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Does Severance Pay Block Unemployment Insurance Benefits in Illinois?

October 2013

By: Nancy E. Joerg, Esq.

The concept of severance pay is very confusing to employers when they are considering firing an employee. Many clients seek the services of our law firm when they are in the process of planning an employee termination. One of the common questions asked by employers is "When I fire the employee and give them severance, will they still be able to get unemployment insurance or does the severance block unemployment insurance benefits?"

Somewhat surprisingly, this issue is treated differently, state by state. In some states, severance payments from an employer block unemployment insurance benefits. But, in Illinois, severance is considered to be payments to an employee for past services. Under the Illinois Unemployment Insurance Act, severance payments are not considered wages by the Illinois Department of Employment Security (IDES) and therefore these severance payments do not render the individual ineligible to receive unemployment insurance benefits.

Section 2920.45 of the Regulations to the Illinois Unemployment Insurance Act states:

a) Amounts paid or payable to an individual for past services rendered by the individual to an employer or amounts paid or payable to an individual for pension or seniority rights lost upon separation or layoff shall be considered severance pay. Such pay shall not be considered wages payable or attributable with respect to the period subsequent to the individual's separation or layoff. Amounts paid or payable to the individual as severance pay shall not render the individual ineligible to receive benefits under Section 2920.5. The nature and purpose of such payments, rather than their characterization, shall determine whether or not such payments are considered severance pay under this Section.

b) For the purpose of this Section, the status of payments as severance pay is not altered by the fact that:

1) Such payments are voluntary; or that,

2) Such payments are made periodically rather than in the form of a lump sum.

A) Example 1 (yes, severance pay): An employer's separation pay program provides for a lump sum payment based on the length of service. The purpose of the payment is to allow the individual to maintain his standard of living while he seeks other work. The individual performs no services after his date of separation. This lump sum payment constitutes severance pay under this Section and hence is not disqualifying.

B) Example 2 (no, not severance pay): The individual was notified that he was to be terminated from employment on April 17. The individual worked on the employer's premises until April 6 but performed incidental services to the employer from April 6 through April 17 by telephone in training a replacement. The wages received from April 6 through April 17 are not severance pay. Because the individual performed some services and received wages for the period April 6 through April 17, he was not unemployed under Section 239 of the Act and hence not eligible for benefits under the Act.

NATURE AND PURPOSE OF THE PAYMENTS: The Illinois Department of Employment Security (IDES) looks at the "nature and purpose" of payments to an employee upon termination rather than what label the employer decides to put on those payments. So, if an employer calls payments to an employee who has just been terminated severance that does not mean the IDES will also consider the payments to be considered severance (i.e., payment for past services).

EXPLAIN TO THE EMPLOYEE BEING TERMINATED THAT ACCEPTING SEVERANCE WILL NOT IMPACT ABILITY TO OBTAIN UNEMPLOYMENT: Employees are sometimes worried when they are terminated that any severance they get will in fact block their unemployment insurance benefits. Therefore, it is an excellent idea for an Illinois employer to carefully explain to an employee (when the employer is offering the employee severance) that if the employee accepts the severance, the severance will in no way impact the employee's ability to obtain unemployment insurance benefits.

Even if the employee voluntarily quits his or her employment with the company and the company thereafter offers severance to the employee, this fact pattern does not change the nature of the payments as severance. These payments are still severance. They will not block that employee's ability to get unemployment insurance benefits (as long as the voluntary quit itself does not block the employee's eligibility for unemployment insurance benefits).

Employees being terminated also sometimes worry about whether they will be able to get unemployment insurance benefits when the severance payments are made periodically (over time), rather than in the form of a lump sum payment. As long as the ex-employee who is collecting unemployment insurance benefits performs no service for his ex-employer after his date of separation, the fact that the severance payment is given to the ex-employee in payments over time (rather than in the form of a lump sum) does not disqualify the employee from collecting unemployment insurance benefits.

IF EMPLOYEE PERFORMS SERVICES FOR COMPANY AFTER TERMINATION, THE SEVERANCE PAYMENTS ARE TRANSFORMED INTO WAGES: It is important to realize that payments made to an employee after the employee is terminated for services performed by the employee during the severance period will transform those severance payments into wages. Therefore, employees should not perform services for the company after termination if the employee and the company want to consider the severance payments to be true severance and not wages paid post termination.

Questions? Call Attorney Nancy E. Joerg of Wessels Sherman's St. Charles, Illinois office: 630-377-1554 or email her at najoerg@wesselssherman.com.