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Severance Math: How COBRA, PTO, and Bonuses Factor Into Your Package (MI)
That lump sum or salary continuation may look generous at first glance—but what about your unpaid vacation days, your pending bonus, or the cost of keeping your health insurance? These are the hidden factors that can dramatically change the true value of your severance package.
Many Michigan employees don’t realize that severance is negotiable. In fact, most employers use standard templates that protect their own interests first. Once you understand the math—how COBRA premiums, unused PTO, and earned bonuses fit into your package—you gain leverage to negotiate what you’ve actually earned.
It’s important to know that, in Michigan, severance pay is not automatically required by law. Employers generally offer it in exchange for something valuable: your release of legal claims. That means signing without fully understanding the agreement could waive your right to pursue claims for wrongful termination, discrimination, or retaliation later.
Understanding Severance in Michigan
At-Will Employment and Severance Reality
Michigan is an at-will employment state, meaning your employer can generally terminate your job at any time, for almost any reason, as long as it isn’t illegal (like discrimination or retaliation). Because of this, severance isn’t guaranteed—but once it’s offered, it becomes a contract, and every term is negotiable.
Employers usually offer severance to minimize legal risk. In exchange for paying you a certain amount, they require you to sign a release of claims, giving up your right to sue them for wrongful termination, harassment, or discrimination. That’s a big tradeoff—and it’s why reviewing your agreement with an employment lawyer before signing is essential. Once you sign, it’s almost impossible to undo.
Typical Structure of a Severance Package
Lump-Sum Payment vs. Continued Salary
Some companies offer a one-time payment, while others continue your salary for a set number of weeks or months. Lump sums provide immediate cash flow but may affect unemployment benefits; ongoing payments might come with conditions (like continued confidentiality or noncompete restrictions).
Duration Formulas
Severance is often calculated using a “service formula”—for example, one week or one month of pay for every year of service. But these formulas aren’t set by law, and they can be negotiated based on your position, tenure, and performance history.
Other Benefits That Add Real Value
Beyond cash, severance may include COBRA premium payments, career transition services, or PTO payouts. Each has its own tax and timing implications, which can change the total worth of your package by thousands of dollars.
Consideration and Revocation Periods
Under the Older Workers Benefit Protection Act (OWBPA)—a federal law protecting employees over 40—your employer must give you at least 21 days to review a severance agreement and 7 days to revoke it after signing. Even if you’re under 40, many employers apply similar timeframes. Never feel pressured to sign on the spot; those days are meant for you to get legal advice and weigh your options.
COBRA Continuation Coverage
What COBRA Is
The Consolidated Omnibus Budget Reconciliation Act (COBRA) is a federal law that lets you continue your employer-sponsored health insurance after your job ends. The coverage can last anywhere from 18 to 36 months, depending on the reason for your separation.
Here’s the catch: under COBRA, you pay the full premium yourself—the portion you used to pay plus the portion your employer used to cover—plus a 2% administrative fee. For many employees, that adds up quickly. If your monthly family plan costs $650, you could be facing nearly $8,000 a year just to maintain coverage.
How Employers Use COBRA in Severance Offers
Because COBRA can be costly, many employers include COBRA contributions as part of severance packages. They might offer to pay for a few months—or even cover the full cost during your severance period. This is an often-overlooked benefit that adds significant real-world value.
Example:
If your employer pays a $650 monthly premium for six months, that’s a $3,900 benefit on top of your cash severance. It’s money that keeps you insured and frees up your own funds for living expenses.
When you review your severance offer, look for this language. If it’s missing, it can be negotiated in—especially if you’ve been with the company for several years or held a key role.
Michigan-Specific Notes
For smaller employers with fewer than 20 employees (not covered by federal COBRA), Michigan law provides state continuation coverage for up to nine months. It’s not as long as COBRA, but it offers a critical bridge until you find new coverage.
Keep in mind: if your employer pays for your COBRA premiums, that portion may be treated as taxable compensation. This can surprise employees at tax time—turning what seemed like a benefit into a partial burden.
PTO, Vacation, and Sick-Time Payouts
Michigan Law on Unused PTO
Unlike some states, Michigan has no statewide law requiring employers to pay out unused vacation or PTO when you leave a job. Whether you’re entitled to that payout depends on your employment contract, offer letter, or the company’s written policy.
If the handbook says unused PTO “will be paid out upon separation,” your employer must honor that. But if it says “use it or lose it,” you may be out of luck—unless your attorney can show the policy was applied inconsistently or unfairly.
That’s why it’s crucial to check your employee handbook before accepting any severance deal.
Common Employer Practices
Many Michigan companies follow one of two approaches:
- “Use it or lose it”: Unused vacation disappears when you leave.
- Accrual payout: You’re paid for unused PTO, often based on the number of hours accrued.
Sometimes, employers fold PTO payout into the severance amount without listing it separately. This might seem harmless—but it can lead to problems. If the PTO portion isn’t broken out, you risk being double-taxed or losing the ability to claim it if there’s a dispute later.
Always ask for PTO and severance to be listed as separate line items in your agreement.
Commissions, Bonuses, and Incentives
When Bonuses Are “Earned” Under Michigan Law
Under Michigan law, any bonus or commission you’ve earned before termination generally must be paid—even if your employer labels it “discretionary.” The key question is when the payment became earned or vested.
If you’ve met the performance goals, completed the work tied to the incentive, or fulfilled the sales quota before being terminated, you have a strong argument that the payment is due. Employers can’t simply withhold it by calling it a “bonus” or pretending it’s optional.
That’s why reviewing performance metrics, commission plans, and payout schedules is essential. Many employees discover that they were on track to receive thousands in bonus pay but were terminated just before the payout date. In such cases, Michigan courts often side with employees—especially when the work has already been performed and the employer’s reason for withholding payment seems retaliatory or unfair.
Common Employer Tactics
Employers know incentive pay can be costly, so they often use clever tactics to avoid paying:
- Canceling or prorating bonuses after you’re notified of termination.
- Claiming you must be “actively employed on the payout date.”
- Changing performance targets retroactively or redefining “discretionary” programs.
Courts in Michigan tend to interpret ambiguities in pay policies in favor of employees, particularly when you’ve completed the work tied to the compensation. If the company benefited from your performance, it shouldn’t be able to rewrite the rules to avoid paying you.
Don’t Sign Away What You’ve Earned
Your severance agreement isn’t just a handshake and a final check—it’s a binding legal contract that can affect your income, benefits, and career for years to come. Every term matters. From COBRA coverage and unused PTO to bonuses and incentive pay, these are all negotiable parts of the total value you’ve earned.
Before you sign away your rights, take a step back. Employers often count on employees feeling rushed or pressured in the moment. But with the right legal advice, you can turn a one-sided offer into a fair agreement that protects your future.
If you’ve received a severance agreement—or expect one soon—don’t sign under pressure. The time to review and negotiate is short, but it’s critical. Have your agreement evaluated by a Michigan employment attorney who understands the fine print, the strategy, and the leverage points that make a difference.
Contact Batey Law Firm, PLLC today for a confidential severance review.
📍 30200 Telegraph Rd., Suite 400, Bingham Farms, MI 48025
📞 248-540-6800
Batey Law is Employment Law.