Losing your job suddenly due to a layoff or not receiving a paycheck due to a major illness that keeps you away from the office can jeopardize your family’s financial situation, especially if you bring in the majority of your household’s income. Severance pay or salary-continuation insurance may help supplement your lost income while you search for another position or recuperate.

Function

Your employer may offer you a severance-pay package during the layoff process. This package may include a lump-sum payment that encompasses several weeks or several months worth of salary. Salary-continuation, or disability, insurance provides you with income your family can use to pay the mortgage, buy groceries and keep the electricity on in the event you become temporarily disabled. Your employer may also offer a salary-continuation program that acts as a retirement savings plan.

Eligibility

Eligibility criteria for severance pay includes the amount of time you worked at the company, the reason for your dismissal and any other qualifying factors your employer stipulates. Your employee handbook may contain details regarding your company’s severance-pay program. Your employer may offer disability insurance, provided you have worked for the company for a continuous amount of time, typically six months or more. You may also elect to purchase additional salary-continuation insurance if your company doesn’t offer disability benefits. Your employer may fund and offer retirement-savings salary-continuation programs to executive personnel as an added employment benefit.

Calculation

The amount of your severance-pay package often directly depends on the amount of time you served in your position at your company. For example, the U.S. Office of Personnel Management offers eligible employees one week of severance pay for each year they worked. Payments from your disability insurance incorporate a set percentage of your normal weekly salary. The financial benefits of independent salary-continuation insurance depend on which policy limit you purchased.

Considerations

The U.S. Department of Labor does not have any regulations pertaining to severance pay. If your employment contract stated you would receive severance pay after meeting the eligibility criteria, and your employer refuses to honor that obligation, the Employee Benefits Security Administration may help in collection efforts. In general, your employer does not need to honor severance-pay obligations if you were fired due to issues such as absenteeism or inadequate work performance.