What’s a Severance Package? And Should I Always Accept It?

Our Patreon donors get to vote on what we write about, and in their infinite wisdom, they selected the topic of severance packages.

I wish I could pepper this with lots of puns on Severance, the show. But I can’t, because I’m not watching it. Sorry, Severance stans—it’s not personal! I refuse to participate in any more mystery box media until it’s concluded AND the conclusion is well received by its fans. It’s for my own protection. The mystery box train usually only goes to two destinations: Cancellation City, or the Incorporated Township of Wasting My Time. I will no longer let myself scrounge for crumbs of satisfaction in a show-runner’s AMA responses as part of the ten-year retrospective. Call me when it’s over and the last season netted an 8.0 average or better on IMDB, Ben Stiller!

Let’s hang the concept of severance packages on a classic good news, bad news framework!

The bad news? You’ve been laid off. Y’know, dismissed? Let go? Made redundant? Fired—out of a cannon, straight into the sun? No matter the euphemism, the result is the same. The kingdom has shut its gates to you, and your descendants will be cursed to toil in the wilderness, filling their bellies with dust.

The good news? You might have an extra paycheck or two coming your way.

Around 25% of employers offer severance pay, making it neither common nor uncommon. It’s a benefit that’s typically reserved for white collar employees, or those who work specifically on the corporate side of major retailers and service providers. And if you think that sounds classist—good! It is! You’ve been paying attention!

If you already know your industry/field/role doesn’t offer this perk, or if you’re not employed right now, you may take this period as an open study hall.

What is a severance package?

Severance packages are bundles of money and benefits that make the experience of being laid off less painful to the departing employees.

A severance package might include:

• Additional weeks (or months) of paychecks, without the expectation that you perform any actual work for it.
• Additional weeks (or months) of healthcare coverage under your existing employee-sponsored plan.
• An exit bonus, in the form of a lump sum of money or stock options. (What color is your parachute? Gold!)
• Outplacement services like references, career coaching, or job placement assistance.
• Other legal forms, like nondisclosure, nondisparagement, or noncompetition agreements.

Generally, the size of your package (HAW HAW HAW) is determined by a combination of tenure, seniority, and company policy. One to two weeks of additional pay is normal; three to four is generous; any more than that makes me question your secret. Are you in a union? Were you in the C-suite? Wait—you’re not an American working remotely for a European company, are you!? I hope you enjoyed getting the entire month of August off, every year, for no reason, you lucky bastards!

For the record, the largest severance package I’ve ever known someone to receive is six months of salary plus three months of health insurance. And I can only assume the recipient held the nuclear launch codes.

Why do severance packages even exist? And how come only some people get them?

You’ve probably heard that it’s professionally courteous for employees to give two weeks notice when they plan to leave their jobs. In theory, the company can use that time to start looking for someone else to fill that roll. If you were leaving on good terms, you could even cross-train your replacement, minimizing the loss of what company analysts call “institutional knowledge.”

The counterpart of that courtesy is the severance package. If a company stops employing you suddenly, it’s professionally courteous for them to continue paying you for a bit. This gives you time to start looking for a new job.

I believe these professional courtesies arose out of a need to maintain good relationships. In previous generations, employers and employees were far more limited in who they could work for and with. These courtesies reduced the social friction of quitting and firing. I also think that’s why they’re more common amongst the more “gentlemanly” classes of work. Although that may be my recent binge of bad period dramas talking…

Today’s economy is so, so different. Everything is so global that every market feels bottomless. And that’s why those courtesies have eroded significantly on the business end. Companies can piss off suppliers and burn out employees because there’s always more struggling small businesses and hungry people waiting to take their place. Why offer courtesies like severance pay (or, god forbid, a pension!) when everyone you might do business with feels anonymous and replaceable?

My personal hot take is that you should only give notice if your company gives severance. Generosity is a two-way street—and they’ve been parking on our side for too goddamn long.

How do I know if I’ll get a severance package?

First, check your employment contract. Some companies detail severance packages in there.

Others view it as discretionary. They don’t provide details upfront, in writing. In those cases, you’ll have to do some detective work. Check Glassdoor reviews, ask a trusted mentor, or just become friendly with the office gossip. Which, by the way, I recommend to everyone. (Just note that I didn’t say “friends”—just “friendly.” The office gossip is a powerful source of information, but you should always keep them at arm’s length. Like the Rose Bride, they are the human personification of a double-edged sword.)

Should I always accept a severance package offer?

If you get laid off and your employer offers you a severance package, you should probably accept whatever they offered, say thanks, and dip.

If your severance package is guaranteed by a contract, union, or law, its terms are already set. And if it’s not guaranteed by any of those things, then it’s at the employer’s discretion to offer you anything at all. So you might as well accept it and begin the process of moving on with your life.

There’s only two cases in which you shouldn’t accept a severance package offer. I’ll outline them both.

Case #1: Do you think you have a strong legal case for discrimination or wrongful termination?

I hate to tell ya, but… if you get to the point of being terminated and you haven’t already documented a pretty extensive amount of questionable behavior, your case probably isn’t strong.

It doesn’t mean that being older, or a parent, or a racial minority, or LGBTQ didn’t unfairly factor into their decision—but you need evidence if you want to prove it. (Technically, the burden of proof in such cases falls on the employer to prove they didn’t discriminate, NOT on the employee to prove they were discriminated against. This is one of the reasons companies are so secretive and opaque about the decision-making that goes into laying people off. Still, it’s far easier to collect evidence during an experience, not afterward.)

If you think you’re in this situation, stop reading this and go find real legal counsel. The sooner you get representation, the better. We recommend the website of your state’s Department of Labor and Employment to start.

Case #2: Would accepting the severance damage your career prospects?

Many companies offer severance only if you sign legal documents agreeing to certain concessions, which might not be in your best interest.

The main one to watch for is a non-competition clause, which limits your ability to continue to work in your current field. Now, non-competition agreements are legally fuzzy. Some states have restrictions or even full bans on them. (Do look yours up, because it’s not intuitive. Traditionally blue states like California ban non-competes outright, but so do traditionally red “right to work” states like North Dakota.) Anecdotally, I’ve heard stories of people feeling pressured to sign documents that companies definitely know aren’t legally binding, and seem to only function as an intimidation tactic against a departing employee.

For next steps, the same advice as above applies. Here, let me format it as a helpful nursery rhyme!

Lawyer, lawyer, bad employer,
How will you make your case?
With evidence and documents
And an attorney ace.

Do I have to decide right away?

Many employers have decided that the very best way to fire an employee is by ambush.

A meeting appears suddenly on your calendar, and that’s it. Someone you’ve never met tells you it’s over. By the time you get back to your desk, you’re already locked out of everything. You’re marched out of the building, usually under guard. It’s shocking, humiliating, and dehumanizing.

… I know someone who had this experience in a company with five total people. He was 20% of the whole company, and close personal friends with everyone else, yet he was still marched out like a dangerous lunatic. The standardization of this approach makes me think that it’s not so much a best practice, but maybe potentially a requirement for business insurance or something? If you’re in HR and you know more about this, please drop a comment. I’d love to understand why this has become seemingly mandatory.

Anyway, in this dreadful final meeting, you’ll be offered your severance package. And they will put a lot of pressure on you to sign it immediately. Like QVC, they will imply this offer is selling like hotcakes, and will expire in five, four, three—

You don’t have to capitulate to these high pressure tactics!

No one can force you to put your signature on something against your will, in this situation or any other.

It’s not just your right to read the contract thoroughly, reflect on what it is you’re signing, and even seek legal counsel to review it. It’s your responsibility.

That’s because many companies bundle unappealing legal agreements with the extremely appealing free money. We talked about non-competition agreements, but there’s also non-disclosure and non-disparagement agreements. Depending on the state you live in, the work you do, and the wording of the agreement, some are legally enforceable and some are not. They exist mainly to scare you into not causing trouble on your way out.

How do I ask for more time to review the severance package?

It’s perfectly reasonable to ask for more time to review anything you’re asked to sign. Here’s a simple script you can follow.

I’m not prepared to sign this today, as it would obviously be irresponsible to sign my name on a legal document I haven’t had adequate time to read and reflect upon. I appreciate that you’d like this resolved quickly—I do too. Can I get back to you by [date]?

If you’ve been given an initial deadline, and realize you need more time, here’s how you can ask for an extension.

I appreciate your patience. I’d like to request an extension of [x days] to come to a final decision.

They’ll probably agree to it without being difficult. But if they’re fussy babies about it, throw in the phrase “I need time to secure the legal counsel I need to make an informed decision.” That’ll put a pacifier in their mouths.

Is it true the rules are different for older workers?

Yup. Older Americans get more protections under the law!

What can I say, folks? Our gerontocracy is a broken clock that’s right twice a day! Baby Boomers saw Death of a Salesman at a formative age and said “No ma’am, not me!”

If you’re over the age of 40, you’re protected by the Older Workers Benefit Protection Act (OWBPA) of 1990, which is an amendment to the Age Discrimination in Employment Act (ADEA) of 1967. When let go individually, older workers automatically get 21 days to reflect upon any severance agreements. When let go en masse in a layoff, they get 45 days. They also get 7 days to revoke anything they signed, if they change their mind about it.

Must be nice! Sounds kinda minimal and common sense to me, but what do I know! Be a real shame if all employees had that level of protection!

Can I negotiate a severance package?

If you’re reading this blog, the answer is: probably not.

Your strongest bargaining position with an employer is usually when you’re accepting a job offer to enter the company. Once your employer decides they don’t want you anymore, you don’t have a lot of social capital left to spend.

If you’re a very tenured or very high-level employee, yes, you can probably at least make a counter offer. But for normal working slobs, it’s best to just get on with it.

Personally, I’d only counter a severance package offer if I had a very specific set of extenuating circumstance. For example, if I were pregnant, or halfway through a series of chemotherapy treatments, I would respectfully counter-offer for longer healthcare coverage to give me potentially lifesaving continuity of care. In cases like those, it doesn’t hurt to ask. They might decide that being generous is wiser than creating a potentially damaging bit of gossip or news.

What are the tax implications of accepting a severance package?

If the severance pay is an extension of your current pay, it’ll be taxed the same as normal income, including tax withholdings. So it should look exactly like your normal paycheck, less any benefits accounted for in the severance agreement (i.e., no more retirement account contributions or life insurance premiums).

If the pay is a bonus or lump sum, it’ll be taxed at a flat rate. At time of writing, that’s 22%. So if you get a lump sum, set a quarter of it aside to pay taxes. Some states take the taxes out automatically, some don’t. Regardless, Uncle Sam will come for his pound of flesh, so factor that in to your post-firing budget.

Can I still file for unemployment if I’m getting severance pay?

I hate to be a broken record, but: every state is different. This site is sponsored by the federal Department of Labor, and will help you learn your state’s rules and qualifications.

Typically, you can collect unemployment benefits, but only after your severance pay has run out. Either way, you should still apply for unemployment insurance as soon as you’re let go. The process can be lengthy, and there are plenty of flaming hoops and trapdoors to dodge.

What’s the best way to use the extra money?

If you’ve gotten a severance payout, congratulations/I’m so sorry. Losing your job usually sucks, especially if it was unexpected. Hopefully in time you come it see it as a blessing, because it leads you to something better. (We’ve been there!) In the grand scheme of things, there are many problems worse than having an unexpected extra paycheck.

If you want a strategic, logical guide to advantageously spending a windfall, check out our article called The Financial Order of Operations: 10 Great Money Choices for Every Stage of Life. This is one of our foundational articles, it clearly lays out the optimal order to build your net worth.

If your change in employment status has you feeling angry, upset, or blindsided, check out this season 3 podcast episode. It’s about inheritances, but it’s got a lot of good advice for people who are navigating grief AND investing at the same time. It should give you a lot of ideas for ways to use the money that help you process a sudden upheaval.

Tell me your severance stories!

…That’s literally everything I can think to teach you about severance packages!

But here’s a fun tidbit I buried, like an outdoor cat in a sandbox: I’ve never gotten severance before, because I’ve actually never been laid off myself.

Okay, well, the campus karaoke bar fired me after two shifts for committing the grave sin of sitting on a stool while slicing limes for the bar, and they weren’t intellectually curious enough to learn the difference between POTS and laziness. Also Jess’s longtime nanny gig during college declined to hire me after a trial shift because the 5-year-old with hiring and firing privileges found my Little Mermaid role-playing skills wanting. (The little philistine wanted Melissa McCarthy; I gave her Divine, and she couldn’t eat it.)

For big-girl jobs, my philosophy has always been “You can’t kill me, I quit.” So today’s advice is based purely on research and conversations with friends who have experienced severance firsthand. If you have personal experience with accepting, rejecting, or negotiating severance packages, please add your experience to the comments below! I’d love for readers to round out their knowledge by hearing about the direct experiences of others.

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