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Employment Contracts and Severance Agreements

When an employee is terminated or laid off, some companies have a policy of giving the employee severance pay. Severance pay is not required by law, and how and whether an employer chooses to give severance pay is at its discretion. Companies that offer severance pay each have their own policies and guidelines for how severance is handled.

Severance pay may come in the form of a lump sum payment, a period of continued paychecks, continuation of benefits, or other forms of payment. Employers who grant severance pay usually calculate it according to a set formula, based on the employee’s length of service.

If you have been offered a smaller amount of severance pay than you think you deserve, or none at all, you can try to negotiate for more severance pay. If you have been with the company for many years, have an excellent performance record, or have provided unique services to the company such as bringing in large clients, this may help you negotiate for additional severance pay. In some cases, employees who quit due to intolerable working conditions can also negotiate more severance pay than the company initially offered.

Sometimes an employer will offer a lump sum severance payment, which is a one-time payment in full of the amount of severance pay. This gives you immediate access to the funds, so you can use or invest them. Usually, if you receive a lump sum, your other benefits will end as of the date of the payment. A lump sum severance payment is taxable, and if the lump sum puts you in a higher tax bracket, the employer may withhold taxes at a higher than usual rate. To avoid this, you may wish to defer a portion of the payment until the next calendar year.

Sometimes an employer will offer a continuation of an employee’s salary as severance pay. In this case, you usually remain on the company’s payroll for a set length of time and are paid normally, as though you were still working there. Usually, if you receive a continuation of your salary as severance pay, your benefits, such as health insurance, will continue during that time. Severance of this type may last for a set number of weeks, or until you find another job. Generally, state laws do not allow you to collect unemployment compensation during the period you are receiving severance payments.

Unused Vacation Time

  • Contrary to popular belief, very few states legally require employers to pay you for your unused vacation or sick time when your employment ends. Some companies have a policy regarding payment for unused leave, but most differentiate between employees who quit, those who are laid off, and those who are terminated for misconduct.
  • In New Jersey, if an employer has a policy stating that it will pay you for accrued but unused vacation time, it must pay you as stated in its policy.
  • In New York, an employer must pay employees for accrued but unused vacation time unless the employer has a written policy specifying that employees lose their accrued but unused vacation time under certain conditions, and those conditions are met.

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