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What is Severance Pay and How Does it Work?

So, what is severance pay? Severance pay refers to the compensation an employee (typically an executive) receives upon departure from the company. Employees receive severance pay in one of two ways:

  1. An employment contract that requires severance pay
  2. A company policy of paying severance pay.

Let’s discuss how severance pay works and why companies would want to pay severance in the first place.

What is Severance Pay and How Does it Work?

Companies pay severance employees after they leave their employment with the company. Generally, employers provide severance pay in exchange for a full release of all employment claims the employees may have against the employers. This provides employers with a “clean” break from the employees. Severance pay generally also comes with restrictions such as confidentiality where the employee agrees not to divulge company secrets and non-disparagement where the employee agrees not to say or write negative things about the company. Other severance pay restrictions may include an agreement to never apply for employment again with the company, an agreement not to compete with the employer such that the employee does not go to work for a competitor, and to return all company property such as computers, phones, and vehicles within a short time period.

The employer often determines the amount of severance pay based on how long the employee has worked for the employer and the employee’s job level with the company. An employment contract or company policy may expressly determine the amount of severance pay. A severance pay example is two weeks of pay for every year of employment. The severance pay amount is often negotiable even if an employment contract or company policy sets a specific severance pay amount. Severance agreements may also provide for benefit continuation such as health insurance, vacation time payout, and outplacement assistance.

An employee who accepts severance pay must abide by any terms of the severance agreement. An employee who violates that agreement must generally return all severance pay and may be subject to additional monetary penalties. This is why it is critically important for employees to know the terms of any severance agreement before they sign it.

Severance agreements are a rather simple concept, but they tend to be very complex and lengthy. Many of our clients find themselves unsure of what they’re signing because they only vaguely understand the contract terms. If you’re not careful, you could be signing away the legal employment rights you have with your employer in exchange for very little money.

Why Do Companies Offer Severance Pay?

Companies have incentives to offer severance pay of which employees should be aware.

First severance pay allows companies to attract better talent because severance pay can provide a bridge to employees’ next job by paying them while they find that job. Fortune-500 companies can afford to do this much more than smaller companies.

Second, severance pay helps safeguard company secrets. Similar to non-disclosure agreements (NDAs), severance agreements usually require the employee to agree to avoid revealing insider secrets like confidential business development plans, marketing strategies, or other company information which is tightly controlled.

Third, and most importantly, we often see companies use severance pay to control the behavior of their employees post-employment. As stated above, the most problematic provision is that the employee must waive all possible employment claims against the employer and agree never to sue the employer about employment claims. Again, this is why employees must be certain of the severance agreement they are signing.

What is Severance Pay Legal Assistance?

Rowdy Meeks Legal Group LLC has represented many employees at all levels in severance negotiations. We’re here to help you review severance agreements before you sign something you don’t understand. There are several reasons for this:

  • There’s a lot of money on the line, including your overall salary and benefits. If nothing else, you’ll want to know the amount of money the employer is offering in exchange for you waiving your employment rights.
  • Although this may not be clear in the severance contract, these contracts usually involve waiving all future rights to sue employers over employment-related claims. You’ll need to know whether the severance pay amount makes that waiver worthwhile.
  • Make sure you know how NOT to violate the severance contract terms. Any material violation could result in losing all your benefits and severance pay. Even something as minor as mentioning the employer on social media could result in the revocation of the severance package. It’s prudent to know these details before agreeing to them.

Would you like more information about severance pay? Then consider reading about the 7 reasons a lawyer should review your severance package before signing.

Contact Rowdy Meeks Legal Group: LLC With Questions

We assist clients with a wide array of wage claims including severance pay issues.

We will help you whether you’re having trouble understanding a severance package, need help with job misclassification, or lost part of your wages or salary including overtime pay.

Hopefully, you now understand what is severance pay and it works, and that you’ll contact Rowdy Meeks Legal Group LLC for help with any employment wage issues including severance pay.