Yusra3
VIP Contributor
Severance pay is compensation that an employer provides to an employee who is laid off or whose job is eliminated. The purpose of severance pay is to provide the employee with financial assistance and time to find new employment.
How Severance Pay Works
Severance packages are usually based on position seniority and length of employment. Typical severance pay equals 1-2 weeks of salary for every year worked. For example, an employee who worked at a company for 5 years and earned $50,000 annually would receive 10-20 weeks of pay, or $10,000-$20,000 in severance.
Some companies have standard severance policies outlined in an employee handbook. Other companies negotiate severance on a case-by-case basis. Severance may be provided in a lump sum or in installments paid out over time after the job ends.
Severance pay is taxable income for the former employee. Companies also pay payroll taxes on severance. Employees can choose to have taxes withheld from severance pay.
Severance Agreements
In some cases, receiving severance pay requires signing a severance or release agreement. This legally waives an employee's ability to sue the company for wrongful termination or discrimination. Agreements may also include non-compete and non-disclosure clauses. Refusing to sign an agreement means forfeiting severance pay.
Exemptions from Severance
Severance pay is uncommon for temporary, contract, and union workers. High-level executives usually have severance provisions included in their contracts. Employees fired for cause also do not qualify for severance.
While losing a job is difficult, severance pay helps cushion the financial blow. The extra weeks or months of income provide workers time to find a new position without tapping into emergency savings. With wise budgeting, severance pay can help maintain lifestyle and wellbeing between jobs.
How Severance Pay Works
Severance packages are usually based on position seniority and length of employment. Typical severance pay equals 1-2 weeks of salary for every year worked. For example, an employee who worked at a company for 5 years and earned $50,000 annually would receive 10-20 weeks of pay, or $10,000-$20,000 in severance.
Some companies have standard severance policies outlined in an employee handbook. Other companies negotiate severance on a case-by-case basis. Severance may be provided in a lump sum or in installments paid out over time after the job ends.
Severance pay is taxable income for the former employee. Companies also pay payroll taxes on severance. Employees can choose to have taxes withheld from severance pay.
Severance Agreements
In some cases, receiving severance pay requires signing a severance or release agreement. This legally waives an employee's ability to sue the company for wrongful termination or discrimination. Agreements may also include non-compete and non-disclosure clauses. Refusing to sign an agreement means forfeiting severance pay.
Exemptions from Severance
Severance pay is uncommon for temporary, contract, and union workers. High-level executives usually have severance provisions included in their contracts. Employees fired for cause also do not qualify for severance.
While losing a job is difficult, severance pay helps cushion the financial blow. The extra weeks or months of income provide workers time to find a new position without tapping into emergency savings. With wise budgeting, severance pay can help maintain lifestyle and wellbeing between jobs.
