Act 6 of 2011 was signed into law on June 17, 2011 by then Governor Rendell. It amended the Pennsylvania Unemployment Compensation Law in a number of ways. Most significantly, for the first time in Pennsylvania, severance pay may serve as an offset against unemployment compensation 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. This means that claimants can receive up to a gross amount of $17,853 in total severance pay before their unemployment compensation benefits are affected.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. Act 6 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.”

What does this mean for Pennsylvania employers?

1. The cost of severance agreements may go up as plaintiffs’ lawyers filter into any settlement the offset. The Commonwealth’s gain may be at the employer’s expense.
2. Do not state or suggest that severance will not affect unemployment. It may.
3. Consider including in your severance agreement a statement to the effect that the denial or reduction in unemployment will have no effect on the general release. Many agreements address denial of unemployment but will need to be modified to address reductions in unemployment.

This blog should not be construed as legal advice, as pertaining to specific factual situation or as creating an attorney-client relationship.