Severance Pay

DEFINITION of 'Severance Pay'

The compensation that an employer provides to an employee who has been laid off, whose job has been eliminated, who through mutual agreement has decided to leave the company, or who has parted ways with the company for other reasons. Typically, severance pay amounts to a week or two of pay for every year that the employee was with the company. Executives may receive a month's pay for each year of service and senior executives generally receive severance pay as outlined in the employment contract. In addition to pay, severance packages can include extended benefits, such as health insurance and outplacement assistance to help the employee secure a new position.

BREAKING DOWN 'Severance Pay'

Not all companies provide severance pay to employees upon termination and those that do may not provide severance pay to all employees. Severance pay is typically issued on a case-by-case basis and as dictated by any employment contracts in place during hiring. No law requires employers to provide severance pay; however, the Fair Labor Standards Act (FLSA) mandates that an employer must pay the employee whose employment has been terminated through their last day of work and any vacation time that the employee has accrued. If severance pay is received, any unemployment compensation to which the individual is entitled will be accordingly reduced.

RELATED TERMS
  1. Employee Stock Option - ESO

    A stock option granted to specified employees of a company. ESOs ...
  2. Fair Labor Standards Act - FLSA

    A United States law which sets out various labor regulations ...
  3. Cost Cutting

    Measures implemented by a company to reduce its expenses and ...
  4. Golden Boot

    An inducement or incentive for an older worker to "voluntarily" ...
  5. Restructuring

    A significant modification made to the debt, operations or structure ...
  6. Featherbedding

    Term used to describe the practice of a labor union requiring ...
Related Articles
  1. Economics

    What You Need To Know About The Employment Report

    This widely watched indicator of economic well-being directly influences the market.
  2. Personal Finance

    The Layoff Payoff: A Severance Package

    If you must leave your job, go out fighting for the best benefits you can get.
  3. Budgeting

    Planning For Unemployment

    Preparation can help you land on your feet after getting the "old heave-ho".
  4. Retirement

    How To Lay Off Staff

    Firing employees isn't easy, but it is simple: be honest, be compassionate and be quick
  5. Options & Futures

    Putting Management Under The Microscope

    We tell you where to find the telltale signs of corporate misdeeds.
  6. Executive Compensation

    How Restricted Stocks and RSUs Are Taxed

    Many firms pay a portion of their employees’ compensation in the form of restricted stock or restricted stock units.
  7. Personal Finance

    Don't Sign That Non-Compete Without Reading This

    Non-compete contracts aren't just for high-level execs these days. How to protect yourself if your employer – or prospective employer – insists you sign one.
  8. Your Practice

    How to Save for Retirement Like a Wealthy CEO

    Don't have a CEO's income? You can still employ a millionaire’s saving strategy when it comes to planning for retirement.
  9. Economics

    Why Enron Collapsed

    Enron’s collapse is a classic example of greed gone wrong.
  10. Credit & Loans

    Top 5 Reasons Why People Go Bankrupt

    The biggest cause of bankruptcy in the United States is medical expenses.
RELATED FAQS
  1. If I take a severance package from my employer, how will it be taxed?

    It depends on your tax bracket. For instance, if your employer offers you a payout of $100,000, you will owe federal tax ... Read Full Answer >>
  2. Can LLCs have employees?

    A limited liability corporation (LLC) can have an unlimited number of employees. An employee is defined as any individual ... Read Full Answer >>
  3. Do flexible spending accounts (FSA) funds roll over?

    An individual can utilize an employer’s cafeteria plan of employee benefits to establish a flexible spending account (FSA). ... Read Full Answer >>
  4. How do mutual fund managers make money?

    Mutual fund managers get base salaries, which vary greatly depending on the size and pedigree of the fund company. They may ... Read Full Answer >>
  5. What are the best free online calculators for calculating my taxable income?

    Free online calculators for determining your taxable income are located at Bankrate.com, TaxACT.com and Moneychimp.com. Determining ... Read Full Answer >>
  6. What economic indicators are important to consider when investing in the retail sector?

    The unemployment rate and Consumer Confidence Index (CCI) rank as two of the most important economic indicators to consider ... Read Full Answer >>
Hot Definitions
  1. Flight To Quality

    The action of investors moving their capital away from riskier investments to the safest possible investment vehicles. This ...
  2. Discouraged Worker

    A person who is eligible for employment and is able to work, but is currently unemployed and has not attempted to find employment ...
  3. Ponzimonium

    After Bernard Madoff's $65 billion Ponzi scheme was revealed, many new (smaller-scale) Ponzi schemers became exposed. Ponzimonium ...
  4. Quarterly Earnings Report

    A quarterly filing made by public companies to report their performance. Included in earnings reports are items such as net ...
  5. Dark Pool Liquidity

    The trading volume created by institutional orders that are unavailable to the public. The bulk of dark pool liquidity is ...
Trading Center