Getting fired is stressful. Depending on the circumstances of an employee’s departure, however, he may be entitled to receive continued benefits. The fired employee could qualify for government assistance, along with any assistance offered by his former employer.
In this module, we highlight both the mandatory and voluntary financial compensation that an employee may be entitled to after leaving her place of employment. First, we’ll examine what an employer provides and second, we discuss the federal and state government’s role in post-employment compensation.
Final Paycheck and Severance Pay
Each state has enacted legislation to provide specific rules on when final paychecks are due to an employee who has been fired. In Vermont, for example, an employee terminated involuntarily must be paid within 72 hours of discharge. If an employee leaves a job voluntarily, her employer must provide her with a final paycheck “on the last regular pay day, or if there is no regular pay day, on the following Friday.”[1]
The final check includes all earned “wages”, which is based on time worked, but depending on the state and employer, wages could also include unused, accrued vacation time. Some states, such as California, are employee-friendly and require an employer to pay out accrued, unused vacation time as wages and do not allow the employer to deny such payments. Other states, like Iowa and Kentucky, grant an employer more leeway to adopt policies that restrict vacation payments.
Unlike a final paycheck, which an employer is required to provide, severance pay is money that an employer voluntarily provides for an employee who is leaving his place of employment. There is no right to severance pay under federal or state law. It may be voluntarily provided by an employer or an employee may be entitled to severance pay based on contractual agreements or union rules as severance pay is sometimes negotiated as a benefit in collective bargaining agreements between employee unions and employers.
Even when not required by contract, there are several reasons an employer may offer severance. First, an employee may be more likely to remain with her employer if she knows that the job has benefits that provide some security if her employer terminates the relationship. Second, severance pay can have a stabilizing effect on the labor force, as workers can move between jobs with little financial disruption.
An employee can negotiate the possibility of a severance package before she’s hired. Though it can be a delicate subject because neither she nor her prospective employer wants to consider the partnership failing, employment attorneys recommend an employee to at least broach the subject.
A severance package agreement can be agreed to in a simple confirmation letter. There’s no need for a lengthy and detailed contract. This letter can reiterate what the employer will provide to the employee in case of termination.
Severance pay can be a fixed sum or an amount calculated based on an employee’s wage and experience at the time of termination. In some cases, severance pay amounts to a week or two of pay for each year of employee service to an employer.
Severance pay cannot be provided in a discriminatory manner. In Gerner v. County of Chesterfield, Karla Gerner, after more than twenty-five years of employment by the County, including twelve as a department director, lost her job. Her supervisors asked her to sign an agreement, which offered her three months’ severance pay and health benefits in exchange for her voluntary resignation and waiver of any cause of action against the County. Gerner ultimately declined and she didn’t receive severance pay.[2]
Gerner filed a lawsuit alleging disparate treatment in violation of Title VII of the Civil Rights Act of 1964, which prohibits an employer from discriminating against any individual with respect to compensation, terms, conditions, or privileges of employment because of a person’s sex, race, color, religion, or national origin. Specifically, the severance package the county offered her differed from the severance package that it offered to departing male employees. Here, though the court didn’t reach a decision as to whether the county violated Title VII by offering Gerner a lower severance package, it reasoned that offering a lower severance package, a non-contractual employment benefit, to female employees could be a violation of Title VII.
What Chesterfield County offered Gerner is common; an employer may ask a terminated employee to sign a liability waiver, which prevents the employee from bringing a legal claim against the employer based on the circumstances surrounding the termination, in exchange for severance pay. Just by signing the liability waiver, however, the employee will not waive all his legal rights in exchange for severance pay. For example, worker rights under the National Labor Relations Act cannot be waived. So, even if an employer terminates an employee because of her affiliation with a labor union and the employee then signs an agreement promising not to sue her employer for wrongful termination on that basis, she could still bring an action against her former employer under the NLRA.
Additionally, a terminated worker asked to waive her rights in return for severance pay must do so knowingly and voluntarily, or else the waiver is unenforceable.
Non-Cash Severance Benefits
As organizational psychology continues to tell us more about the science of job satisfaction and how employees interact in a workplace environment, more employers are thinking outside the box with respect to severance benefits. Employers often have access to resources that can provide terminated employees with greater opportunities for new work. As a result, employers may want to include job search assistance as part of their severance packages or other noneconomic benefits like training, resume and interviewing workshops, and referrals to new positions. These sorts of non-cash severance benefits may be less costly to employers and more helpful to employees than direct financial compensation, and as a result are catching on among modern employers.[3]
Exit Incentive Programs
In some circumstances, employers may offer enhanced severance benefits to a group of workers who opt to voluntarily resign. Such exit incentive programs give workers more control when a company is downsizing or reducing the size of their labor force. Voluntary exit incentive programs have less negative impact on employee morale than traditional layoffs, and they also create options for employers that are restricted from laying off employees due to contractual or collective bargaining agreements. Exit incentives commonly take the form of cash payments in exchange for an employee’s voluntary and uncontested resignation. Some companies also offer early retirement benefit coverage. Like all other employment benefits, exit incentive programs must be administered in a uniform and non-discriminatory manner, so all employees must have the same opportunities under the policy.[4]
Unemployment Insurance
Employer-provided benefits aren’t the only way to ease the burden on recently-terminated employees. State programs include unemployment insurance benefits, disaster unemployment assistance, trade adjustment allowances, and self-employment assistance.
Upon the onset of the Great Depression, millions of Americans lost their jobs. In response, the federal government created a federal unemployment insurance program to provide unemployment benefits in 1935. Unemployment benefits play a significant role in preventing the jobless from ending up in poverty and this program has helped mitigate the impact of economic instability on communities nationwide by temporarily supporting workers who are laid off.[5] Not only does it help a laid-off employee, the financial assistance shields the American economy from turbulence and decreases the likelihood of sending the economy into a recession because an unemployed worker will have money to buy goods and services.
An employee who loses his job through no fault of his own is eligible for unemployment insurance. Each state has its own insurance program, but all state programs receive federal support. In Florida, for example, the state administers a separate unemployment insurance program through the Florida Department of Economic Opportunity, with guidelines established by federal law.
A terminated employee will qualify for unemployment benefits if he earned a certain amount of wages for a certain time, known as a “base period.” The base period is then used to calculate a worker’s weekly unemployment insurance benefit rate. The formula for calculating unemployment insurance benefit rates varies from state to state, but most states identify the base period as the worker’s wages in a twelve-month span. Benefits are subject to federal income taxes and must be reported on a recipient’s federal income tax return. The amount of benefits received will be less than the recipient’s salary, so to encourage her to find employment. Additionally, it is common to require that the applicant must actively be seeking work, meaning that she is “engaged in systematic and sustained efforts to find work by contacting prospective employers.
Unemployment Insurance Extended Benefits
Some workers who have maxed out their regular unemployment insurance benefits may be entitled to extended benefits during periods of high unemployment. Like regular unemployment insurance, states administer and determine eligibility for extended benefit programs. In jurisdictions with extended unemployment benefits, workers may receive up to 13 additional weeks of coverage on top of the up to 26 weeks that the typical claimant is entitled to. However, not everyone who qualifies for regular benefits can receive extended benefits, so unemployed workers should contact their state regulatory authority to determine their eligibility for extended unemployment benefits. Disaster Unemployment Assistance or Trade Readjustment Allowances benefits are not included in determinations regarding extended benefits.[6]
Disaster Unemployment Assistance
The federal government is authorized to provide unemployment benefits to people who became unemployed due to a major disaster. Pursuant to the Robert T. Strafford Disaster Relief and Emergency Assistance Act of 1974, certain federal funds are issued to state unemployment insurance agencies so that they can extend coverage to people whose employment was terminated or interrupted due to a disaster but who otherwise would not be eligible for regular unemployment insurance.[7] For the protections of the Act to become active, the President must declare a situation to be a major disaster. Workers who are displaced, injured, or killed in these disasters are entitled to benefit payments for the weeks of unemployment caused by the disaster for up to 26 weeks after the state of disaster was declared. Disaster unemployment assistance beneficiaries are entitled to weekly payments of 50% of the average unemployment benefit amount in the state. Maximum weekly benefit payments are determined by state law.[8]
Other Forms of Assistance
Trade Readjustment Allowances
Foreign imports may offset domestic production, and this may cause layoffs in United States labor markets. Under the Federal Trade Act, workers who are laid off by employers who are adversely impacted by increased imports from other countries may be entitled to special compensation. The federal Trade Adjustment Assistance program offers trade readjustments and job training opportunities to support workers seeking employment because their industries were impacted by foreign trade. Qualified workers may be entitled to benefits under this program that include trade readjustment allowances, paid job training, financial assistance in job search, and relocation expenses. Trade readjustment allowances are paid to those who have exhausted all regular unemployment compensation. To qualify, a group of workers must be certified by the Department of Labor as being part of an industry that has been negatively impacted by increasing imports from abroad. Once the agency certifies a workforce, individual employees may apply for trade readjustment benefits.
This program provides over a quarter million people with benefits each year. Most workers who receive trade readjustments come from manufacturing industries, and the average claimant has 12 years of work experience in a job that may be disappearing due to shifts in world trade. Trade readjustment assistance benefits a unique population of workers that face specific employment challenges, so workers in industries that are downsizing may wish to reach out to their local State Workforce Agencies to determine if they may be eligible for these benefits.[9]
Self-Employment Assistance
Some people use job loss as a springboard towards entrepreneurship. However, many states require individuals receiving unemployment benefits to actively seek traditional employment. This leaves many workers who have the skills and ambitions to start their own businesses with a conundrum. They want to become entrepreneurs, but also need to qualify for unemployment benefits. To address this issue, the Middle-Class Tax Relief and Job Creation Act was passed in 2012 to help fund state Self-Employment Assistance programs. Five states have enacted Self-Employment Assistance programs – Delaware, Maine, New Jersey, New York, and Oregon. These offer benefits to unemployed people seeking to become entrepreneurs. Typically, people who qualify for regular unemployment benefits and wish to engage in self-employment full-time in these states can receive weekly payments to help them get their businesses started. Workers who are eligible for unemployment benefits and have viable business ideas that they wish to spend all their time supporting should contact their state unemployment offices to determine whether any benefits may be available to help them get their businesses off the ground.[10]
Conclusion
Employees leave their jobs under a variety of circumstances for a variety of reasons. When this occurs, employers may offer voluntary severance, but are also subject to mandatory ongoing obligations in many cases, by law or by agreement. Unemployment compensation of various forms may be available to employees who lose their jobs because they were laid off or terminated for reasons that are not their fault. Employers are required to fund state-run unemployment insurance programs. Employers also may offer voluntary severance payments in exchange for an employee’s promise not to sue based upon the terms of the separation, but those are subject to restrictions on what employees can be asked to agree to.
[1] Holzman, R., Pouget, Y., Vodopivec, M., & Weber, M. (2011). Severance Pay Programs Around the World: History, Rationale, Status, and Reforms. Bonn, Germnay: Institute for the Study of Labor. Retrieved from http://ftp.iza.org/dp5731.pdf .
[2] Gerner v.County of Chesterfield, 674 F.3d 264, 2012 U.S. App. LEXIS 5559.
[3] Rassas, L. (2014). Employment Law: A Guide to Hiring, Managing, and Firing for Employers and Employees. 483. Frederick, MD: Wolters Kluwer.
[4] Rassas, L. (2014). Employment Law: A Guide to Hiring, Managing, and Firing for Employers and Employees. 488. Frederick, MD: Wolters Kluwer.
[5] U.S. Department of Labor Employment & Training Administration. (2004, March 29). Unemployment Insurance. Retrieved from Workforce Security: https://workforcesecurity.doleta.gov/unemploy/.
[6] U.S. Department of Labor Employment & Training Administration. (2004, March 29). Unemployment Insurance Extended Benefits. Retrieved from Workforce Security: https://workforcesecurity.doleta.gov/unemploy/extenben.asp.
[7] 42 U.S.C. § 5121-5207
[8] U.S. Department of Labor Employment & Training Administration. (2004, March 29). Disaster Unemploymet Assistance. Retrieved from Workforce Security: https://workforcesecurity.doleta.gov/unemploy/disaster.asp.
[9] U.S. Department of Labor Employment & Training Administration. (2012, June 22). What is Trade Adjustment Assistance?. Retrieved from: TAA Program. https://www.doleta.gov/tradeact/factsheet.cfm.
[10] Beesley, C. (2016, September 20). Laid Off and Want to Start a Business? Self-Employment Assistance Programs May Help. Retrieved from U.S. Small Business Administration: https://www.sba.gov/blogs/laid-and-want-start-business-self-employment-assistance-programs-may-help.