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Can I Collect Unemployment If I'm Getting Severance Pay?

By Maurie Backman – May 23, 2020 at 10:52AM

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Find out how a severance package could affect your benefits.

COVID-19 has sent U.S. unemployment levels through the roof. A frightening 20.5 million Americans lost their jobs in April alone, at which point the country's unemployment rate reached 14.7% -- its highest since the Great Depression.

Thankfully, workers who are out of a job may be entitled to unemployment benefits. Generally, you can qualify for those benefits if you lose your job through no fault of your own, though you'll also need to meet your state's minimum earnings requirement, too. Furthermore, to collect unemployment, you usually need to be engaged in an active job search and be willing, able, and ready to work. But because of the ongoing crisis, many states are waiving those latter requirements. After all, looking for work during an extended period of social distancing may not be feasible, and for those with child care constraints resulting from widespread school closures, the ability to work outside the home may be compromised right now.

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Still, if you're out of work, and you didn't quit or get fired for cause, then there's a good chance you'll be entitled to claim unemployment benefits. But what if you're getting a severance package from your employer? Will that prevent you from being able to collect those benefits?

The good news is that you may be entitled to unemployment benefits even if you're getting severance. But the specific rules around that vary from state to state.

Will severance prevent you from collecting unemployment?

First, let's be clear: Employers are not required to offer severance pay to terminated employees, but many do so as a gesture of goodwill, or to protect their own interests. Usually, when you sign a severance agreement, the payment you're entitled to hinges on specific terms. For example, you'll often be told you must agree to not disparage your employer publicly.

Severance is often paid as a lump sum, though it can be paid out in installments as well. With a lump sum payment, you may be entitled to unemployment benefits after you've received that money. Severance that's paid in installments, however, could compromise your ability to collect those benefits since you're still receiving a steady stream of income. But again, the laws vary by state, and in some parts of the country, severance is not considered earned wages for unemployment purposes, which means it won't stop you from collecting benefits.

Keep in mind, though, that if you're getting what's known as continuation pay, you may not be able to receive unemployment. Continuation pay represents wages being paid to you through a certain date, during which time you're not actually required to do your job. For example, your employer might lay you off on June 1 and provide continuation pay until June 30, all the while telling you you're not required to do any work in June. In that case, you generally can't collect unemployment until that continuation pay runs out.

Know what benefits you're entitled to

Because unemployment laws are dictated by state, it pays to read up on how benefits work where you're filing. A large number of Americans are struggling right now, and if you're out of work, it pays to pursue all the financial help you may be able to get.

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