4 things to consider before you agree to a severance package

Before you sign your severance agreement, take your time and take a closer look at what you’re gaining—and giving up.

4 things to consider before you agree to a severance package
[Photo: fotografierende/Pexels]

Personal finance expert Jen Smith was roughly five weeks away from giving birth when she found out she was one of roughly 45 people her company was laying off. She would receive a severance package that included five weeks of pay and one month of health insurance coverage, then she would be eligible to continue her coverage through the Consolidated Omnibus Budget Reconciliation Act, or COBRA.


“[Getting laid off] was an absolute surprise to everyone. We didn’t see it coming. And it was people in all different departments,” she says. “They made [the severance packages] look pretty similar.”

A severance package is typically a combination of pay and benefits offered upon termination. Not all employers offer severance packages, and the laws governing them vary by state, says employment attorney Scott Behren. (Some states, such as New Jersey, Massachusetts, and Idaho, do require severance packages when a firm is conducting a large layoff.) But when your employer does offer one, you need to be careful to read the fine print before signing, he says. “Sometimes, if the employee refers the agreement over to me, we can negotiate larger sums,” he says. “There might be other things in the agreement that are negotiable.”

Here are four things to keep in mind before accepting the initial agreement you’re offered:

Don’t rush

Companies typically want you to sign the severance as quickly as possible, especially if there are provisions that limit you from taking action against them. However, it’s typically a good idea to resist that pressure, says Cameron Burskey, partner and managing director at Cornerstone Financial Services.

You may be worried about getting the money as soon as possible to cover expenses, but signing the document could mean giving up important rights without considering the ramifications, Burskey says. “At least sleep on it, read through, and definitely contact a professional,” he says. Depending on your state, your employer may need to give you a period of time—perhaps 21 days—to decide whether to sign the document, so be sure to check your rights, especially when it comes to looking for a new job.

Check for red flags

Smith recalls being emotional when she first received the news of her severance. By giving herself the time she needed to calm down and think through her options, she says she was able to make more clear-headed decisions, such as moving her family to her husband’s health insurance plan, instead of accepting COBRA. She realized that, while she had signed a noncompete with the company, there was no noncompete in her severance document. She double-checked that with her employer and found that she would be free to work for whomever she wished.


In addition to noncompete clauses, severance packages may limit your ability to take action against the company for wrongful termination or other issues or place other restrictions on your rights, Behren says. In other cases, the employer may want you to agree to assist the company through its transition. That may include being available to answer questions or provide information or assistance, he says. It’s a good idea to contact an attorney before you sign, especially if you’re being asked to give up rights or if something is being asked of you in return for receiving the money.


Many people don’t realize that you may be able to negotiate the offer, says personal finance expert Tarra Jackson, author of The 4 Financial Languages: Secrets to Communicating About Money. First, check the laws in your state to see if a counteroffer may negate the severance offer. Then, based on your performance, contributions, length of service, and employment agreement provisions, build a case for what you want. It may be more money or having the company cover your health insurance for a longer period of time, for example.

“Sometimes, it’s not about the money. You could probably save more money by getting less money on the front end, but getting your benefits paid, especially if you have a family and children,” she says. (Fast Company previously covered tips on negotiating your severance package.)

Consider the financial impact

Severance packages may affect your finances in a number of ways. So, once you get the pile of money, don’t do anything just yet, Jackson warns. First, look at how the severance will affect your unemployment benefits. In many cases, you won’t be able to claim unemployment until after the severance period. However, if the payment includes unpaid wages or any settlement for a dispute, that may not delay your benefits, Behren says. Again, check your state’s employment laws. And be sure to file for the benefits to which you are entitled as soon as you can. With the delays caused by mass unemployment, it may take some time to file your claim and receive your benefits.

In addition, Jackson advises checking with your accountant or, at least, looking into how the payment will affect your taxes. Did the employer deduct withholding? If not, you’ll likely need to pay income tax on at least a portion of the payment. And, finally, determine if there is any impact on your retirement plan, including whether you need to move the plan. If so, within what period of time? When did contributions stop and how can you begin contributing again once you’re able to do so?

While most employers aren’t obligated to offer severance packages, it’s a good idea to be cautious when they do. Understand your rights and the implications of signing that document before you put pen to paper and agree to a bad deal.

About the author

Gwen Moran is a writer, editor, and creator of Bloom Anywhere, a website for people who want to move up or move on. She writes about business, leadership, money, and assorted other topics for leading publications and websites