Effect of Severance Pay on Eligibility for Unemployment Compensation

Severance may directly affect whether and when an employee can qualify for unemployment insurance . It also may indirectly affect it as well.

First, the direct impact: If an employee is involuntarily separated from work (e.g. fired not for cause; laid off); he or she is eligible for unemployment insurance (UI) when his or her employment ends. For UI purposes, the date of employment ending is when the employee is no longer on payroll. It has nothing to do with when notice was given, when the employee was told he or she is terminated, or even when the employee stops reporting to work.

If an employee receives severance and that severance is paid as a lump sum or all at once, then it doesn’t affect his or her end date. The employee is still terminated whenever he or she is taken off payroll. Instead of a traditional lump-sum severance, however, sometimes an employer will pay severance over time by keeping the employee on payroll even though that person has been terminated. This type of severance will prevent the employee from receiving unemployment insurance until the final payment is made. For example, if the person receives six months’ severance by being kept on payroll for six months, then he or she cannot apply for unemployment insurance until after the six month period has ended.

Similarly, if an employee chooses to end formal employment and use accumulated paid vacation, he or she will be considered employed and cannot receive unemployment insurance for the duration of that vacation period.

Second, the indirect impact: Severance is often awarded if an employee signs some sort of severance or separation and release agreement. If that agreement states that the separation is voluntary on the part of the employee (e.g., that the employee resigned), that might preclude the employee from receiving unemployment insurance. That’s because only involuntarily terminated employees are eligible for unemployment compensation. If an employee signs a document stating that he or she left by his or her own free will, that document can be used to refute or negate the employee’s unemployment compensation claim.

While severance does not have to bar an employee from collecting unemployment, there are circumstances under which it can. It is vital to review any severance agreement, paying attention to language regarding separation and payment terms. This is the best way to ensure a severance package does not make you ineligible for unemployment insurance.