Changes to PA Unemployment Compensation, Part 2:

Severance Pay and UC Benefits in Pennsylvania

In PA Unemployment Compensation Law Update, Part 1, we covered changes in Pennsylvania’s Unemployment Compensation (UC) Law in regard to active job search requirements for claimants. In Part 2, we will discuss how the amended law impacts UC benefits when former employees also receive severance pay.

As an employer, it is sometimes difficult to terminate an employee’s job. It is also difficult for employees who are "let go." In some cases, employees are offered severance packages by their employer. Severance is money or benefits paid to employees when employment ends, also called separation or termination pay. It is not required by law but may be paid in accordance with an employment contract, collective bargaining agreement or an employer’s policy.

Severance pay can work as a financial buffer, helping former employees pay their bills as they make difficult transitions. Unemployment compensation benefits serve a similar purpose. Employees who receive both often wonder whether their severance pay can count against their UC benefits. Some have been surprised to find out that in Pennsylvania, an unemployed employee could receive full UC benefits even while the employer had paid or was making severance payments.

At least, that was the case until this year. The law has been amended by Act 6 of 2011 to provide that, in UC benefit years beginning January 1, 2012, employees will be paid their weekly benefit rate less the amount of severance pay that is attributed to that week. In other words, severance pay can offset UC benefits, but only when an employee’s total severance pay exceeds and amount equal to 40% of the state average annual wage. Currently, 40% of Pennsylvania’s average annual wage is $17,853. If terminated employees receive any amount up to $17,853 in severance, there will be no deduction or effect on their UC rate.

Severance pay in excess of $17,853 will be offset against UC benefits, but not on a dollar for dollar basis. Instead, a formula is applied that results in a determination of the number of weeks that UC benefits will not be paid. Once that amount of time has passed, the claimant’s regular UC benefits will resume.

This revision of the Unemployment Compensation law impacts the way employers and employees will negotiate severance payments. It reduces the benefit of receiving severance in excess of the average annual wage figure; however, for employees whose severance amount falls below the line, the change will have no effect.

If you have further questions about Unemployment Compensation in Pennsylvania, please visit PA Unemployment Compensation Frequently Asked Questions or consult an attorney.

Christina Hausner is an attorney at Russell, Krafft & Gruber, LLP in Lancaster, PA. She received her law degree from Duquesne University School of Law and practices in multiple areas of law, including Employment Law & Discrimination and Human Resources & Employment Law.