Pays Severance
A company may pay severance to an employee whose employment has ended, usually as a result of a layoff or downsizing. The payment is often combined with other benefits such as continued insurance coverage, career consultation services and perks like employee discounts. Depending on the circumstances, severance pay can be negotiable.
Severance pay is not required by law, though many companies offer it to soften the blow of involuntary termination and discourage workers from suing over wrongful termination or breach of contract claims. It can also be a way to help departing employees get established in new jobs and reduce the cost of hiring, retraining or reassigning other employees.
The amount of severance pay can vary, but is usually based on years of service and the position an employee held. In addition, companies often include a bonus based on performance or other factors such as longevity or contributions to the company. Severance packages can also include unused vacation or sick time.
Some companies also provide severance payments for non-bonus compensation, such as the amount of salary an employee would have earned had they finished out their full year. Some states treat these bonuses as wages, while others don’t.
When deciding how much to offer in a severance package, the employer must consider its budget and the amount it might need to pay to replace an employee with comparable skills. It must also take into account the reputation of the company and the size of its workforce, as well as its business model.
Who Pays Severance?
Employees are free to use their severance payments for whatever they need, but it’s important to understand what the money is really worth and how it can be used. A Northwestern Mutual financial advisor can review a person’s current finances and recommend the best strategies for using define severance pay.
A company isn’t legally obligated to pay severance packages unless it’s part of a mass layoff in which case it must comply with the Worker Adjustment and Retraining Notification Act. It can, however, choose to do so in order to protect its brand and defuse hard feelings by tiding people over while they look for a new job.
The size of a severance package depends on the amount of work the company is doing and the status of its economy. In general, a severance package can range from a week or two of salary for each year of service to four weeks or more for those with more than 20 years in the workforce. It also varies by industry and by company policy.
People in top-level positions and salespeople are typically offered higher severance packages than lower-level staff. It’s also common for employers to include a release of liability, which the terminated worker must sign in order to receive the payment. This prevents the employer from being sued for wrongful termination or other legal claims if the employee files an unemployment claim. It’s also a condition of eligibility for COBRA insurance.