Severance Pay

What is a 'Severance Pay'

A severance pay is 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. Severance Package

    A bundle of pay and benefits offered to an employee upon being ...
  2. Terms Of Employment

    The conditions that an employer and employee agree upon for a ...
  3. Special Employer

    An employer who receives an employee on loan from another business, ...
  4. Base Pay

    An employee's initial rate of compensation, excluding extra lump ...
  5. General Employer

    An employer who loans an employee to another business, and who ...
  6. Highly Compensated Employee

    For employer-sponsored, tax-advantaged retirement plan purposes, ...
Related Articles
  1. Financial Advisor

    Life Insurance Plans to Help Your Small Business Retain Employees

    How to use and design cash value life insurance plans as an incentive to help attract and retain key employees.
  2. Retirement

    6 Benefits You're Required by Law to Offer Your Employees

    Learn about the benefits that a business must offer to employees, such as family and medical leave, as well as various forms of insurance coverage.
  3. Retirement

    How To Lay Off Staff

    Firing employees isn't easy, but it is simple: be honest, be compassionate and be quick
  4. Managing Wealth

    The Layoff Payoff: A Severance Package

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

    Split Dollar Life Insurance: How it Works

    Understanding how split dollar life insurance plans are designed and what tax regulations they must follow.
  6. Personal Finance

    Hiring? Regulations Small Businesses Need to Know

    When a small business becomes an employer, it has new responsibilities. Make sure you familiarize yourself with regulatory requirements.
  7. Insights

    Top 10 Companies With the Best Benefits (NFLX, ADBE)

    Find out which companies offer the most unique benefits. Discover the benefits that are most likely to help workers decide to accept a job offer.
  8. Entrepreneurship & Small Business

    3 Reasons to Develop an Employee Handbook for Your Small Business

    Learn how a small business can benefit from an employee handbook covering labor laws, codes of conduct, leave policies and media relations.
  9. Professionals

    5 Low-Cost Perks for Small Business Employees

    Money isn’t the only way to motivate employees. Here are some savvy strategies even the smallest business can use.
  10. Entrepreneurship & Small Business

    Raises or Bonuses Better for Small Business Staff?

    Weigh the pros and cons of each and strike the right balance to retain a top-tier staff and a healthy bottom line for your business.
RELATED FAQS
  1. Will a 10-99 form make my taxes higher?

    My employer is not withholding taxes each pay day. Will this increase my taxes because they will give ... Read Answer >>
  2. Can LLCs have employees?

    Discover how limited liability corporations (LLC) can have an unlimited number of employees and the legal steps required ... Read Answer >>
  3. What are some examples of common fringe benefits?

    Learn how offering fringe benefits can be a strategic recruitment and retention tool for employers and drastically increase ... Read Answer >>
  4. What does a merger or acquisition mean for the target company's employees?

    Learn about the likely impacts of a mergers & acquisition deal on the target company's employees, their benefits and adjusting ... Read Answer >>
  5. What are some ways employers can reduce employee turn over?

    Learn a few strategies in hiring, compensation and management that employers can use for increasing employee retention and ... Read Answer >>
  6. What incentives does an employer have in offering fringe benefits?

    Learn how offering fringe benefits is a powerful business tool for employers to attract and retain quality employees while ... Read Answer >>
Hot Definitions
  1. GBP

    The abbreviation for the British pound sterling, the official currency of the United Kingdom, the British Overseas Territories ...
  2. Diversification

    A risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique ...
  3. European Union - EU

    A group of European countries that participates in the world economy as one economic unit and operates under one official ...
  4. Sell-Off

    The rapid selling of securities, such as stocks, bonds and commodities. The increase in supply leads to a decline in the ...
  5. Brazil, Russia, India And China - BRIC

    An acronym for the economies of Brazil, Russia, India and China combined. It has been speculated that by 2050 these four ...
  6. Brexit

    The Brexit, an abbreviation of "British exit" that mirrors the term Grexit, refers to the possibility of Britain's withdrawal ...
Trading Center