A former law school classmate posed this question to me today: if an employee is involuntarily* terminated and receives a severance payment, does that preclude the employee from receiving unemployment benefits? The answer is: it depends on whether the payment is considered “severance” or “wages in lieu of notice” under the Texas Unemployment Compensation Act (TUCA).
Under TUCA, “severance” is a payment the employer has obligated itself to make, either verbally or in writing. It is often based upon a set formula, such as length of prior service. For example, an employer may have a company policy that a terminated employee is entitled to one month’s wages for every year of service. “Wages in lieu of notice,” on the other hand, are additional wages that the employer is not obligated to pay. They are paid only because the employer has chosen to give the employee no notice of termination. The amount of wages is not based on length of service.
Under TUCA, severance pay does not disqualify an employee from receiving unemployment benefits. Wages in lieu of notice, on the other hand, will disqualify an employee from receiving unemployment benefits during the period in which he or she is receiving these wages. Paying wages in lieu of notice, therefore, often results in substantial savings to the employer because many people will have found another job by the time they are eligible for benefits. Paying wages in lieu of notice, however, does not allow the employer to reap the often more valuable benefits of a release or waiver of claims, upon which the severance payment is conditioned. Accordingly, for many employers, severance is the better option.
* Voluntary termination disqualifies an employee from receiving unemployment benefits in most circumstances.
For additional information on severance agreements and planning for layoffs, click here to read Severance Savvy 101 for Employers and The Worst of Times Demands the Best Employment Practices: Top 5 Tips for Layoffs by Emily Frost.