Severance pay is when an employer agrees to give a terminated employee some kind of payment or compensation above and beyond their wages and accrued leave. While employers are not required by law to give any kind of severance pay, there are certain instances when it is a good idea to do so.
Severance pay is often the result of a severance agreement. In legal terms, it is a contract between a terminated employee and an employer where the employee agrees not to bring any kind of litigation against the employer for a wrongful termination in exchange for certain compensation. When the employee agrees to the severance agreement, he receives a severance package, which is generally compensation, a temporary benefits agreement and other forms of compensation. By accepting the severance, the employee is giving up his rights to sue the company for any reason.
When an employee is in negotiations for severance pay, he should first ensure that the package gives plenty of compensation for loss of wages. Severance pay is generally figured out by determining the amount of time the employee has been with the company, the circumstances that lead to the termination and the company's financial conditions. There are no laws that force a company to provide severance to an employee, so the type and amounts vary widely from company to company and state to state.
While many employers do include benefits as part of a severance package, there is no requirement to do so. If you are negotiating severance pay, make sure to include enough pay to cover out-of-pocket medical expenses or else include an extension of benefits as part of the severance package.
There are many types of circumstances that may lead an employer to offer severance pay to an employee. Some of the more common scenarios include layoffs, job elimination or company bankruptcy. Other reasons to offer severance pay to an employee might arise when both parties agree to part ways for some reason.
Because the guidelines for severance pay vary from state to state, it's important for both parties to understand the timeline for offering and accepting or refusing severance pay. Some states allow the employee 21 days to decide whether to sign the contract for severance, while other states offer both shorter and longer timelines. Several states even allow the employee 1 week to change his mind after signing. Other states allow no such renege option.