A severance package does not affect unemployment benefits in Kentucky. A Kentucky worker who receives severance pay from a former employer does not lose the employee’s right to collect unemployment insurance (UI). The Kentucky Office of Unemployment Insurance will not reduce unemployment benefits for those weeks in which an employer makes a severance payment to a worker. When an employment contract allows an employee to waive UI benefits in lieu of a severance package, a court can deem the waiver unenforceable.
What an Employee Reports in a UI Claim
An employee must report gross wages that include salaries, commissions and bonuses. Termination or severance pay is not reportable for purposes of unemployment insurance because it is not money paid for services. Even when an employee is a member of a labor union and receives severance pay due to an agreement with the union or clause of their employment contract, severance pay is not considered payment for services rendered.
What Else Are Wages?
Kentucky considers a wage to be a payment for services that an employee performs. A wage can also be the cash value of a payment made in a manner other than cash, such as a payment in the form of a vehicle. The exception to this rule is if the payment is made for agricultural or domestic employment.
There are numerous exclusions to the definition of wages. Travel reimbursements are not wages when they do not exceed the actual out-of-pocket costs of the worker. An excess over actual expenses are wages. The cash value of room and board is not considered wages when provided on the employer’s property, for a legitimate business reason. For example, room and board for a live-in nanny would not be considered wages.
Sick pay is ordinarily wages, but it is not wages when the worker receives a payment under a workers compensation law or when the payment is made more than six calendar months after the last calendar month of employment. Tips are wages when the worker reports them to the employer in accordance with Section 6053(a) of the Internal Revenue Code.
What About COVID-19 Rules?
During the COVID-19 coronavirus pandemic, individuals can claim unemployment benefits other than unemployment insurance. Unemployment insurance benefits provided through federal monies include Pandemic Emergency Unemployment Compensation (PEUC) and Pandemic Unemployment Assistance (PUA). In Kentucky, a claimant’s PEUC or PUA benefits will not be reduced by the amount they received in severance pay.
Weekly Benefit Amount
A current or former employee who has been laid off or seen their hours substantially reduced can calculate their weekly benefit amount (WBA). They will need the amount they earned in the last four calendar quarters, which are three-month periods in the year. These four quarters make up their base period for benefits. The basic benefit payment calculation is 1.1923 percent of an individual’s base period wages.
As of July 1, 2020, the minimum WBA in Kentucky is $39, and the maximum benefit amount is $560 per week. A claimant must earn at least $1,500 in one of the four quarters or their eligibility will be affected. If the wages in the third and fourth quarters are very low compared to the first two quarters, the unemployment insurance claim may be invalid. Once the WBA is calculated, the total wages in the final two quarters must be at least eight times this weekly amount.
Taxes on Severance Pay
Kentucky taxes money a worker receives as severance pay. Although severance pay does not count as wages when an individual is reporting income for Kentucky unemployment insurance, it counts as net income under Kentucky’s statutes relating to revenue and taxation. Severance pay counts as net income acquired from a profession or activities carried on in the state.
A severance payment can count as supplemental pay. An employer can pay supplemental pay separately from a regular paycheck and withhold federal taxes at a flat tax rate provided by the Internal Revenue Service. Alternatively, they can combine the supplement with a regular paycheck and withhold the tax at the rate indicated by the IRS tax tables.
Taxes on Unemployment Benefits
Kentucky taxes unemployment benefits. When a Kentucky resident receives unemployment compensation, their income is subject to Kentucky income tax. For the tax year 2020, the federal government excludes up to $10,200 of unemployment compensation from gross income. But Kentucky is not mirroring this federal practice. If a Kentucky resident excludes any amount up to the $10,200, they will need to add it back to their Kentucky individual income tax return.
Suspension of Collection Action
The Kentucky Department of Revenue (DOR) has suspended all enforced collection actions of monies owed to it during the COVID-19 emergency. A taxpayer may receive a Final Notice Before Seizure letter from DOR encouraging them to pay their debt within 60 days. The letter is generated by DOR’s system and goes out automatically.
An individual who receives such a notice should call DOR about their debt. If they cannot pay because of issues related to COVID-19, the DOR will note this in their case. If the individual can make a payment, DOR will work with them to make arrangements. Whether the taxpayer pays or not, DOR will not engage in a collection action during the COVID-19 emergency.
Severance Pay Not Automatic
Generally, an employer is not automatically, or by statute, required to provide severance pay to a worker separating from a position, but terms of an employment contract may require an employer to provide a worker with severance pay. If an employer does not provide the unemployed worker with severance pay as outlined by the contract, the former employee can sue the employer in civil court.
If the employee is successful, and the employer is ordered to pay severance, the court can award the employee the severance pay, as well as interest and other damages, depending on the circumstances of the employer’s breach of contract. A former employee must file a lawsuit that relates to a written contract within five years of the date of the breach. A former employee must file a lawsuit that relates to a judgment within 15 years of the date of the breach.
- Kentucky Career Center: Unemployment Insurance Employer Guide
- Kentucky Career Center: Weekly Unemployment Insurance Benefits Calculator
- Kentucky Career Center: COVID19 - Unemployment Insurance Frequently Asked Questions
- Kentucky Revised Statutes Section 341.030 Wages Defined
- Internal Revenue Code Section 6053: Reporting of Tips
- Kentucky Career Center: What You Need to Know, Unemployment Insurance in Kentucky
- Kentucky Revised Statutes Section 141.020: Levy of Income Tax on Individuals
- Kentucky Department of Revenue: COVID-19 Tax Relief, Frequently Asked Questions
- Kentucky Department of Revenue: Collection Activity Procedures
- Kentucky Revised Statutes Section 413.120: Actions to Be Brought Within Five Years
- Kentucky Revised Statutes Section 413.090 Action Upon Judgment, Contract or Bond, Fifteen-year Limitation
- Kentucky Revised Statutes Section 143.010 Definitions for Chapter
Jessica Zimmer is a journalist and attorney based in northern California. She has practiced in a wide variety of fields, including criminal defense, property law, immigration, employment law, and family law.