Severance payment: Overview, definition and example
What is a severance payment?
A severance payment is a monetary payment or benefit provided by an employer to an employee upon termination of their employment, often as part of a severance agreement. This payment is typically offered when an employee is laid off, terminated without cause, or their role is eliminated due to restructuring, downsizing, or other business decisions. Severance payments may include additional compensation, continuation of benefits, or other forms of support to help the employee transition out of the organization.
Severance payments are often contingent on the employee signing a release of claims or adhering to non-compete or confidentiality clauses.
Why is a severance payment important?
Severance payments are important because they provide financial support and stability to employees during a period of job transition. For employers, offering severance payments demonstrates goodwill, maintains a positive employer reputation, and reduces the risk of legal disputes by securing agreements that protect the company from future claims.
Additionally, severance payments can help employers uphold their obligations under employment contracts, collective bargaining agreements, or applicable laws, ensuring compliance and fostering trust with employees.
Understanding severance payment through an example
Imagine a manufacturing company decides to downsize due to declining demand. An employee who is laid off after 10 years of service is offered a severance payment equivalent to three months of their salary, along with continued health benefits during this period. In exchange, the employee signs a severance agreement that includes a release of claims against the company.
In another example, a technology firm eliminates a department as part of a restructuring. Employees in that department are offered severance payments based on their tenure, with additional payments for employees who agree to assist with the transition for a limited period.
An example of a severance payment clause
Here’s how a severance payment clause might appear in an employment agreement:
“In the event of termination of employment by the Company without cause, the Employee shall be entitled to a severance payment equal to [insert amount or formula, e.g., two weeks of salary for each year of service], payable within [insert timeframe] following the termination date. This severance payment is contingent upon the Employee signing and not revoking a release of claims in a form acceptable to the Company. The severance payment shall be inclusive of all statutory entitlements.”
Conclusion
A severance payment provides financial security to employees while protecting employers from potential legal risks and fostering goodwill during difficult transitions. Including clear severance payment provisions in employment agreements or policies ensures transparency, compliance, and fairness for both parties. By defining the terms of severance payments, organizations can manage employee departures in a structured and mutually respectful manner.
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.