Severance Pay

Severance Pay Definition

Severance pay is money in addition to wages and any other money that employers owe employees when their employment ends, such as through mass layoffs. Severance pay is a form of what's generally called separation, termination or final pay.

To be true severance pay under unemployment insurance laws in some states, the intent behind employers offering the money must be specifically for supplementing state-provided unemployment benefits.

Otherwise, so-called severance pay might count as wages or other pay that will delay the start of unemployment compensation.

A severance package is typically severance pay combined with benefits or perks, such as extended health insurance benefits under the Consolidated Omnibus Budget Reconciliation Act (COBRA).

Employers typically base employee severance pay on length of service and weekly salary or wages. For example, as severance pay, your employer might offer you one extra week of salary for each consecutive year you worked for the employer.

To receive severance pay these days, departing employees usually must sign separation or severance agreements (or related clauses within other agreements). Such agreements usually deprive departing employees of their right to take legal action against their former employers.

Departing employees might also have to sign noncompete or nondisclosure agreements (or clauses) to collect their severance pay. Such agreements waive even more employee rights.

Unless it's in breach of contract, it is generally legal for employers to withhold severance pay as a "bribe" to encourage departing employees to sign agreements. Even so, it's a good idea to consult an attorney if you have doubts about signing any agreement that waives your legal rights. To avoid enforceability problems your employer will give you a reasonable amount of time to sign, so that you may first consult an attorney.

The fact that your employer is effectively trying to bribe you with severance pay to sign away some of your legal rights, gives you negotiating power. As a result, you might be able to negotiate more than your employer initially offers.

But, be aware that, if you attempt to negotiate, you're effectively declining your employer's first offer and making a counteroffer. If your employer rejects your counteroffer, you might end up with little to no severance pay.

Most employers will likely still honor their first offers, as bribing departing employees with severance pay to get them to waive their legal rights has obvious advantages. Additionally, the courts typically frown on employers requiring employees to sign agreements that waive their legal rights without offering the employees some sort of compensation in exchange.

However, it's a myth that U.S. employers are generally required by law to offer employee severance pay. The next page explains.

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