Effect of Severance Pay On Unemployment Compensation

Updated : February 15th, 2017

In the United States of America, a social assistance program jointly run by the federal government along with the states offers weekly monetary compensation to citizens who go jobless due to no fault of their own. Commonly known as the Unemployment Compensation (U.C) benefits program, a jobless worker can look forward to up to 26 weeks of even benefits on the basis of eligibility, claiming state and other factors.

As a leading info website with years of expertise in the field of Unemployment Compensation, one of the most common questions we receive relates to the implication of severance pay on receipt of Unemployment Insurance from the state. This article is aimed at helping you in clearing the air with regard to drawing separation pay from your employer and claiming UC benefits on the sidelines.

What is Severance Pay?

It is a monetary payment made by the employer to the employee just before separation from the job. The compensation generally consists of a couple of months’ of the last drawn gross pay of the employee and is paid either as a lump sum or at regular intervals as agreed between the worker and the employer in the contract. Also known as “Thank you” payment, this compensation is a goodwill gesture for the services rendered by the worker and comes with clauses attached.

Severance pay as a lump sum
Severance payout is mostly lump sum

It is a part of a separation agreement between the two parties (employer and the employee) where the payment ranges between a few months’ which can go up to a year, depending on the circumstances for drawing the contract.

Am I Eligible to Apply for Unemployment While Drawing Severance Pay?

A simple answer is “Yes”, but with conditions. There are both direct and indirect implications of receiving separation pay and applying for UC benefits simultaneously. The basic premise for offering state-sponsored jobless benefits to such claimants are as below.  

  • The claimant should have lost the job due to no fault of their own such as being laid off.
  • He/she should not be on the payroll of the company.
  • Should be “able and available” for work. The jobless worker should actively be looking for employment and should fulfill the conditions set by the Unemployment Office in this regard.

For those of you who received a lump sum separation pay, you can go ahead and apply for the UI benefits straightaway. Since you’re receiving a one-time payment from the employer, declare the amount during application to determine monetary eligibility. For some of the workers who receive severance, the payment is made at periodic intervals, let’s say every month for a specific duration.

In such cases, you will qualify to apply for compensation only after expiry of this period since you’re treated as being on the rolls of the company. Another reason why an aspirant’s claim may be rejected is due to specific clauses mentioned in the separation agreement which bars him/her from claiming. If the contract states that the employee left voluntarily or will not claim UC from the state, such applications will not be entertained.

Guidelines to Apply for UC Benefits While Drawing Severance Pay

Read the separation agreement

When you’re offered severance, do not jump into signing the contract. Get a copy and read the clauses thoroughly. If you see a specific clause(s) which prevents you from drawing UC or hampers your future employment prospects, raise a flag.

Wait for the severance to be paid out

As stated in the section above, you may not be eligible to apply for the state-provided benefits until the expiry of the severance payout. Therefore, keep a note of the last date of payment (if not a lump sum) and apply towards the end of it.

Understand the law/regulations

Since Unemployment Compensation is administered by each state separately with its own legal framework, it’s paramount to understand how your state treats severance pay. Therefore, make sure to place a phone call, read online or visit the nearest Unemployment Office to make sure your application complies with the rules. Some states have elaborate terms and conditions to fulfill when it comes to separation compensation provided by the employer.

Now that you have a clearer picture of the prerequisites, make sure to keep them in mind to make a successful application minus hassles. Happy Claiming!

  1. I have been working as an hourly employee for the last 4 months. Currently the board of the nonprofit agency came to me and told me that I had to file a 1099 or go to part time or find a new job. I have a scheduled time that I report to work. What are the laws here in Florida about who can receive a 1099

  2. I am unemployed and currently going to a community college. How can I apply for federal assistance?

    1. Carol,

      If you’re able and available for full-time employment, you can directly go to the website of the Unemployment Office and apply.

  3. I have worked in AZ since March 2016. However, I moved lived and worked for my employer in CA since 08/02/1982. Can I apply for Cali unemployment benefits?

    1. Robert,

      You should be applying from the state where your employment was based. Employers generally remit unemployment taxes to the state where the employee is based.

  4. I have been trying for over a month to file and I still do not seem to be able to do it, but I finally got to the correct place, I think.

  5. Cumberland NJ Unemployment Center kept me on hold for 2 hours; I finally had someone answer my call, after providing my information and question regarding the status of my NJ Unemployment Claim the representative disconnected my call.

  6. Excellent list of things to help execute better. Even taking 3 or 4 of these that one does not currently utilize could help immensely.

    1. How did you calculate the total weekly Illinois benefit of $1495? Also, why isn’t Washington and Minnesota listed in your top 5 states with the highest paid unemployment insurance compensation?

Leave a Reply

Your email address will not be published. Required fields are marked *

Please answer a simple Math question: *