Will my severance prevent me from collecting unemployment?

Question

I was recently laid off from my job at a California publishing company, along with more than a dozen others. The company has always paid severance to employees who are laid off. Each of us got a week of severance pay for every year we worked at the company. Based on my nine years of employment, I got nine weeks of severance pay. Instead of paying us a lump sum on our last day, the company is paying it out every two weeks. I'm worried that this will prevent me from collecting unemployment, at least until the severance payments run out. Does this money count as wages that will make me ineligible for unemployment benefits?

Answer

State law determines whether severance payments (also called termination payments or dismissal payments) are treated as wages. If they count as wages, then they would affect your right to collect unemployment. As long as you are receiving wages, you aren't considered to be unemployed. Many states allow employees to make a relatively small amount and still collect unemployment, but a former employee who is still collecting the same amount he or she used to earn would be well over that limit.

In this regard, you are lucky to have worked in California. Under California law, severance pay is not considered wages for unemployment purposes. Instead, it is considered a payment in recognition of your past service. Even if it is paid out in installments, as yours will be, it doesn't count against your unemployment.

To count as severance pay under California law, your severance must be paid out pursuant to an employer policy or plan. And, it must be available to a class or group of employees. Based on the facts you've given, it sounds like your severance could meet these criteria. (To learn more about these requirements, see Severance Pay, Dismissal, or Separation Pay, at the website of California's Employment Development Department.)

Different rules apply where your employer pays you in lieu of notice. For example, let's say you had an employment contract requiring your employer to give two weeks' notice before firing you or laying you off. If your employer decides to lay you off, it might just give you two weeks' pay rather than giving you notice and requiring you to work for two more weeks. Because this money is considered to be wages, you would be prevented from collecting unemployment while you were receiving it. Essentially, you are still considered to be employed during the notice period, even though you are not actually showing up to work.

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