What is Severance Pay?

Severance pay is any compensation paid by an employer to an employee that is triggered by the departure of the person from the business. The amount of severance pay is typically defined in the employee manual, and so will vary significantly by business. For example, a firm may offer one week of pay for every year worked. An agreement to issue severance pay may be limited, depending on the circumstances of an employee’s departure. For example, it may be paid in the event of a layoff, but will not be paid if the individual is being fired for cause.

Severance pay may be included in a severance package that also includes outplacement counseling and extended access to health insurance.

Advantages of Severance Pay

One reason for issuing severance pay is that it improves relations with the local community and the public at large, which may look askance at employees being laid off with no compensation at all. Another reason is that these payouts can forestall lawsuits, especially when an employee is required to sign a release of all claims prior to being paid. A third reason is that severance protects the culture of a workplace, since employees will know that they will be treated fairly if they are required to leave the business.