Cash severance: Overview, definition, and example
What is cash severance?
Cash severance refers to a financial payment provided to an employee when their employment is terminated, typically due to layoff, redundancy, or other forms of involuntary separation. It is often part of an employee's severance package and is meant to help ease the transition to new employment. The cash severance amount is typically based on factors such as the employee’s length of service, salary, and the terms of the employment contract or company policy.
Cash severance can be a lump sum or paid out over time, and it may also be combined with other benefits, such as continuation of health insurance or outplacement services.
Why is cash severance important?
Cash severance is important because it provides financial support to employees who are leaving a company involuntarily. It helps ease the financial burden of losing a job while the employee searches for new employment. For businesses, offering cash severance can be a way to demonstrate goodwill and help maintain a positive relationship with departing employees. It can also reduce the risk of legal action or claims related to wrongful termination.
In many cases, cash severance is part of the overall employment agreement or negotiated as part of an employee's exit terms.
Understanding cash severance through an example
Imagine an employee who has worked at a company for 10 years but is laid off due to a company restructure. The company's severance policy offers cash severance equal to one month’s salary for every year of service. In this case, the employee would receive a lump sum payment of 10 months’ salary as cash severance to help cover expenses while they look for a new job.
In another example, a high-level executive is let go from a company due to a merger. Their severance agreement includes a cash severance payment of a negotiated amount, plus additional benefits such as continuation of health insurance for several months and outplacement services to assist with finding a new role.
An example of a cash severance clause
Here’s how a cash severance clause might look in a contract:
“In the event of involuntary termination, the Employee shall be entitled to a cash severance payment equal to [insert amount] or [insert formula] of the Employee’s base salary, payable within [insert time frame]. The Employee will also receive continuation of benefits for [insert duration] as outlined in the company’s severance policy.”
Conclusion
Cash severance provides financial support to employees who are involuntarily terminated, helping to ease their transition to new employment. It is an important part of an employee’s severance package and can be a key element in maintaining positive relations with departing employees. For businesses, offering a fair cash severance package can help mitigate legal risks and support the employee during a difficult transition.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.