Severance benefits: Overview, definition, and example
What are severance benefits?
Severance benefits refer to the compensation or benefits provided to employees when their employment is terminated, typically due to reasons such as layoffs, company restructuring, or downsizing. Severance benefits can include a variety of offerings, such as financial compensation (usually based on the employee’s length of service or position), continuation of health insurance, outplacement services, or other support to help the employee transition to new employment. The specific terms of severance benefits are often outlined in an employment contract, company policy, or collective bargaining agreement.
Severance benefits are designed to support employees during their transition from one job to another, providing them with financial security and access to resources while they search for new employment opportunities.
Why are severance benefits important?
Severance benefits are important because they help ease the financial burden on employees who are leaving a job involuntarily. These benefits serve as a safety net during periods of unemployment, reducing stress and providing the necessary time for employees to find new work without immediate financial hardship. For employers, offering severance benefits can help mitigate the legal risks associated with termination and improve the company’s reputation by demonstrating care and responsibility towards employees.
Severance benefits also help maintain goodwill and can prevent potential disputes or claims of wrongful termination. In some jurisdictions, severance benefits are required by law under certain conditions, such as mass layoffs or if an employee has been with the company for a specific period.
Understanding severance benefits through an example
Imagine an employee who has been with a company for five years and is laid off due to a company-wide restructuring. As part of their severance package, the company offers the employee two weeks of salary for every year of service, so they receive a total of 10 weeks of severance pay. Additionally, the company offers continued health insurance coverage for three months and access to career counseling services to help the employee transition into a new job.
In another example, a senior executive is terminated as part of a corporate downsizing. The executive's severance package includes a lump sum payment based on their years of service and position, continued pension contributions, extended health benefits, and outplacement services to assist with job placement. The package is negotiated as part of the executive’s employment contract, ensuring a smooth transition.
An example of a severance benefits clause
Here’s how a severance benefits clause might look in an employment agreement:
“In the event of termination of employment by the Company, not for cause, the Employee shall be entitled to severance benefits as follows: (1) payment of [Insert Number of Weeks] weeks of salary, (2) continuation of health benefits for a period of [Insert Number of Months], and (3) outplacement services for a period of [Insert Number of Months] to assist with the Employee’s job search. Severance benefits are subject to the Employee’s execution of a release of claims in favor of the Company.”
Conclusion
Severance benefits provide financial and practical support to employees who are involuntarily terminated from their jobs. These benefits help employees navigate the difficult transition between jobs while ensuring that the employer fulfills its responsibilities and reduces potential legal risks. Clearly defined severance packages can foster a positive relationship between employees and employers, demonstrating the company's commitment to its workforce even in challenging times. By including severance benefits in employment contracts and company policies, both parties can have clear expectations regarding the terms of termination and support during transition periods.
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.