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Read This Before Accepting a Severance Pay Offer

Buyouts and termination agreements often have strings attached.

maintain a sense of normalcy income-wise, but it can result in a loss of eligibility for unemployment compensation or in reduced unemployment payments. The good news is that ongoing periodic payments are often accompanied by continued health benefits provided on favorable terms.

Employers often base their decision whether to provide lump-sum versus periodic payments on the unemployment compensation laws of the employee’s state of residence. In some states, workers are not eligible for unemployment payments if they receive ongoing, periodic income from a severance. So a person may need to wait to file for unemployment until the employer is finished paying out the severance. Paying out severance in this fashion helps employers avoid or reduce unemployment claims charged to their records, and as a result, prevents their unemployment-compensation premiums from increasing. 

If you accept the severance agreement, I would recommend filing for unemployment compensation immediately. Let the state officials sort out your eligibility. You can always appeal an unfavorable decision.

Unemployment and Severance Pay
Again, whether severance pay affects your unemployment benefits is based on the laws of the state where you live.

In California, severance pay, whether lump-sum or periodic, never affects unemployment benefits. In Michigan, ongoing, periodic payments or a lump sum that an employer “allocates” over a specific period both reduce unemployment benefits for every week in which there is an allocation assigned. Massachusetts also cuts unemployment benefits in the weeks in which you receive severance payments, but it does not lower the benefits if you were required to sign a release of liability.

Your best course of action is to contact the state agency that manages unemployment compensation. Review your state's rules. You can do this online or by doing a search for "severance pay" and "unemployment compensation."

Do I Need a Lawyer?
If offered severance pay with a required release of liability, your employer is obligated to suggest you seek independent legal counsel. Unless you’re a highly-paid executive with a complex employment agreement and your severance package is worth a large sum, a lawyer's service is not cost-justified.

You should always read the agreement carefully, talk with colleagues, and ask the human resources department for its interpretation of the documents. Employers are also required to grant you a "cooling off" period after you sign, in case you change your mind and decide not to accept the terms of the severance agreement.

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