Home Corporate Contracts Severance: A Brief Guide

Severance: A Brief Guide

Severance: A Brief Guide



What is Severance?

Severance (often referred to as a severance package) is pay and/or benefits that an employee receives upon termination or leave. In essence severance is a departing gift, offered to an employee who is let go for reasons that stray away from a breach of the employee’s contract. As a result, severance is not awarded to an employee if he or she violates the terms in their contract; for instance, if an employee habitually misses work, without an excuse, the individual may be fired without receiving severance. Furthermore, if an employee does not perform well at his or her work they may not be awarded severance. The transfer of severance; however, is typically up to the employer. This right enables the employer to distribute severance based on their particular evaluations.

Although severance may not be awarded at the leave of employment, the majority of lay-offs (company-wide firings as a result of macro-economic factors or a failing business model) are met with the delivery of severance packages. For example, when the recession of 2008 struck the financial sector, a number of investment backs–due to failing investments in real estate, a tumbling stock price etc.—had to fire massive groups of employees. These individuals, who were in all likelihood receiving healthy compensation, were in most cases, awarded severance. As stated before, the willingness to offer severance is widely up to the discretion of the employer; furthermore, the amount of compensation and other forms of finances will differentiate based on the particular severance package.

What does a Severance Package typically include?

The majority of severance packages will offer the employee a portion of the individual’s pay; for example, if an employee is let go the individual

l, in a hypothetical situation, may be offered 3 months at their base pay, plus an extended healthcare coverage or stock options. In addition to the employee’s remaining regular pay, a severance package may include some of the following benefits:

• An additional payment based on months of employment

• Payment may be awarded for unused vacation time or sick leave

• Payments in lieu of a required notice period

• The extension of medical, dental or life insurance

• The delivery or liquidation of retirement benefits, for example, the employee’s 401k

• The issuance of stock options

• The delivery of resources to help the employee find new work, including access to employment services or help in modifying the employee’s resume.

When is a Severance Package Offered?

As stated earlier, severance packages are most often offered to employees who were laid off or retired. Severance pay was instituted to help protect the newly unemployed; the package is similar to unemployment compensation, except that it is not publicly funded. Policies for severance pay are typically elucidated upon the company’s respective employee handbook—in many countries the distribution and subsequent acceptance of severance is subject to strict government regulation. In most severance packages, the severance contract will stipulate that the employee shall not sue the employer for wrongful termination or attempt to collect unemployment insurance—if the employee does not adhere to these policies they will be forced to return their severance pay.