Severance Package Negotiation: Definition, Tips, and Examples (2024)

Whether you expect it or not, losing your job is distressing, especially if you get laid off without warning.

But it’s going to be alright. You have a valuable skill set, and you’ll find another position in due course. In the meantime, you need to manage your finances and resources to sustain yourself until you find work.

Depending on your company’s policy and standards, they might offer compensation for your departure with a severance package: the money or benefits your employer might give you when you get laid off or fired.

In February 2023, 1.5 million workers experienced a layoff or discharge. And although it’s commonplace, losing your job isn’t easy, and it can impact your personal and financial wellness. A severance package can soften the blow and give you the financial flexibility you need to get back on your feet.

If this is your first time dealing with job loss, you might think your only option is to accept the severance offer as-is. But as with a new job contract, it’s in your best interest to negotiate the terms of your departure. A successful severance package negotiation could provide additional cash, resources, and other employee benefits.

What’s a severance package?

A severance package is the financial compensation and benefits your company might offer during termination. Your employer will offer the package, and you’ll sign a contract or agreement to confirm its terms. This might happen when you get fired or laid off, but usually not when you quit your job.

According to California non-profit Legal Aid At Work, companies have to give you termination benefits when there’s a:

• Collective agreement with a union
• Employment contract
• Company policy outlined in the employee handbook

Beyond those conditions, the Fair Labor Standards Act doesn’t require that employers offer severance pay.

Although your employer doesn’t have to give you benefits, they still might do so, especially during a reduction in workforce. Severance is a gesture of goodwill, and offering a package can protect its brand reputation and preserve professional relationships.

6 elements of a severance package

Before you negotiate, understand the different components of a severance package and how they could impact your situation. Even if you can't secure a larger severance payment, your employer may be willing to negotiate other requests. It's worth it to start a conversation and try to secure a better package.

Here are the six most common sections in a severance package:

1. Severance payment

This is the financial component of your compensation package, based on your salary and years of service. You’ll typically receive one or two weeks’ salary for every year you’ve worked with the company, but this varies by situation.

If you completed six years of service at $800 per week, and the company compensates you based on one week of salary per year, severance pay would be 6 x $800, which gets you $4,800 of severance pay.

Your employer will either make a single lump sum payment or scheduled installments. This is important to note because severance pay is taxable, and receiving a one-time payment could place you in a higher tax bracket for the year, meaning you pay more in taxes. And on top of tax considerations, depending on your state, severance payments could affect your ability to qualify for unemployment wage requirements.

How you receive severance can affect your finances in the long term. It’s a good idea to consult with an accountant or tax expert to find out which format is best for you so you know how to negotiate your salary compensation.

2. Payment for unused vacation days or sick days

Like severance packages, the FLSA doesn’t regulate the payment of unused vacation, paid time off (PTO), or sick days. However, some states may require payment for leftover vacation or PTO days under certain circ*mstances. As for sick leave, employers generally don’t have to offer compensation, unless the employer falls under the Family and Medical Leave Act (FMLA).

Before you agree to the severance package, familiarize yourself with your company’s vacation and sick leave compensation and benefits policy. Even if there’s no established policy, you may be able to negotiate a payment as part of your settlement.

3. Health insurance

If your healthcare benefit plan qualifies, the Consolidated Omnibus Budget Reconciliation Act (COBRA) allows health insurance coverage to continue for 18 or 36 months after you lose your job, depending on why you’re applying for COBRA. But according to your group health plan, you might have to pay all premiums yourself, and there will be an additional 2% to cover administrative costs, according to COBRA guidelines.

Coverage is expensive, and your former employer may or may not pay your insurance premiums after you leave. You could ask them to cover part or all of your COBRA premiums for a fixed period of time or until you find a new job.

Job loss also counts as a qualifying health event if you’re losing your healthcare coverage. That means you’re eligible for a Special Enrollment Period outside of the regular Open Enrollment Period for government-sponsored healthcare. If this applies to you, don’t hesitate to take advantage of those benefits while you can.

4. Retirement savings plan benefits

Depending on your retirement or pension plan type, you may be entitled to a lump sum payment. And in some cases, you can roll your funds into an individual retirement account (IRA), 401k, or your new employer’s retirement program.

Review your plan and consult with an accountant or retirement specialist to determine your best option and if there is any room for negotiation.

5. Outplacement services

If you're entering a competitive job market or it's been a while since your last job search, you might need some help. Some companies include access to resources like career coaching, job search training, and resume writing support to make the process easier.

As part of your negotiation, specify the type of assistance you think you’ll need, and request ongoing support until you secure a new position.

6. Legal considerations

Part of your severance package might involve signing legal documents such as non-disclosure and non-compete agreements, or a waiver of legal claims. While the company can’t compel you to sign away your rights in exchange for severance as of 2023, agreeing to any of these has the potential to impact future employment.

Always consult an employment lawyer if you’re unsure whether to sign. If these contracts are necessary to your severance agreement, a legal expert can help you negotiate a better package to compensate for their impact.

8 steps to negotiate your severance package

Now that you understand the parts of a severance package, you can prepare your arguments to improve on your employer’s offer.

Here’s how to ask for a better severance package and get ready for negotiation:

1. Pause before signing anything

It’s difficult to make good decisions when you’re stressed or upset. Give yourself some time before signing any legal agreements with your former employer. There’s no standard time limit for younger employees, but those 40 and older have 21–45 days before deciding whether to accept, which provides ample time to feel better and consult a lawyer or expert to assess your options.

2. Read the agreement carefully

Your severance agreement is a legal document, so evaluate the contract carefully. Take notes and identify missing items or vague terms. If anything is unclear to you, bring the agreement to an expert who might better understand or give you the tools to approach your employer about it.

3. Consult an expert

Ask an employment lawyer or trusted mentor to review the terms of your severance package. Their opinions are especially valuable if the agreement includes a non-disclosure or non-compete clause that could affect your ability to find work.

Experts can also help clarify the contract's terms, locate potential loopholes, and find room for improvement. That way, when you’re ready to negotiate, you have an expert-backed argument for a better deal.

4. Assess your priorities

Understanding your personal and professional goals will help develop a clear picture of your ideal severance package. Use that knowledge to create a list of priorities to help you focus and guide negotiations. If your health insurance is important to you, find out whether you qualify for COBRA or could ask for another agreement that extends your benefits.

At this stage, you should also consider your stock options and restricted share units (RSUs). Your access to these perks after termination depends on your employment agreement, but some companies will let you purchase stock even after you leave. If this is something you value, include it on the list, or at least clarify the terms so you don’t get caught off guard.

5. Consider the big picture

While it’s appealing to negotiate a larger amount of severance pay, your employer may not have the flexibility to meet your request. Negotiating for better health benefits, letters of reference, or outplacement services could be more valuable in the long run than money, so focus your energy there if your employer won’t budge on pay.

6. Determine what’s reasonable

Research typical severance packages for your industry to create a fair and realistic counter-offer. Employers might not want to engage in a lengthy negotiation, so if you present a reasonable alternative to the package on the table, they could be more likely to accept your proposal.

7. Build on your success

Part of your negotiation should be to remind your employer of your positive impact on the company. Provide a list of achievements that demonstrate the value of your hard work during your time there. In comparison, increasing your severance might seem more reasonable.

8. Establish your limits

Sometimes, negotiations don’t go as planned. It may be better for your emotional well-being to walk away from a severance than to spend weeks negotiating. Knowing what conditions you can accept ahead of time and being prepared for that potential outcome can make it easier to pass on an agreement that doesn’t serve you.

5 severance package negotiation tips

If your company’s going through a round of layoffs, chances are you aren’t the only one trying to negotiate severance. Talk to trusted coworkers, review your options, and express your intentions before you meet with your employer. Creating a clear and honest process will make negotiation smoother.

These additional tactics can help you negotiate a better severance package:

1. Talk to your coworkers: If possible, compare severance packages with other laid-off employees to ensure their fairness. Find out if your coworkers negotiated a better settlement, and learn what strategies worked for them.
2. Go for a lump sum: Depending on your tax situation and potential unemployment benefits, you may want to receive your severance in a lump sum rather than installments. This gives you more financial planning flexibility and guarantees you get the total value of the settlement, regardless of the company's future performance.
3. Remember taxes: If your employer doesn’t withhold taxes from your package, put some money aside yourself. Consider negotiating a higher severance payment to ensure your take-home income matches pre-layoff levels. When tax season comes around, you should be ready to pay the right amount.
4. Use your own words: Your severance agreement might have corporate or financial jargon that you won’t understand if you aren’t an expert. Consult a professional and have them explain the terms into language you understand. You can then use this experience to confirm comprehension and clarify the points you wish to negotiate.
5. Meeting options: If meeting with your former employer feels too intimidating, you don't have to opt for a one-on-one conversation. For example, a severance package negotiation letter is a perfectly acceptable way to communicate your counteroffer.

It’s your move

Even if your company delivers the news of a layoff with empathy, losing your job is hard. Severance package negotiation can help soften the blow and provide more stability while you look for a new position. You were a hard-working, loyal employee, and you deserve fair compensation as you move toward the next phase of your career path.

Published June 2, 2023