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What is Severance Pay?
Severance Pay is a monetary sum that is often granted to employees who are terminated from a company. It is typically based on the duration of time that the employee had worked for the business. Severance pay is commonly included in a “severance package”, which includes other benefits such as a pension plan or pay for unused vacation.
In most instances, severance pay is offered to employees who are terminated for reasons not related to performance issues. An employee who is terminated due to some fault of theirs may become ineligible for severance pay. Sometimes, employees who voluntarily resign can obtain severance pay.
Employers are not required by law to offer severance pay. It is usually entirely up to the employer’s discretion whether or not they will provide severance pay. The company’s policies regarding severance pay and severance packages are often included in the business’ company handbook or in an employee handbook.
When is an Employee Entitled to Severance Pay?
Again, severance pay is not required by law. If an employee wishes to secure severance pay, they usually need to negotiate this with their employer or future employer.
If the employer agrees to offer severance pay in the future, this agreement should be finalized into a written, signed employment contract. The contract can serve as evidence if a dispute arises over severance pay. In other words, the employee needs to take matters into their own hands if they want to get severance pay later on.
An employee can also lose their rights to severance pay. For example, many companies offer severance pay on the condition that the former employee will not sue the company for wrongful termination. If the employee then decides to sue the company for some reason, they may forfeit the severance pay, and may even be required to return any payments they may have received. Again, these terms would be stated in the employment contract or in the company policies.
How is Severance Pay Calculated?
Unlike minimum wage standards, there are no federal or state guidelines covering the calculation of severance pay. It is up to the employer to determine how much severance pay a person might receive, and whether it will be in lump sum or periodic payments.
A common rule of thumb for most businesses is to pay one week’s for each year of the employee’s service. Some companies also enforce a minimum and maximum amount for severance pay (such as a minimum of one month and a maximum of half a year). Severance pay is classified as taxable income, and may be distributed in increments like a paycheck, or in lump sum.
What if My Employer Refuses to Pay Me Severance Pay as Promised?
The first thing you need to do is to double check that you were entitled to severance pay in the first place. If you were not promised severance pay, then chances are your employer is not required to pay the severance amounts.
On the other hand, if you had a valid contract with your employer that included severance pay provisions, you should re-visit the contract to see what the terms stated. If it appears that the contract was breached, you may be able to recover the severance pay through a civil lawsuit.
In some instances, “employee benefit plans” are covered by the Employee Retirement Income Security Act (ERISA). ERISA may provide some protection, but only if the severance pay was clearly addressed in a formal company policy or procedure.
Should I Speak with a Lawyer if I have a Question about Severance Pay?
If you are unclear about your eligibility for severance pay, you may wish to contact an employment lawyer for legal advice. A lawyer can help determine your rights to severance pay, and can assist you with creating an employment contract. Also, a lawyer can represent you in court if a civil suit becomes necessary.
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Last Modified: 12-31-2012 01:41 PM PST
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