Following job loss, the relationship with your employer may become tense, making it less appealing to engage in further discussions. Nevertheless, it’s crucial to recognize that you could be eligible for severance pay. The amount of severance pay you receive is contingent on your employment circumstances. If this applies to your situation, it’s essential to understand both what it entails and how to determine the amount.
What is severance pay?
Severance pay, according to the United States Department of Labor, is paid to terminated employees.
According to the DOL:
Severance pay is frequently provided to employees when their employment ends. Typically, it is determined by the duration of an employee’s service at the time of termination. The Fair Labor Standards Act (FLSA) does not mandate severance pay. Instead, it is a subject of negotiation between an employee and their employer (or the representative of the employee).
Severance pay and FLSA
According to the U.S. DEPARTMENT OF LABOR, the Fair Labor Standards Act (FLSA) requires payment of at least the Federal minimum wage for all hours worked in a workweek and time and one-half an employee’s regular rate for time worked over 40 hours in a workweek. There is no requirement in the FLSA for severance pay. Severance pay is a matter of agreement between an employer and an employee (or the employee’s representative).
How to calculate severance pay
Severance pay can fluctuate based on several factors unique to the employee. It’s essential to take these considerations into account when determining this type of compensation:
- Whether the employee is salaried or hourly
- The length of their tenure with the company
- The circumstances surrounding their departure
- Their position within the organization
It’s important to note that seeking advice from a payroll tax professional is advisable when dealing with severance pay calculations. However, there’s a standard formula to provide you with a general understanding.
For hourly employees
Multiply the number of years with the company by one week’s worth of regular pay to calculate the total severance pay.
For instance, if you usually earn $1,000 per week and have been with your company for a decade, your severance pay would amount to $10,000 (10 years X $1,000 = $10,000).
What does the calculation look like?
# of years with company X 1 week of regular pay = Severance pay total
For salaried employees
Multiply the number of years with the company by two weeks’ worth of regular pay to determine the total severance pay. Please note that the maximum cap for severance pay is typically 25 weeks.
For instance, if your annual salary is $100,000, which equals to approximately $4,000 for two weeks (considering the 25-week cap), and you have a decade of service with the company, your severance pay would amount to $40,000 ($4,000 X 10 years).
It’s important to bear in mind that severance pay isn’t guaranteed and depends on the circumstances with your employer. If you’re seeking a straightforward method to estimate your severance pay, you can use the Severance Pay Estimation Worksheet.
What does the calculation look like?
# of years with company X 1 week of regular pay = Severance pay total
Severance Pay Estimation Worksheet
Keep in mind that severance pay isn’t universally provided; its availability hinges on your specific situation with your employer. If you’re seeking a convenient method to estimate your severance compensation, you can utilize the Severance Pay Estimation Worksheet provided by the U.S. Office of Personnel Management.
