Effective January 1, 2012, a signature amendment to the Pennsylvania Unemployment Compensation Law will require that severance pay in excess of 40% of the average annual wage in Pennsylvania offset unemployment compensation benefits otherwise payable to separated employees.

Prior to Act 6 of 2011, the amount of unemployment compensation a qualified claimant would receive would be offset only by: (1) compensation received for employment services performed during the week in which the individual claimed benefits; and (2) vacation pay in excess of partial benefit credit, which did not apply to employees who had been permanently or indefinitely separated from employment. The most recent “poster child” benefiting from these limited offsets is the former Superintendent of the Philadelphia School District, who received $905,000.00 as part of a severance package and still qualified for unemployment compensation benefits.

The amendment adds a third offset to the weekly unemployment benefit to help avoid a Philadelphia School District anomaly by offsetting the benefit with any severance pay received. Severance pay is “one 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.” 43 P.S. § 804(d)(1).

Severance pay, however, is deductible from unemployment compensation benefits only to the extent it exceeds 40% of the average annual wage in Pennsylvania. That 40% threshold is currently $17,853.00. Only the excess over 40% will be an offset.

Any severance pay offset is applied “to the day, days, week or weeks immediately following the employee’s separation” until used up. The severance pay offset applied to each day or week is equivalent to the regular full-time daily or weekly wage of the claimant. As an example, an individual who is entitled to receive $500 per week in unemployment benefits but is also entitled to $19,853 in severance pay ($2,000 more than the 40% average) would collect no unemployment benefits for the first four ($500 times four is $2000) weeks following her separation from employment and would begin to collect her $500 weekly benefit for and after the fifth week.

If the amendment had been in effect at the time the former Philadelphia School District Superintendent received her severance package, the size of her severance payment would have offset her unemployment benefit for her entire 26 weeks of benefits eligibility.

These changes apply to severance compensation payable by agreement or policy on and after the January 1, 2012 effective date of the amendment.

Contact your Reed Smith attorney or an experience employment lawyer for added guidance.