Texas employees often question the relationship between severance pay and unemployment benefits through the Texas Workforce Commission. Workers often think if they accept severance pay they are automatically ineligible for unemployment benefits in Texas. That is incorrect. The terms of the severance agreement determine whether you can receive severance and unemployment pay in Texas.
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Basic rules for Texas Workforce Commission unemployment benefits and severance pay
Unemployment benefits from the Texas Workforce Commission are available to Dallas and Fort Worth employees who lost their job through no fault of their own. This includes reductions in force (layoffs), termination without misconduct or performance problems and quitting with good cause (such as avoiding sexual harassment). The standard for Texas unemployment benefits is broader than most other employment claims for employees. (See more discussion from the Texas Workforce Commission.)
In the past employees who received severance pay could receive unemployment benefits without adjustments for severance pay. That means the employee could receive unemployment benefits and severance pay at the same time or the employee could exhaust severance pay and then start taking full unemployment benefits.
In 2012 the Texas legislature changed the rules. Now Chapter 207 of the Texas Labor Code disqualifies unemployment benefits while receiving most forms of severance pay. Once the severance pay runs out the fired employee can receive Texas unemployment benefits, if otherwise eligible.
Assuming eligibility for unemployment benefits under the Texas Labor Code aside from the severance pay issue, let’s discuss when you can receive both at the same time.
Severance pay for employment law claim settlement agreements and Texas unemployment benefits
Eligibility for TWC unemployment benefits is not affected by severance pay when the severance is payment of settlement of a legal claim against the employer. These settlement agreements often arise from settling overtime pay, employment discrimination, wrongful termination and other employment law or labor law claims that might result in a lawsuit against the employer.
A common settlement includes paying the employee extended wages as severance pay rather than a lump sum payment. This eases the burden on the employer to finance the settlement while paying the employee in a reasonable time period.
The Texas Legislature opted to exclude this form of severance pay from disqualifying severance pay for unemployment benefits. You can see why. The employee suffered from the bad acts of the employer. It is unfair to punish the employee a second time by disqualifying unemployment benefits.
Additionally, as an employment lawyer I would advise a client against accepting a settlement agreement with severance pay if it disqualified unemployment benefits. The employee would lose money through unemployment benefits by letting the employer pay out the settlement as severance. This exception encourages settlement of employment discrimination and other types of employment law claims.
Severance pay by contract and Texas Labor Code unemployment benefits
The Texas Legislature also permits unemployment benefits while an employee receives severance pay agreed to in a contract between employer and employee made prior to termination. This includes severance pay as part of an offer letter, a collective bargaining agreement or other employment contract.
The severance pay is usually included as a contracted form of compensation to the employee if the employee works a length of time or employment ends for some reason other than employee misconduct. Here the severance pay is considered compensation already earned by the employee through prior labor.
This is different from severance pay as part of an employer’s policy to pay severance pay as part of its unilateral decision to end the employment relationship. If the employer conducts a reduction in force and grants severance pay then this exception does not apply. Alternatively, if the employer solicits voluntary layoffs with severance then likely the exception would apply.
If you are uncertain if you qualify for unemployment benefits in Texas…
Apply for benefits with the Texas Workforce Commission. The application is free and they will render a determination whether you qualify. The TWC may be wrong, but you have to apply to contest their decision anyway. If denied then you may want to speak with an employment lawyer about next steps to challenge the TWC determination. If you do not qualify then you definitely cannot receive unemployment benefits. Visit the unpaid wages and overtime pay page for more information about pay issues. If you have questions about severance pay and public benefits then you should talk to an employment attorney.