Meaning of Severance Pay

It’s not an easy decision to let someone go, but sometimes business leaders have no choice. Whether due to a restructure, company downsizing or financial difficulties, companies may need to reduce their workforce to remain viable. When this happens, it’s common for the departing employee to receive a severance package that helps mitigate the blow. This compensation is commonly offered in the form of a lump sum payment based on years of service and/or position, along with other benefits such as outplacement support, health insurance and retirement contributions.

Employers aren’t required by law to provide severance packages to departing employees, but many choose to do so in order to help defuse hard feelings and maintain a positive image of the company. In addition, severance packages can be useful in helping an employer avoid liability for paying unemployment benefits to former employees once their employment relationship has ended.

Companies that are not profitable typically cannot afford to offer a generous severance package, but those that are can often provide employees with a large sum of money. A typical severance pay will include a lump sum payment of up to a few weeks of salary for each year of service, which is usually based on the position an employee held and the level of seniority at the company. Additionally, severance packages can include accrued vacation time, sick days and holiday pay.

What is the Meaning of Severance Pay?

Other benefits that can be included in a severance package are outplacement support, which can include career counseling, interview coaching and resume writing services, as well as access to job boards and social media platforms to find new positions. In addition, an employer may also choose to continue an employee’s health insurance or retirement contribution as part of a define severance pay.

A major concern when offering a severance package is that it will likely be subject to state and federal taxes. In order to minimize the tax impact, an employer can offer severance packages that are broken down into monthly payments or even paid over two years in order to reduce the overall tax burden on an employee.

In some instances, a severance package will also include a release of all claims against the company that the departing employee has as a condition of receiving their payout. This waiver is often used to protect the employer from potential lawsuits filed by exiting employees who claim that they were terminated without cause or were wrongfully denied a bonus or promotion.

The amount of severance pay an employee is entitled to receive will vary by company, as there is no standard minimum or maximum in the United States. However, in most cases, employers will honor a promise of severance pay made in a pre-existing direct contract between the employer and employee, in a collective bargaining agreement or as part of a company policy. In addition, if a company is involved in mass layoffs, they are legally required to give workers 60 days notice under the Worker Adjustment and Retraining Notification (WARN) Act and thus are obligated to pay workers for the duration of this period.