How Unemployment Works


When an employee gets fired or laid off, he or she may be offered a severance or separation package. This package can be a combination of salary, a lump sum of cash, stock options or other benefits. It is designed to thank terminated employees for their work and to ease their transitions to new jobs. The amount of severance pay depends on the position you held, length of service with the company, your service record and the reason for termination. Some terminated employees manage to negotiate for more severance money based on these factors or by giving up the right to sue.

Some companies have written severance policies while others propose a different package for each individual. A severance package could equal a year’s worth of pay or much less, but almost all severance pay is taxable, though some severance benefits, like healthcare, are not [source: IRS].

You may continue to receive a salary or get a lump sum in your severance package. A lump sum payment is just what it sounds like -- you get all the money agreed upon in your severance package in one lump payment. This has some key advantages, including a clean break from your employer; there’s no need for continued correspondence because you’ll have your money. However, your other benefits, such as health insurance, will cease once you get that lump sum [source: New York Life]. The IRS also can tax lump sum payments at a higher rate than regular severance payments, so you might want to talk to a tax professional before accepting a lump sum payment [source: New York Life].

Salary continuation means that you stay on the payroll and get paid every pay period as if still an employee. According to the agreement, the salary continuation may last for a set period or until you find a new job. You also retain benefits when on salary continuation, again because you're still on the payroll and treated in many ways like an employee (albeit one who no longer shows up for work). A similar method to salary continuation, but one with clear disadvantages, is periodic payments, in which you receive several equal payments over time. You're not officially on the company’s payroll, meaning that there is less oversight, potentially no financial record and uncertainty about how to resolve and recover missed payments.

If you have the choice between a lump sum, salary continuation or periodic payments, keep in mind the amount of money offered and tax consequences compared to your needs and how long it might take you to get a new job. Generally, you also cannot collect unemployment benefits while receiving a severance, if it is equal or exceeds your previous weekly wages [source: New York Life].