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Defined: What is Severance Pay and Are Employers Required to Offer it?

Defined: What is Severance Pay and Are Employers Required to Offer it?

There's more to an employee leaving an organization than simply saying goodbye. Between offboarding protocols and other compliance details, there's also the issue of severance pay. Find out what employers should know about how this benefit works and if it's legally required. 


What is Severance Pay?

Severance pay is a lump sum or benefits granted to an employee when they leave a company, sometimes in addition to a person's final paycheck. In some cases, severance is given to laid-off employees to help them navigate unemployment, while in other cases this pay is offered because employers need to honor an employment agreement. It is a good idea to list any company policies related to severance in an employee handbook.


Is Severance Pay Legally Required?

According to the Department of Labor (DOL), the Fair Labor and Standards Act (FLSA) doesn't require employers to offer severance pay when employees leave a company. In some cases, however, severance packages and pay may be part of an employment agreement between an organization and a worker (or the worker's representative).

However, there are a few circumstances when severance pay may be legally binding. Legal resource FindLaw points out that some states enforce employment laws that require severance pay for workers who are laid off after a factory or facility closes, or if the organization severs ties with a significant portion of its workforce. Employers may also be required to offer severance if stated in official company materials or an employment contract, among other reasons. 


What to Include in a Severance Package

Even though most employers are not required by law to offer severance, many still do. So what exactly goes into a severance package?

Severance packages are typically created at the discretion of the employer, unless a prior commitment was made to deliver specific post-employment compensation. This means that there is no set amount of severance pay and that the employer can offer a pay and benefits package that they find suitable for the terminated employee. Common types of severance compensation include:

  • Wages: The most common form of severance is money. As a general rule of thumb, employers will offer the terminated employee 1-2 week’s worth of wages for every year worked at the company. For instance, an employee of three years may receive severance money equivalent to 3-6 weeks of pay.
  • COBRA Coverage: Employers offering group benefits with more than 20 employees (or the part-time equivalent) are responsible for extending the opportunity for COBRA continuation coverage under the group’s health insurance plan.
  • Unemployment Compensation: Upon termination, some employees may file an application for specific severance benefits. The employer may agree to offer these to the employee or may contest those requested severance benefits.
  • Outgoing Employee Services: Outgoing employee benefits are services provided to the employee by the employer in order to help the terminated employee find another job. These benefits are especially crucial for those who have been off the job market for a significant period of time. It is common for employers to write recommendation letters or serve as a reference for the terminated employee. 

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