Avoiding a Severance Agreement Trap

Wednesday, May 21, 2014

This is a true and cautionary tale and one that can be readily avoided.  You have finally completed negotiations with a problem employee you have wanted to get rid of and a severance agreement has been signed.  The terms are generous, with full salary for a number of months, plus health insurance benefits, but it was worth it to get that release signed.  No need to worry about unemployment, because surely the employee will find a new job sometime before a month’s of severance payments run out.

One small problem with the plan.  To get things over, you decided to pay the severance payment in one lump sum.  Much to your surprise, after receiving the severance payment, the employee files for unemployment.  Lo and behold it is granted for all but the week that the severance payment was made.  You say to yourself, “How can that be?”  The severance agreement explicitly states that he’s receiving x months of pay and benefits.  No matter, the Unemployment Insurance Division of the Department of Labor has a rule which states that severance payments are credited to the week that they are paid, only, no matter the amount or the period covered.  The law says that an employee should not receive unemployment for the period of time when he/she is receiving severance payments.  The State says that means only when that payment is paid, not the period of time that it covers, even if there is an explicit written agreement.

The solution is to pay the severance payments over time on the regular pay dates.  Unemployment will then be deferred until all payments have been made.  A difference that is hard to understand?  You bet.