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What Is Severance Pay?

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  • Written By: B. Miller
  • Edited By: Andrew Jones
  • Last Modified Date: 10 March 2014
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Severance pay is pay given to an employee when he or she leaves the company, typically as a result of mass layoffs. It is not given if the employee quits the company, but may be given if he or she volunteers to leave, possibly as an incentive for early retirement. Severance pay is virtually never given to an employee who is fired from the company for any negative reason.

Severance pay is considered to be additional, supplementary pay to an employee's regular wages or final paycheck. In some states, it must be classified as such in order for the employee to be eligible for unemployment benefits. Otherwise, the severance pay can delay the time period in which one is eligible for unemployment benefits, which is unfortunate.

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Businesses are certainly not required to offer severance pay to their employees, and some use it as a sort of negotiation tactic in order to get an employee to compromise and sign a waiver releasing all of his or her legal rights. This is up to the employee whether or not he or she chooses to take the pay in exchange for signing the waiver. Some employees attempt to negotiate with the company, or hire a lawyer in order to do the negotiation for them. Keep in mind that while negotiating may lead to a better deal, it may also lead to no deal at all, which means no severance pay; be prepared for that if choosing to negotiate and not accepting the first offer.

Severance pay does not always come in the form of monetary compensation. Sometimes, a company will offer a severance package, which may include extension of benefits such as health insurance or life insurance, for example, or even career counseling. These benefits might extend for six months to a year after the employee leaves the company, depending on the specifics of the package. Some companies might even offer employees some time to come into the office to use resources and search for a new job, though this is relatively rare.

In many cases, severance pay is mutually beneficial for the business and the employee. It is obviously helpful to the employee while he or she is transitioning to a new job, and it portrays the company in a favorable light. Existing employees as well as potential employees can recognize that the business will help them out if they can no longer employ them, and shows that the company holds its employees in higher regard.

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