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A severance package is pay and benefits an employee receives when they leave employment at a company. In addition to the employee's remaining regular pay, it may include some of the following:
- An additional payment based on months of service
- Payment for unused vacation time or sick leave.
- A payment in lieu of a required notice period.
- Medical, dental or life insurance
- Retirement (e.g., 401K) benefits
- Stock options
- Assistance in searching for new work, such as access to employment services or help in producing a résumé.
Packages are most typically offered for employees who are laid off or retire. Severance pay was instituted to help protect the newly unemployed. Sometimes, they may be offered for people who resign, regardless of the circumstances; or are fired. Policies for severance packages are often found in a company's employee handbook, and in many countries are subject to strict government regulation. Severance contracts often stipulate that the employee will not sue the employer for wrongful dismissal or attempt to collect on unemployment benefits, and that if the employee does so, then they must return the severance money.
Severance pay is a guaranteed right for any employee whose employment is terminated after having completed at least 12 months of consecutive work.1 The minimum amount paid is equal to 5 days' wages plus 2 days' wages for every 12 months of work prior to being dismissed.1 One is not entitled to benefit from severance pay if they quit their job, were dismissed with just cause, did not return to work after being recalled from a layoff, or if they are entitled to a pension under a registered pension plan.1
Severance agreements are more than just a "thank you" payment from an employer. They could prevent an employee from working for a competitor and waive any right to possibly pursue a legal claim against the former employer. Also, an employee may be giving up the right to seek unemployment compensation. An employment attorney may be contacted to assist in the evaluation and review of a severance agreement.
In February of 2010, a ruling in the Western District of Michigan held that severance pay is not subject to FICA taxes.2
Employers are required to pay severance pay after an employee working in Puerto Rico is terminated.34 Employees are not permitted to waive this payment.5 Severance pay is not required if the employee was terminated with "just cause."4
Just cause is satisfied in any of the following situations: The employee had a pattern of improper or disorderly conduct; the employee worked inefficiently, belatedly, negligently, or at a level of poor quality; the employee repeatedly violated the employer's reasonable and written rules; the employer had a full, temporary, or partial closing of operations; the employer had technological or reorganization changes, changes in the nature of the product made, and changes in services rendered; or the employer reduce the number of employees due to an actual or expected decrease in production, sales, or profits.6
An employee with less than five years of employment with the employer must receive a severance payment equal to two months of salary plus an additional one week of salary for each year of employment. An employee with more than five years but less than fifteen years of employment must receive a severance payment equal to three months of salary plus an additional two weeks of salary for each year of employment. An employee with more than fifteen years of service must receive a severance payment equal to six months of salary plus an additional three weeks of salary for each year employment.7
- Judge Rules FICA Tax on Severance Pay is Improper | author=Thomas A. McKinney 
- Cheskin, Mark R.; Ramirez, Maria Eugenia (September 11, 2006). "Puerto Rico Labor Laws: Recent Amendments to Christmas Bonus Act and Law 80" (PDF). Hogan & Hartson, L.L.P.
- Puerto Rico Law 80. Sections 185a-185l.
- Puerto Rico Law 80. Section 185i.
- Puerto Rico Law 80. Section 185b.
- Puerto Rico Law 128.
- "Severance package" at jobsearchtech.about.com (USA specific)
- "Severance Agreement" at (USA specific)