Effect of Severance Pay on Eligibility for Unemployment Compensation Benefits

UPDATED: Jul 13, 2023Fact Checked

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UPDATED: Jul 13, 2023

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UPDATED: Jul 13, 2023Fact Checked

Severance may directly affect whether and when an employee can qualify for unemployment insurance. It also may indirectly affect it as well.

First, the direct impact: If an employee is involuntarily separated from work (e.g. fired not for cause; laid off); he or she is eligible for unemployment insurance benefits (UI) when his or her employment contract ends. For unemployment claims purposes, the date of the termination of employment ending is when the employee is no longer on the payroll. It has nothing to do with when the notice was given when the employee was told he or she is terminated, or even when the employee stops reporting to work.

If an employee receives severance and that severance is paid as a lump sum or all at once, then it doesn’t affect his or her end date. The employee is still terminated whenever he or she is taken off the payroll. Instead of a traditional lump-sum severance, however, sometimes an employer will pay severance over time by keeping the employee on the payroll even though that person has been terminated. This type of severance will prevent the employee from receiving unemployment insurance until the final payment is made. For example, if the person receives six months’ severance by being kept on the payroll for six months, then he or she cannot apply for unemployment benefits until after the six-month period has ended.

Similarly, if an employee chooses to give a separation of employment notice and uses accumulated unused vacation, he or she will be considered employed and cannot receive unemployment benefits for the duration of that vacation benefit period.

Second, the indirect impact: Severance payments are often awarded if an employee signs some sort of severance or job separation and release agreement. If that agreement states that the job separation is voluntary on the part of the employee (e.g., that the employee resigned), that might preclude the employee from receiving unemployment benefits. That’s because only involuntarily terminated employees are eligible for unemployment compensation benefits. If an employee signs a document stating that he or she left by his or her own free will, that document can be used to refute or negate the employee’s unemployment benefits claim.

While severance does not have to bar an employee from collecting unemployment, there are circumstances under which it can. It is vital to review any severance agreement, paying attention to language regarding the job separation and payment terms. This is the best way to ensure a severance package does not make you ineligible for unemployment insurance benefits.

Case Studies: Navigating Severance Pay and Unemployment Compensation Benefits

Case Study 1: Lump Sum Severance Payment

Mark was laid off from his job and received a lump sum severance payment from his employer. Since the severance was provided as a one-time payment, it did not affect Mark’s eligibility for unemployment insurance benefits. He was able to apply for unemployment benefits immediately after his termination and receive the necessary financial support while searching for a new job.

Case Study 2: Severance Payments Over Time

Sarah was terminated from her job, and her employer offered her a severance package paid out over six months. As long as Sarah remains on the payroll during the severance period, she cannot receive unemployment benefits. She will have to wait until the severance period ends before she becomes eligible to apply for unemployment insurance.

Case Study 3: Voluntary Resignation and Severance Agreement

John decided to leave his job voluntarily and signed a severance agreement with his employer. The agreement stated that John’s departure was voluntary. As a result, John became ineligible for unemployment benefits because unemployment compensation is typically reserved for individuals who are involuntarily terminated.

The severance agreement and the voluntary resignation status prevent John from accessing unemployment insurance benefits.

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Jeffrey Johnson

Insurance Lawyer

Jeffrey Johnson is a legal writer with a focus on personal injury. He has worked on personal injury and sovereign immunity litigation in addition to experience in family, estate, and criminal law. He earned a J.D. from the University of Baltimore and has worked in legal offices and non-profits in Maryland, Texas, and North Carolina. He has also earned an MFA in screenwriting from Chapman Univer...

Insurance Lawyer

Mary Martin

Published Legal Expert

Mary Martin has been a legal writer and editor for over 20 years, responsible for ensuring that content is straightforward, correct, and helpful for the consumer. In addition, she worked on writing monthly newsletter columns for media, lawyers, and consumers. Ms. Martin also has experience with internal staff and HR operations. Mary was employed for almost 30 years by the nationwide legal publi...

Published Legal Expert

Editorial Guidelines: We are a free online resource for anyone interested in learning more about legal topics and insurance. Our goal is to be an objective, third-party resource for everything legal and insurance related. We update our site regularly, and all content is reviewed by experts.

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