Q: What Is a Severance Package?

When laying off or firing an employee, some employers choose to give the terminated employee a severance package. Severance packages typically have two components: pay and benefits. More specifically:

  • Pay: A severance package typically includes a sum of money. The amount of money can vary, and typically depends on how long that employee has worked at the company. The payment can be made in one lump sum or it can be paid out regularly over a period of time.
  • Benefits: In addition to money, severance packages can include the continuation of benefits like healthcare or life insurance. The length of continued benefits coverage should depend on your company policies or your employee’s employment contract.

What’s not included in a severance package?

A severance package is entirely different from an employee’s last paycheck or paying out accrued PTO. It’s also different than separation pay, which is money given to a terminated employee in return for signing a separation agreement.

Am I required to offer a severance package?

Severance packages are not required by federal law or even in most states. That said, you may be required to offer a severance package when:

  1. It’s in the employee’s contract. Employees in top-tier positions often have an employment contract that includes a stipulation for a severance agreement.
  2. It’s required by state law. Check your state’s Department of Labor website to be see the local laws that apply. Mass layoffs and facility closings are the most common triggers of mandatory severance pay.
  3. It’s implied that the employee will receive one. You may be required to give a terminated employee a severance package if you have (a) given them to other employees with similar positions, (b) circulated a company policy (such as in your employee handbook or wiki) promising severance to groups including the employee, or (c) told the employee, even if orally, to expect severance.

Pro tip: To avoid any confusion, outline your policies in your employee handbook. That way it’s clear to you and employees what the standard is in your company.

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Why would I offer a severance package?

Aside from the three cases above, employers often opt to offer a severance package to terminated employees when:

  • The employee is terminated as part of a layoff.
  • The company has decided to reduce staff by offering early retirement packages.

If you want to offer a severance package, it’s best to work with a lawyer or who has expertise in your local laws and standards in your area.

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