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The Empuls Glossary

Glossary of Human Resources Management and Employee Benefit Terms

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Severance Pay

Severance pay is financial compensation, and sometimes benefits, offered to an employee when their employment is terminated. It acts as a safety net during the job search transition after an involuntary separation from the company.

What is severance pay?

Severance pay is financial compensation, and sometimes benefits, offered to an employee when their employment is terminated. It's essentially a goodbye package to help the employee financially during the job search transition.

Listen, recognize, award, and retain your employees with our Employee engagement software  

What are the types of termination of employment?

There are two main categories of termination that typically qualify for severance pay:

  • Involuntary termination: This is when the company initiates the separation, not the employee. Reasons can include layoffs due to downsizing, company restructuring, or elimination of a specific position.
  • Voluntary termination due to company cause: In some cases, even if you resign, you might be eligible for severance if the company creates a hostile work environment or implements changes that significantly alter your job duties from what was originally agreed upon in your contract.
  • Not every termination includes severance:
  • Voluntary resignation: Typically, if you choose to leave the company of your own accord, you won't receive severance pay.
  • Termination for cause: If you are fired for misconduct, poor performance, or violating company policies, you likely won't be offered severance.

What are the examples of severance pay?

The examples of severance pay are:

  • Cash payment: This is the most common form of severance, typically a lump sum based on your salary and tenure.
  • Accrued vacation or sick pay: Any unused vacation or sick leave is often included in your severance package and paid out.
  • Extended health insurance: The company might cover your health insurance premiums for a specific period to help bridge the gap until you find a new job with benefits.
  • Outplacement services: Some employers offer outplacement services as part of severance, which can include career counseling, resume writing assistance, and interview coaching.

How much severance pay is typical?

There's no legal mandate for severance pay in the United States. However, it's often used as a goodwill gesture or to comply with employment contracts or company policies. Here's how the amount is typically determined:

  • Contractual obligations: Your employment contract might specify severance pay terms, including the amount and calculation method.
  • Company policy: Some companies have established severance policies outlining eligibility and calculation methods.
  • Negotiation: In some cases, you might be able to negotiate a severance agreement, particularly during involuntary termination. Factors like your position, salary, and tenure can influence the negotiated amount.
  • Legally required severance (rare): In specific situations, federal or state laws might mandate severance pay. This is uncommon but can occur in plant closings or mass layoffs governed by certain regulations.

How can employers ensure compliance with severance pay laws?

There's no federal law mandating severance pay in most cases. However, employers need to comply with:

  • Federal WARN Act: The Worker Adjustment and Retraining Notification Act applies to mass layoffs or plant closings. If a company trigger WARN Act requirements, they might have to provide severance pay based on the specific situation.
  • State laws: Some states have their own severance pay regulations. Employers must ensure compliance with these laws to avoid legal issues.
  • Employment contracts and company policies: If your employment contract or company policy outlines severance pay, the employer must adhere to those terms during termination.

Can severance pay be negotiated?

Yes, severance pay can be negotiated in some situations, particularly during involuntary termination. This is because severance isn't always mandated by law, so it becomes part of the separation agreement between you and your employer.

Employee pulse surveys:

These are short surveys that can be sent frequently to check what your employees think about an issue quickly. The survey comprises fewer questions (not more than 10) to get the information quickly. These can be administered at regular intervals (monthly/weekly/quarterly).

One-on-one meetings:

Having periodic, hour-long meetings for an informal chat with every team member is an excellent way to get a true sense of what’s happening with them. Since it is a safe and private conversation, it helps you get better details about an issue.


eNPS (employee Net Promoter score) is one of the simplest yet effective ways to assess your employee's opinion of your company. It includes one intriguing question that gauges loyalty. An example of eNPS questions include: How likely are you to recommend our company to others? Employees respond to the eNPS survey on a scale of 1-10, where 10 denotes they are ‘highly likely’ to recommend the company and 1 signifies they are ‘highly unlikely’ to recommend it.

Based on the responses, employees can be placed in three different categories:

  • Promoters
    Employees who have responded positively or agreed.
  • Detractors
    Employees who have reacted negatively or disagreed.
  • Passives
    Employees who have stayed neutral with their responses.

Is severance pay taxable?

Yes, severance pay is generally taxable as income. The IRS considers its wages and withholds income taxes accordingly.

However, there are exceptions:

  • Accrued vacation or sick pay: The portion of your severance that represents unused vacation or sick leave is not taxed.
  • Payments for wrongful termination: If you successfully sue your employer for wrongful termination and receive compensation for lost wages, it might be treated differently for tax purposes. Consult a tax advisor for specifics.

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