How Does Severance Pay Affect Eligibility for Unemployment Benefits?
Receipt of severance pay will typically either delay an applicant’s eligibility for unemployment benefits or will reduce the amount of benefits they receive. Minnesota law provides that an applicant is ineligible for unemployment insurance benefits during any week in which the applicant receives “severance pay … paid by an employer because of, upon, or after separation from employment” if the severance pay is “equal to or in excess of the applicant’s weekly unemployment benefit amount.” Minn. Stat. § 268.085, Subd. 3(a)(2).
The severance payments will affect the applicant’s eligibility for “all the weeks of payment.” When the severance payments are made periodically, the “weeks of payment” are calculated by dividing the total amount of the payments by the applicant’s last level of regular weekly pay from the employer. When the severance payment is made in a lump sum, the “weeks of payment” are calculated by dividing the amount of the lump sum by the applicant’s last level of regular weekly pay from the employer. See Minn. Stat. § 268.085, Subd. 3(b).
If the severance payment amount per week is equal to or greater than the applicant’s weekly unemployment benefit amount, the applicant is not eligible to receive unemployment benefits that week. If the amount of severance payment per week is less than the applicant’s weekly unemployment benefit amount, the applicant’s unemployment benefits are reduced by the amount of the severance payment for that week.
Takeaway: The impact of severance payments on a former employee’s eligibility for unemployment benefits is one factor, among many, that an employer may want to consider when determining whether to offer severance pay to an employee and, if so, how much.