Effect of Severance Pay on Eligibility for Unemployment Compensation Benefits

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 benefits (UI) when his or her employment contract ends. For unemployment claims purposes, the date of the termination of employment ending is when the employee is no longer on the payroll. It has nothing to do with when the 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 the payroll. Instead of a traditional lump-sum severance, however, sometimes an employer will pay severance over time by keeping the employee on the 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 the payroll for six months, then he or she cannot apply for unemployment benefits until after the six-month period has ended.

Similarly, if an employee chooses to give a separation of employment notice and uses accumulated unused vacation, he or she will be considered employed and cannot receive unemployment benefits for the duration of that vacation benefit period.

Second, the indirect impact: Severance payments are often awarded if an employee signs some sort of severance or job separation and release agreement. If that agreement states that the job separation is voluntary on the part of the employee (e.g., that the employee resigned), that might preclude the employee from receiving unemployment benefits. That’s because only involuntarily terminated employees are eligible for unemployment compensation benefits. 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 benefits 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 the job separation and payment terms. This is the best way to ensure a severance package does not make you ineligible for unemployment insurance benefits.