What Is Severance Pay?

Severance pay is pay provided to employees after they’re removed from a position, or after employment is “severed”.

Severance Pay

Severance pay is pay provided to employees after they’re removed from a position, or after employment is “severed.” Severance pay is generally provided in cases where an employee is let go from a position due to situations like downsizing or job elimination, rather than voluntary job termination on the part of the employee. Severance pay can be provided to employees all at once or over time.

Is Severance Pay Required?

Severance pay isn’t required in any state under normal circumstances, so many employers don’t offer or pay it. Circumstances that may warrant severance pay even if it isn’t generally offered as a benefit of employment include changes in policy or structure that eliminate an employee’s position or a merger in which all existing employees must be let go. Otherwise, severance pay may be offered as a benefit of employment.

Why Provide Severance Pay?

Providing severance pay is a courtesy for employees, allowing them time to find a new job without suffering financial hardship. Providing severance pay can attract top talent to a company and entice employees to stay on with a company, rather than seeking new employment – particularly if it’s offered along with other attractive benefits.

Release from Claims with Severance Pay

Providing severance pay may act as a way to protect employers against potential lawsuits. Since employees can sue a company and cost the company money in court fees, regardless of the validity of claims, it’s sometimes in an employer’s best interest to create insurance against this possibility. Employers usually require employees to sign a form releasing the employer from any future claims as a condition of receiving severance pay.

How Is Severance Pay Calculated and Distributed?

Severance pay is often calculated using a formula that takes into consideration the amount of time an employee worked for the company. A common practice is to give employees one or two weeks of severance pay for each year worked. Unused vacation time and sometimes sick time are also figured into severance pay.

Severance pay may be distributed over time or in one lump sum. It may work in an employee’s favor to distribute severance pay in a lump sum, as the employee may be able to collect unemployment compensation after the payment is received. When severance pay is distributed over time, employees may have difficulty collecting unemployment compensation or the amount may be lower.

Who Is Eligible for Severance Pay?

If severance pay is offered as a condition of employment, the eligibility requirements are often stated up front, which may include working for the company for a certain amount of time. If a company employs over 100 people and is terminating a large part of the workforce, the Worker Adjustment and Training Notification (WARN) Act may require an employer to provide severance pay to all terminated employees unless 60 days notice is given prior to lay-offs.

Severance pay isn’t standard with every company, but can provide employees with a bit of protection, while also safeguarding an employer against lawsuits. Offering severance pay may give companies a competitive advantage and perpetuate a compassionate image.

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