What is Severance Pay and How Does It Work? 

Unexpectedly losing your job is always a bitter pill to swallow. Will your employer show you the door and leave you with nothing? For most workers, the answer to this question is no.

Instead, employers will often offer workers severance pay. Employees who are laid off can use their severance to sustain themselves during their job search. The reasons and details of severance pay can vary. As this is the case, let’s dive into what severance pay is and how it works.

What is Severance Pay?

Severance pay is the compensation that employers give to employees upon the termination of their employment. This will typically be an involuntary separation from an employee’s perspective, and they can only receive compensation if they meet the conditions of eligibility that an employer has set.

Severance pay is a financial package given to employees who lose their job through no fault of their own. Reasons for this can vary from a period of downsizing to an employer wanting to cut costs. The amount of severance pay that an employee receives depends on several factors.

How Does Severance Pay Work?

Many employees rely on severance pay when they lose their jobs. This helps them to transition to a new job and support themselves and their family in the meantime. Many factors influence the amount of severance pay that someone receives. These include:

1. Years of Service

The longer someone works for an organization, the more severance pay they are likely to receive. It’s important to note that the limit for total severance pay is 52 weeks’ worth of pay. Many employers choose to do 2-3 weeks of pay for every year that the employee was in the position.

2. Salary Level

Employees at higher levels of pay will typically receive higher severance pay. For example, executives and managers may receive 6-12 months of severance pay. On the other end of the spectrum, lower-level staff may only receive a few weeks of severance pay.

3. Company Policy

All organizations will have a severance pay policy in place to help calculate and determine the exact amount they’ll give an employee. Not all organizations are as generous as others when it comes to severance pay, however. It is common for union employees to have negotiated severance pay terms in their contracts.

4. Negotiation

Employees often have some room to negotiate severance pay. This is especially true for long-term and high-level employees. If this happens to you, make sure you prepare details on your contributions to help build a case of why you deserve higher severance pay.

The temporary financial security that severance pay gives employees can make a world of difference in their personal lives. It is important to spend this money wisely, however, as you may need it to last you a long while. After all, the job hunt is a time-consuming and exhausting process.

Who Qualifies for Severance Pay?

Not all employees qualify for severance pay from their employers. Typically, the employees who qualify are ones that have been laid off through no fault of their own.

Full-time and part-time employees are usually the first ones that qualify for severance pay. This differs from temporary, seasonal, or contract workers though, as they typically don’t receive severance pay. As well as this, some employers require a minimum length of service (such as 6-12 months) before employees become eligible for severance pay.

Severance pay usually also differs between salaried employees and hourly employees. Salaried employees are more likely to receive severance pay, while hourly employees are more likely not to. The answer to whether an employer will give severance pay to an hourly employee depends on the context and circumstances of the company policy and job performance.

Job performance comes into play for severance pay as employees will typically need a solid work history and a satisfactory performance rating in the eyes of the organization. Without this, they may be ineligible for severance pay.

When Do Employers Owe Employees Severance Pay?

To put it simply, employers owe employees severance pay when their employment ends. For employees though, it’s important to know your rights to severance pay so that you can plan in accordance with any situation which may arise. Let’s take a closer look.

Scenarios where you may be entitled to severance pay include:

• Position Elimination

Organizations can eliminate positions through downsizing, closing departments, or by restructuring. If this occurs, the employer likely owes the employee severance pay.

• Layoff

When events of economic downturn occur, many organizations can no longer afford to retain all their staff members. This means that they will need to lay off employees. If this happens through no fault of your own, you should be able to receive severance pay.

• Termination Without Cause

Employers can choose to terminate an employee’s contract without establishing just cause. In cases where this occurs, employees will usually receive severance pay.

• Constructive Dismissal

If employers make changes to your job conditions or responsibilities, it may make it difficult for an employee to continue working. When this occurs, the employee may have grounds to claim a constructive dismissal. This means that they are essentially forced to resign, but they may still be owed severance pay. Examples of where this can happen include pay cuts or relocation.

Do Your Research

Whether you’re an employer or an employee, it is essential to do your research when it comes to severance pay. There is no requirement in the Fair Labor Standards Act (FLSA) for employers to give employees severance pay. It is an agreement between the employer and its employees.

Check with your labor lawyer regarding any cases where you may consider giving severance pay to an employee. On the flip side, employees need to ensure that they have everything they feel entitled to in writing. If they choose to negotiate, they will need to prepare themselves with concrete evidence of their contributions and why they deserve a higher level of severance pay.

Every situation differs in the case of severance pay. Both employers and employees should take time to process everything before moving on. After all, when one door closes, other ones are waiting to be opened.