Sometimes employers offer severance packages to employees who lose their jobs. While a severance package can soften the blow of a job loss, especially for someone who is laid off unexpectedly in tough economic times, accepting such an offer is not right for everyone.

Here are some of the practical and legal implications to consider when evaluating an employer's offer of severance.

What is a Severance Package?

A severance package is a combination of pay and benefits offered to an employee who is laid off or terminated. It might include money based on years of service, compensation for unused vacation or sick days, health benefits, stock options, or outplacement services to help the employee find a new job.

Why do Employers Offer Severance?

Generally, employers are not required to offer severance. Some reasons they chose to do so include:

• Corporate goodwill. Some employers feel that giving departing employees severance is the right thing to do. A side effect is likely to be improved morale among the remaining employees.
• Maintain a talented workforce. Severance can be an incentive to encourage people to join the company and stay for long periods of time.
• Limit competition. Employers will sometimes condition severance on the employee signing a non-compete agreement that prohibits the employee from working with rival businesses or clients.
• Avoid bad publicity. A severance package can include a confidentiality agreement that prevents the employee from criticizing the company.
• Limit liability. Severance is often offered in exchange for the employee releasing the right to sue the company.

You do not have to accept severance. Ultimately, you should take the offer only if the financial reward from doing so outweighs whatever rights you must give up—for example, the right to sue your employer.

How Does Severance Pay Affect Unemployment Benefits

A common question is whether the employee can accept severance and still be eligible to collect full unemployment benefits. The answer depends on the laws in your state.

Many states differentiate between a lump sum payment and severance over time. A lump sum payment that doesn’t extend employment generally does not impact unemployment eligibility. The result might be different, however, if the employer pays severance over time through payroll. Some states treat this arrangement as a continuation of employment that delays and/or reduces state benefits.

A number of states compare the amount of the severance to the state’s maximum weekly unemployment benefit rate. In those states, you forfeit eligibility for unemployment if your severance is greater than the state’s rate. In other states, compensation you receive for unused vacation days or sick time might impact your eligibility for unemployment.

Before you accept a severance package you should figure out how it impacts your eligibility for unemployment benefits. For information about your state's rules, consult your state’s labor department website, your local unemployment office, or an employment attorney in your area.

Special Rules for Workers Aged 40 and Older

The Older Workers Benefit Protection Act (OWBPA) is part of the Age Discrimination in Employment Act (ADEA) and it protects employees who are 40 years of age or older with regards to employment benefits.

Employers often condition severance on the employee signing a release and giving up the right to sue the company for age discrimination. The OWBPA gives an employee 21 days to consider an employer’s release and allows the employee to change his mind up to seven days after signing it. A material change to the release during the initial 21 days restarts the clock. When a release is offered to two or more employees there are additional benefits, such as extending the time periods discussed above.

More importantly, certain safeguards are provided within the release itself. The release must:

• be clearly written using plain language that does not deceive the employee
• only waive claims that occurred before the release was signed, not after it was signed
• specifically refer to the ADEA, and
• advise the employee to talk to a lawyer before signing it.

No matter how much protection is offered by the OWBPA you must think about the big picture. By signing a severance agreement, you will be giving up your day in court. As a result, you must weigh the value of the severance package against your likelihood of success at trial. Consulting an employment law attorney is a good idea in this situation.

You should also be aware that a release can be voided under certain circumstances, such as when it’s obtained through fraud or coercion.

Deciding Whether to Accept a Severance Package

Every situation is different, but here are some considerations to keep in mind when deciding whether the offered severance is right for you.

• Think about why you were terminated. Was it in retaliation for reporting illegal conduct or an unsafe work condition? Were you fired due to your race, age, gender, or religious beliefs? Do you have a disability? Are your pregnant? Did you recently request family leave? In these situations, there’s a good chance your employer will require you to waive your right to sue. If you feel you’re being fired for an unlawful reason, you should contact an attorney to determine whether accepting severance is in your best interest.
• Don’t let your employer rush your decision. Think things through and remember that if you're at least 40 years old, the law gives you 21 days to review the employer's release and seven days to change your mind.
• Make sure the numbers are accurate. Did your employer consider the correct amount of unused vacation days and sick time? Were bonuses or other types of compensation included?
• How does the package measure up? Try to figure out if there is an industry standard or whether the company has a policy or history of offering specific benefits. Check whether the employee handbook, company emails, or other documents give you additional rights.
• Does your employer want you to sign a confidentiality agreement? You might feel a duty to speak out about your experiences with your employer; signing a confidentiality agreement waives this right.
• Is your employer asking you to sign a non-compete agreement? Non-compete agreements are usually only enforceable if they are reasonably limited in time and geographic scope. But even legally enforceable agreements can place a large burden on a person's ability to earn a living. Consider whether the severance package is really worth it.

Of course, you can always try to negotiate with your employer over the details of your severance package. As in any negotiation, be clear about what exactly you want and provide good reasons for why you deserve it.

Contact an Attorney

If you have a legal claim against your company, such as one for wrongful termination, be sure to contact an attorney to evaluate the strength of your case before accepting a severance package.