Severance package
Encyclopedia
A severance package is pay and benefits an employee receives when they leave employment
Termination of employment
-Involuntary termination:Involuntary termination is the employee's departure at the hands of the employer. There are two basic types of involuntary termination, known often as being "fired" and "laid off." To be fired, as opposed to being laid off, is generally thought of to be the employee's...

 at a company. In addition to the employee's remaining regular pay, it may include some of the following:
  • An additional payment based on months of service
  • Payment for unused vacation
    Annual leave
    Annual leave is paid time off work granted by employers to employees to be used for whatever the employee wishes. Depending on the employer's policies, differing number of days may be offered, and the employee may be required to give a certain amount of advance notice, may have to coordinate with...

     time or sick leave
    Sick leave
    Sick leave is time off from work that workers can use during periods of temporary illness to stay home and address their health and safety needs without losing pay. Some workplaces offer paid sick time as a matter of workplace policy, and in few jurisdictions it is codified into law...

    .
  • A payment in lieu of a required notice period.
  • Medical, dental or life insurance
    Insurance
    In law and economics, insurance is a form of risk management primarily used to hedge against the risk of a contingent, uncertain loss. Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for payment. An insurer is a company selling the...

  • Retirement (e.g., 401K) benefits
  • Stock options
  • Assistance in searching for new work, such as access to employment services or help in producing a résumé
    Résumé
    A résumé is a document used by individuals to present their background and skillsets. Résumés can be used for a variety of reasons but most often to secure new employment. A typical résumé contains a summary of relevant job experience and education...

    .


Severance packages are most typically offered for employees who are laid off
Layoff
Layoff , also called redundancy in the UK, is the temporary suspension or permanent termination of employment of an employee or a group of employees for business reasons, such as when certain positions are no longer necessary or when a business slow-down occurs...

 or retire
Retirement
Retirement is the point where a person stops employment completely. A person may also semi-retire by reducing work hours.Many people choose to retire when they are eligible for private or public pension benefits, although some are forced to retire when physical conditions don't allow the person to...

. Severance pay was instituted to help protect the newly unemployed. Sometimes, they may be offered for people who resign, regardless of the circumstances; or are fired
Termination of employment
-Involuntary termination:Involuntary termination is the employee's departure at the hands of the employer. There are two basic types of involuntary termination, known often as being "fired" and "laid off." To be fired, as opposed to being laid off, is generally thought of to be the employee's...

. Policies for severance packages are often found in a company's employee handbook
Employee handbook
An employee handbook, sometimes also known as an employee manual or staff handbook, is a book given to employees by an employer. Usually, the employee handbook contains information about company policies and procedures...

, and in many countries are subject to strict government regulation
Regulation
Regulation is administrative legislation that constitutes or constrains rights and allocates responsibilities. It can be distinguished from primary legislation on the one hand and judge-made law on the other...

. Severance contracts often stipulate that the employee will not sue the employer for wrongful dismissal
Wrongful dismissal
Wrongful dismissal, also called wrongful termination or wrongful discharge, is an idiom and legal phrase, describing a situation in which an employee's contract of employment has been terminated by the employer in circumstances where the termination breaches one or more terms of the contract of...

 or attempt to collect on unemployment benefits, and that if the employee does so, then they must return the severance money.

United States

Severance agreements are more than just a "thank you" payment from an employer. They could prevent an employee from working for a competitor and waive any right to possibly pursue a legal claim against the former employer. Also, an employee may be giving up the right to seek unemployment compensation. It is important to review a severance agreement carefully and contact an employment attorney to assist with the review.

A recent ruling in the Western District of Michigan held that severance pay is not subject to FICA taxes.

Puerto Rico

Employers are required to pay severance pay after an employee working in Puerto Rico
Puerto Rico
Puerto Rico , officially the Commonwealth of Puerto Rico , is an unincorporated territory of the United States, located in the northeastern Caribbean, east of the Dominican Republic and west of both the United States Virgin Islands and the British Virgin Islands.Puerto Rico comprises an...

 is terminated. Employees are not permitted to waive this payment. Severance pay is not required if the employee was terminated with "just cause."

Just cause is satisfied in any of the following situations: The employee had a pattern of improper or disorderly conduct; the employee worked inefficiently, belatedly, negligently, or at a level of poor quality; the employee repeatedly violated the employer's reasonable and written rules; the employer had a full, temporary, or partial closing of operations; the employer had technological
or reorganization changes, changes in the nature of the product made, and changes in services rendered; or the employer reduce the number of employees due to an actual or expected decrease in production, sales, or profits.

An employee with less than five years of employment with the employer must receive a severance payment equal to two months of salary plus an additional one week of salary for each year of employment. An employee with more than five years but less than fifteen years of employment must receive a severance payment equal to three months of salary plus an additional two weeks of salary for each year of employment. An employee with more than fifteen years of service must receive a severance payment equal to six months of salary plus an additional three weeks of salary for each year employment.

See also

  • Compromise agreement
    Compromise agreement
    In the United Kingdom, a compromise agreement is a specific type of contract, regulated by statute, between an employer and its employee under which the employee receives a negotiated financial sum in exchange for agreeing that he or she will have no further claim against the employer as a result...

  • Golden parachute
    Golden parachute
    A golden parachute is an agreement between a company and an employee specifying that the employee will receive certain significant benefits if employment is terminated. Sometimes, certain conditions, typically a change in company ownership, must be met, but often the cause of termination is...

  • Layoff
    Layoff
    Layoff , also called redundancy in the UK, is the temporary suspension or permanent termination of employment of an employee or a group of employees for business reasons, such as when certain positions are no longer necessary or when a business slow-down occurs...

  • Voluntary redundancy
    Voluntary redundancy
    Voluntary redundancy is a financial incentive offered by an organisation to its employees with the purpose of attracting volunteers to leave the organisation, due to downsizing or restructuring situations. The purpose is to circumvent union employee regulation laws.-Reasons:A Voluntary Redundancy...


External links

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