be the time to splurge on a big vacation. That said, if you think your future job prospects are good and you were already financially prepared for a layoff, it's not a bad idea to give yourself a bit of a break—so long as you can afford it.
Put some cash aside for emergencies—a high yield savings account is a good place to keep it—and adjust your monthly budget to match how much income you're actually going to have in the near future. These tips on rethinking your budget after a layoff can help.
Look for additional sources of cash
There's support out there for people who've lost their jobs, including unemployment insurance and other programs. These steps to take when you've lost your job outline some options.
Consider your next career move
Before you really delve into the job hunt, think about where you'd like to be in the future and the steps that will help you get there. Look for jobs that value the skills you already have, while offering plenty of room for growth.
Losing a job is a difficult thing to experience, but with some clever negotiating and smart planning, you can set yourself up with a severance package that will help you make it through.
Kat Tancock is a freelance writer who covers everything from personal finance to climate change solutions.
READ MORE: Rethinking Your Family's Finances After a Layoff
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