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What is severance pay?

What is severance pay?

Severance pay definition

Severance pay is the amount of money or benefits given to an employee as that employee leaves an employer either voluntarily or involuntarily. Severance is often offered to terminated employees in order to lighten the the burden of unemployment.

Employers also offer severance pay in exchange for signed release agreements from the terminated employee(s). This exchange is typically used in order to avoid costly lawsuits.


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 the employer can offer a severance 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 3 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 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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