Pennsylvania Labor and Employment Blog : Pennsylvania Labor and Employment Lawyer & Attorney : McNees Wallace & Nurick Law Firm : Human Resources, Workplace and Business Law : Harrisburg, Lancaster, Allentown, Lehigh

This post was contributed by Adam R. Long, Esq., a Member in McNees Wallace & Nurick LLC's Labor and Employment Group.

As a reminder, amendments to the Pennsylvania Unemployment Compensation Law that provide for severance pay offsets against unemployment compensation benefits take effect January 1, 2012. We discussed in a prior post the amendments' definition of "severance pay" and how the severance pay offset will be calculated.

Please note that severance agreements reached between an employer and employee in 2011 should not impact the employee's unemployment compensation benefits, even if the severance pay continues into 2012. The offset will apply, however, to agreements reached on or after January 1, 2012.

Some questions still exist regarding how exactly the offset will be calculated and implemented. For example, it is unclear how the Pennsylvania Department of Labor and Industry will treat payments made by an employer directly to a former employee's attorney as part of a separation or settlement agreement. We expect that some of these questions will be answered in the near future through implementation, the issuance of additional guidance from the Department of Labor and Industry, or litigation. In the meantime, employers and employees alike should be aware of the new rules regarding severance and unemployment compensation benefits when making post-employment plans that include severance.

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This post was contributed by Adam R. Long, Esq., a Member in McNees Wallace & Nurick LLC's Labor and Employment Group.

Act 6 of 2011, which was signed into law on June 17, 2011, amended the Pennsylvania Unemployment Compensation Law in a number of ways. These changes include for the first time a severance pay offset against unemployment compensation benefits. Under the new law, "severance pay" is defined as:

one or more payments made by an employer to an employe on account of separation from the service of the employer, regardless of whether the employer is legally bound by contract, statute or otherwise to make such payments. The term does not include payments for pension, retirement or accrued leave or payments of supplemental unemployment benefits.

The offset is calculated by subtracting 40 percent of the "average annual wage" under the Unemployment Compensation Law from the total severance amount. Currently, this "40% of the average annual wage" calculation equals $17,853, which means that claimants can receive up to $17,853 in total severance pay before their unemployment compensation benefits are affected. The amount of the severance attributed as an offset in any given week will equal the claimant's full-time daily or weekly wage, and the offset begins with the first week immediately following the claimant's separation from employment.

The effective date of the Act's severance pay provision is January 1, 2012. Severance agreements reached between an employer and employee in 2011 should not impact the employee's unemployment compensation benefits, even if the severance pay continues into 2012. The Act states that its severance pay provisions apply to benefit years that begin on or after the effective date, but will not "apply to severance pay agreements that were agreed to by an employer and employee prior to the effective date."

As we approach 2012, employers and employees should be aware of these new severance pay offset rules and their impact on unemployment compensation benefits when considering severance arrangements.

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Reductions in Force, Layoffs, Downsizing, Rightsizing or whatever you may call it is occurring with greater frequency as the economic conditions continue to deteriorate. The business objects are reducing costs, preserving talent, treating separated employee with compassion and avoiding litigation. The compassion and litigation avoidance may go hand in glove.

The most prevalent litigation avoidance strategy is getting a release from separated employees for which a company pays severance and provides other benefits. Some companies pay severance without requiring a release and others pay enhanced severance if the employee releases claims.

I frequently get asked how much severance is appropriate. There is no right answer to this question, but depends on a myriad of factors including the size of the company, its financial condition, the number and positions of employees being released, the tenure of the employees and the risk of litigation.

Ann Bares at Compensation Force has a post that notes Global and US Severance Pay Benchmarks. There is a caveat on the international benchmark information. Severance pay is mandated by some governments outside the United States including Canada and many European countries. The amount of mandated severance varies depending sometimes on age, years of service and the reason for separation. Also missing from the analysis might be unemployment benefits received by US employees. As usual, it is not an "apples-to-apples" comparison.

Also keep in mind that releases of employment-related claims should be reviewed by legal counsel.

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Employers offering severance payment to employees are typically uncertain about the payroll taxes that may apply to these additional payments. Severance pay is treated as “supplemental wages” because it is not a payment for services in the current payroll period but a payment made upon or after termination of employment for an employment relationship that has terminated. As supplemental wages, special payroll tax withholding rules apply. The Internal Revenue Service recently clarified its position on withholding for supplemental wages, including severance pay.  Employers should also make sure that severance payments offered in conjuntion with a waiver and release comply with the ADEA and WARN requirments.

Revenue Ruling 2008-29 addresses nine different situations where supplemental payments are made to employees that require additional payroll tax withholding as follows:

1. commissions paid at fixed intervals with no regular wages paid to the employee;
2. commissions paid at fixed intervals in addition to regular wages paid at different intervals;
3. draws paid in connection with commissions;
4. commissions paid to the employee only when the accumulated commission credit of the employee reaches a specific numerical threshold;
5. a signing bonus paid prior to the commencement of employment;
6. severance pay paid after the termination of employment;
7. lump sum payments of accumulated annual leave;
8. annual payments of vacation and sick leave; and
9. sick pay paid at a different rate than regular pay.

For the supplemental wage payments identified above that do not exceed $1 millon, the amount of income tax withholding is determined under the rules provided in § 31.3402(g)-1(a)(6) and (7). These paragraphs describe two procedures for withholding on supplemental wages: the aggregate procedure and optional flat rate withholding. The Revenue Ruling explains the application of the two procedures to each of the nine payment types. A Supplemental to Circular E also provides guidance on withholding in Publication 15 and Publication15A.

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