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Recent Changes to Pennsylvania Law Affecting Severance Pay and Unemployment Compensation

On January 1, 2012, Act 6 of 2011 (“Act 6”), which was signed into law on June 17, 2011, became effective. Act 6 amended the Pennsylvania Unemployment Compensation Law (“PA UC Law”) in a number of ways.  Most significantly, Act 6 included a provision to the PA UC Law whereby, for the first time in Pennsylvania, severance pay may serve as an offset against a former employee’s unemployment compensation benefits.

What is Act 6?

Before Act 6 became effective, former employees could collect unemployment compensation benefits without any corresponding offset for the amount of severance pay they were to receive from their former employer. Act 6 defines “severance pay” as:

[O]ne or more payments made by an employer to an employee 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.

Now, under Act 6, employees will receive an offset to their unemployment compensation benefits for the amount of severance pay they were to receive from their former employer. This new offset to unemployment compensation benefits is calculated by subtracting 40% of the “average annual wage” from the total severance pay paid or payable to the former employee by the employer. Currently, “40% of the average annual wage” equals $17,853.00 and is subject to change. The “average annual wage” used under Act 6 is the average annual wage calculated under the PA UC Law as of June 30 immediately preceding the calendar year in which the claimant’s benefit year begins.

Therefore, former employees can receive up to a gross amount of “40% of the average annual wage,” currently $17,853, in total severance pay before their unemployment compensation benefits are affected. Any amount of severance pay in excess of that amount will trigger an offset of unemployment compensation benefits. Conversely, if an employer pays less than “40% of the average annual wage,” in total severance pay, there is no offset to a former employee’s unemployment compensation benefits. There will also be no “increase” to an employee’s unemployment compensation benefits if the “severance pay” is less than “40% of the average annual wage.”

How is the New Offset Calculated?

Act 6 utilizes a somewhat complex formula to determine how a former employee’s “severance pay” will affect his or her unemployment compensation benefits. Briefly, the portion of “severance pay” that is used to offset unemployment benefits is attributed as follows:

(A) The day, days, week, or weeks immediately following the employee’s separation;

(B) The number of days or weeks to which severance pay is attributed is determined by dividing the total amount of severance pay by the regular full-time daily or weekly wage of the claimant;

(C) The amount of severance pay attributed to each day or week equals the regular full-time daily or weekly wage of the claimant; and

(D) When the attribution of severance pay is made on the basis of the number of days, the pay shall be attributed to the customary working days in the calendar week.

As such, the severance pay decreases the amount of a former employee’s unemployment compensation benefits paid closest to his or her separation. The length of time any offset will endure is established by dividing the total amount of severance pay by the former employee’s daily or weekly full-time wage. Finally, the portion of “severance pay” that counts as an offset for any given day or week is equal to the former employee’s daily or weekly full-time wage.

What Does This Mean for My Business?

It is important to note, Act 6 states that its severance pay provisions shall not apply to severance pay agreements that were agreed to by an employer and employee prior to the effective date of separation. Therefore, because Act 6 did not become effective until January 1, 2012, severance agreements entered into between an employer and employee in 2011 or earlier should not affect the employee’s unemployment compensation benefits, even if the severance pay is paid or payable in 2012 or later.

It is also important to note it does not make any difference whether severance payments are paid as a lump sum or in installments. Rather, any offset to unemployment compensation benefits is determined by subtracting “40% of the average annual wage” from the total severance pay paid or payable by the employer. The Pennsylvania Department of Labor and Industry has yet to provide guidance as to how it will actually apply any offset to weekly unemployment compensation benefits.

It is also unclear whether Act 6 will have any effect on payments made by an employer directly to a former employee’s attorney as part of a separation or settlement agreement or payments to a former employee to satisfy a non-wage claim.

Leech Tishman’s Employment Practice Group has experience handling matters with the state and local employment and unemployment compensation agencies and is willing to advise you and answer any questions you may have regarding the recent changes occurring under Act 6.

Please feel free to contact the Employment Group with any questions regarding the new changes under Act 6 or any other employment law issue.

Leech Tishman is a firm dedicated to providing full-service commercial legal services to individuals, businesses, and institutions. We combine a deep understanding of our clients’ and their businesses with skilled legal counsel to find solutions. We offer legal services in alternative dispute resolution, bankruptcy & creditors’ rights, construction, corporate, employment, energy, environmental, safety & toxic torts, estates & trusts, government relations, insurance coverage & corporate risk mitigation, litigation, real estate, and taxation. For more information call 412.261.1600 or visit www.leechtishman.com.