Effect of Severance Pay On Unemployment Compensation

Updated : September 23rd, 2020

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!

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