Moneyzine
Contents
/Careers Guides/Severance Pay

Severance Pay

Moneyzine Editor
Author: 
Moneyzine Editor
2 mins
September 26th, 2023
Advertiser Disclosure

Definition

The term severance pay refers to compensation provided by a company to an individual when their employment has been terminated. Severance pay may be provided when an employee is laid off, or through a mutual agreement with the company when a decision is made to terminate their employment.

Explanation

Severance pay is a benefit provided to an employee when their job is eliminated or when the company and employee agree it would be mutually beneficial for the employee to resign from the company. Employees are usually not entitled to this benefit if they were fired due to poor performance, or were found to be in violation of a company policy.

Companies are not required to pay employees severance, the Fair Labor Standards Act (FLSA) does not provide any employee with this benefit. Severance may be negotiated as part of a collective bargaining agreement. It may also be part of the company's benefits package offered to all employees.

The amount of compensation paid is typically a function of the employee's years of service; however, a maximum benefit may also apply. For example, a company may agree to pay 1.5 weeks of an employee's salary for every year of service, up to a maximum of 52 weeks. Typical benefits range from one-half to two weeks of pay for every year of service. Executives may be entitled to additional benefits, which are often negotiated as part of their employment contract with their company.

A severance benefit can also include the payment of unused sick or vacation days. The extension of medical or dental insurance beyond an individual's last day of employment is usually categorized as a termination benefit. When an employee agrees to accept severance pay, they may be asked to give up their right to file a lawsuit against the employer for wrongful discharge.

Related Terms

Related Content

Is It Worth Pursuing a Master's Degree?
In an era where education is synonymous with opportunity, many consider pursuing a Master's degree a surefire way to advance their careers. However, is it really the golden ticket to success we've been led to believe?
March 21st, 2024
The gender pay gap, the persistent disparity in average earnings between men and women throughout their careers, serves as a critical measure of wage inequality. This gap underscores the ongoing issue of income disparity, despite the ideal of equal pay for equal work.
March 14th, 2024
7 Essential Financial Moves After Losing Your Job
Navigating the stormy seas of job loss? You're not alone.
February 23rd, 2024
The Most In-Demand Skills to Get Hired in 2024
Every job requires a combination of vital skills, but what skillset is valued most in 2024? As the job market evolves, staying ahead means it’s key to understand and acquire the skills that employers value most.
February 20th, 2024
Key Productivity in the Workplace Statistics for 2024
In 2023, global employee engagement saw a slight uptick, with 23% of employees engaged, up by two percentage points. However, a sizable 59% are categorized as disengaged, while actively disengaged employees, known as "loud quitting," declined to 18%. These figures highlight the persistent challenge for organizations to cultivate happiness and productivity in the workplace.
January 31st, 2024

Contributors

Moneyzine 2024. All Rights Reserved.