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DEFINITION of 'Severance Package'

A severance package is a bundle of pay and benefits offered to an employee upon being laid off from a company. The receipt of a severance package is contingent upon signing a severance agreement. The amount of money received is usually based on the length of employment prior to termination and may include payment for unused vacation and sick days, and unreimbursed business expenses.

Other continued benefits that may be offered or negotiated include life insurance, disability insurance and the use of company property, such as a laptop, cell phone, personal digital assistant (PDA) or vehicle. Companies may also offer outplacement assistance, to help the former employee find a new job.

BREAKING DOWN 'Severance Package'

An employee handbook typically includes information on a company's severance package policy. Keep in mind, however, that the handbook may need to be updated, and that severance packages are negotiable. Companies are not required to offer a severance package and, in fact, may not be able to offer one if they are letting employees go because they are in major financial trouble.

How Severance Packages Are Determined

With many employees hired on an at-will basis, companies typically are not contractually required to provide severance packages when they are laid off or terminated. If a severance package is offered, the scope of what is offered can vary by company. Some companies might offer pay on a flat rate for all separated workers regardless of the length of their employment. Other companies might create a scale for payment based on the duration of their employment with the company. Even if a company does offer a severance package, there may be circumstances, such as a termination for cause, when such compensation is withheld.

The size of severance packages and what they include may be part of the negotiations between companies and collective bargaining organizations. For instance, a union might demand a certain minimum payout with severance packages in order to help members who lose their jobs and must seek new employment. This can be of particular concern in industries where mass layoffs are possible and can affect entire divisions or a category of employees, such as factory workers.

Accepting a severance package may make you ineligible to file a wrongful termination suit or collect unemployment insurance. As well, the severance agreement may include a noncompete clause, which could interfere with the worker’s ability to find a new job in the same industry or market. Before accepting any severance package, it is advisable to read the severance agreement carefully and consult a lawyer if necessary.

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