Severance Pay and its Relationship to Unemployment

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SEVERANCE PAY AND ITS RELATIONSHIP TO UNEMPLOYMENT

The interplay between severance pay and unemployment benefits can be confusing to both employers and employees. Many clients seek out the services of our law firm when they are in the process of planning an employee termination. One of the most common questions asked is: “If the company provides severance pay, will that mean I don’t have to pay unemployment benefits (i.e. will the severance block unemployment insurance benefits to the terminated employee”)? Likewise, employees who have been terminated often ask us, “If I’m offered severance, will it mean I can’t get unemployment, or might it delay or offset any unemployment I might be eligible for?” The simple answer to these questions is that severance generally does not impact claims for unemployment.

Employers and Employees view severance very differently. While there is no obligation in Illinois to provide severance to a terminated employee (unless there is a contract mandating it), employers view severance as a means to help bridge a terminated employee from one job to the next. The payment has nothing to do with past service, but is prospective in nature. Employees however, almost always look at severance as a reward for past years of service service.

Not surprisingly, the Illinois Department of Employment Security (IDES) sides with the employee view and considers severance to be payments made to an employee for past service. Under the Illinois Unemployment Insurance Act (the “Act”), severance payments are not considered to be wages, and therefore these payments do not render an individual ineligible to receive unemployment insurance benefits.

IDES will examine the nature and purpose of the payments made by the employer to the terminated employee rather than what kind of label the employer chooses to place upon the payment. Even if an employer calls the payments something other than severance (for example, outplacement assistance, job assistance fund, retirement pay…) does not mean the unemployment bureau will refuse to consider the payment as severance.

An employer can not use the payment of severance as a reason to claim an employee is ineligible for unemployment benefits. Since an employee termination is a traumatic event in the lifecycle of employment, we often advise employers to explain to the employee (whether the employee chooses to accept the severance or not) that the severance payment will in no way impact the employee’s ability to seek or be eligible for unemployment. Any assistance an employer can give an employee after the difficult decision to terminate employment can only lessen the hard feeling that employee will naturally harbor against the employer. Importantly, an employer can, in limited circumstances, get an offset from unemployment charges where the employee performs services for the employer AFTER the termination. In these limited circumstances, the “severance” pay is magically transformed into wages received and could be viewed as an offset.

From an employee’s perspective, the question often arises, “Will it matter if I continue to get severance paid to me on a bi-monthly basis or if I take it all in a lump sum?” As long as the ex-employee who is collecting unemployment insurance benefits performs no further work for that employer (i.e. does not continue on under the guise of a “consultant”, the fact that the severance payment is paid out over installments rather than all at once does not qualify the employee from receiving unemployment insurance benefits.

Finally, an employee who voluntarily quits his or her job, and is offered severance thereafter by the employer, is not automatically barred from receiving unemployment benefits. Under the Act, an employee who voluntarily leaves his or her job when there is work available is generally barred from receiving unemployment benefits. The reason is the State and the unemployment system should not reward someone from walking away from their jobs by giving them benefits. However, if the employee was forced to resign or was put in a position where the only reasonable alternative would be to step down and severance was offered in connection with that type of departure, unemployment benefits may still be payable.

With over 30 years’ experience in advising employers and employees on workplace issues, let Boznos Law represent you as your employment attorney to ensure you are ready to meet the challenges posed by the changes to the overtime laws. Call Bill Boznos today at (630) 375-1958 or contact us through our website at www.boznoslawoffice.com

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