severance pay be based on the cost of living
While it’s never ideal for a company to let employees go, it’s often the case that businesses must reduce their workforce in order to remain competitive or even viable. For employees, getting fired can be financially devastating, and companies are usually motivated to offer severance pay to ease the transition for departing workers.
In general, a company doesn’t need to provide severance pay to any employee who is laid off. Exceptions are sometimes made, however, when an employee is part of a union that has negotiated an agreement or a specific employment contract that stipulates severance pay must be provided. In addition, if the layoffs are due to a mass firing or closing of a business and fall under the federal Worker Adjustment and Retraining Notification (WARN) Act, employers may be legally required to provide severance pay to workers who lose their jobs in that situation.
When a company does offer severance pay, the amount is typically determined by a formula that’s tied to an employee’s position in the hierarchy of the business. For example, entry-level employees may be offered a week of pay for every year they’ve worked for the company, while senior-level and management personnel are usually offered a month or more per year. The amount a company offers can also vary by industry.
Companies may also consider the value of other benefits when determining the size of a severance package, such as continuing health insurance coverage for several months to a year or outplacement services to help former employees find new positions. This can help ensure that a company isn’t overpaying for severance packages or giving them away too easily.
Can severance pay be based on the cost of living?
Many severance packages also include additional benefits, such as stock options or the option to keep company equipment such as a laptop or cell phone. While these extras aren’t always a necessity, they can make the package more appealing to departing employees and help them feel valued by their former employer.
As a lump sum, severance payments are usually taxed at a lower rate than regular income, but there’s still the possibility of an unexpected tax bill at filing time. Using a calculator and working with a tax professional can help prevent financial surprises at tax time.
In addition, if an employee chooses to take the how to get severance pay in the form of a lump sum, there’s a good chance they’ll need to adjust other forms of withholding or file an estimated tax payment to cover their federal and state income taxes. A Northwestern Mutual financial advisor can help individuals plan ahead and avoid surprises.
Whether to accept lump-sum or periodic payments as severance can be a complex decision for many people, but there are advantages to each approach that can depend on personal financial needs and goals. A Northwestern Mutual financial advisor can help individuals weigh their options carefully and make a decision that’s best for them.