Losing a job can be a stressful experience, and understanding how different types of payments you receive upon separation can impact your eligibility for unemployment benefits is crucial. Severance pay is a common example that can significantly affect your weekly unemployment benefits. This post will explain how separation or termination pay is treated under Ohio unemployment law and specifically discuss how its allocation affects your ability to collect weekly benefits.

The Basic Principle: Severance Pay Reduces Benefits

The fundamental principle of unemployment compensation in Ohio is to provide financial assistance for the loss of income due to involuntary unemployment. When you receive severance pay, you are receiving compensation from your former employer for a designated period, which directly impacts whether you have experienced a "loss of income" for those weeks.

Under Ohio law, "remuneration in the form of separation or termination pay paid to an employee at the time of the employee's separation from employment" reduces benefits otherwise payable for any week. This includes various types of payments made upon separation, including payments made to employees in return for their agreeing to a separation from employment and payments under buy-out plans.

How Severance Pay is Allocated: The Critical Factor

The key to understanding how severance affects your benefits lies in how the payment is allocated to specific weeks. This allocation determines exactly which weeks will see reduced unemployment benefits.

Default Allocation When No Designation is Made

If you receive a lump sum severance payment and your employer does not specify which weeks the payment covers, Ohio will use a default allocation method. The state will calculate your normal weekly wage and treat that amount as if it were paid to you each week, starting from the week after your separation, until the total lump sum amount is exhausted.

For example, if you received a $6,000 lump sum severance payment and your last normal weekly wage was $1,200, and there was no specified allocation, ODJFS would allocate $1,200 to the first week after separation, $1,200 to the second week, and so on. This would cover 5 weeks. Your unemployment benefits would be zero or significantly reduced for those 5 weeks.

Specific Allocation Based on Employer Designation

However, if an employer provides a clear and specific designation of the period that the lump sum severance pay covers, especially when this designation is clearly communicated to ODJFS, the state agency will follow that specific allocation instead of the default method.

Crucially, if an employer chooses to allocate the entire lump sum severance payment to the single week of separation and notifies ODJFS of this allocation, ODJFS will apply the full lump sum amount as compensation for only that single week.

Using the previous example, if you received a $6,000 lump sum severance payment and your employer notified ODJFS that this entire $6,000 is designated as being paid with respect to the week of your separation, ODJFS would apply the full $6,000 as compensation for only that single week. Your unemployment benefits for that specific week would be reduced by $6,000, likely resulting in $0 benefits for that week. Benefits claimed for subsequent weeks would then be evaluated based on other eligibility factors, without further reduction from this severance payment.

Why This Allocation Matters So Much

The difference between these two allocation methods can be dramatic. Under the default method, you might lose unemployment benefits for multiple weeks. Under employer designation to a single week, you only lose benefits for one week, even if that week results in zero benefits due to the large severance amount.

The default method of spreading severance pay week-by-week based on your normal weekly wage is used only when the employer provides no designation of the period the payment covers. If the employer explicitly designates the entire lump sum payment to a specific period and informs ODJFS, that specific allocation will be used.

Payments That Do NOT Reduce Benefits

Not all payments received upon separation are treated the same way. Several types of payments are explicitly excluded from reducing unemployment benefits, including military severance pay, private unemployment benefits paid under SUB plans, lump sum distributions from pension or retirement plans, and certain settlement payments.

Practical Steps for Managing Severance Impact

Understanding these rules can help you work with your employer to minimize the impact on your unemployment benefits:

First, employer designation is paramount. The most effective way to have the entire lump sum apply only to the week of separation is for the employer to make this specific designation, ideally in the written separation agreement. The employer must then ensure this allocation is communicated to ODJFS when responding to the unemployment claim.

Second, understand the default allocation. Be aware that without a specific employer designation, the lump sum will be allocated week-by-week based on your normal weekly wage, potentially spreading the reduction over many weeks.

Third, communicate with your employer if possible. Discuss how the severance payment will be reported for unemployment purposes and request that the payment be allocated specifically to the week of separation.

Fourth, report accurately. Regardless of how the payment is structured, you must accurately report any severance pay when filing your weekly claims. Failure to do so can result in findings of fraudulent misrepresentation and penalties.