Severance pay is an amount some employers pay to employees upon their termination. The usual reasons for severance pay include involuntary separation, such as job elimination, layoff or business closure. However, there are instances where employees who voluntarily resign receive severance packages. The amount of severance pay varies, depending on the company's financial condition, the employee's length of service to the organization and the purpose of the termination. For example, a severance package for job elimination might be slightly more generous than a severance package offered to employees when a business is closing due to financial struggles.
Early Retirement and Buyouts
Early retirement and buyouts are forms of voluntary resignation precipitated by an employer's announcement that separation or severance pay is available to employees who voluntarily resign. Many companies entice employees with early retirement packages or buyouts to reduce the size of their workforce and minimize continued high compensation costs. They offer certain employees the opportunity to voluntarily resign in exchange for a severance package, continuation of benefits and other monetary consideration. Some early retirement and buyouts are very lucrative; for some employees it could make sense to accept the package in lieu of working another three to five years. Additionally, some severance packages may be structured so they don't affect the employee's qualification for unemployment benefits.
Pre-Negotiated Severance Agreement
In some cases, the employer and employee reach a mutual agreement about severance pay at the beginning of the relationship. These agreements aren't uncommon, and they include terms and conditions that apply once the employee resigns. The agreement also may describe how the employer will calculate severance pay or what amount of severance pay is due when the employee voluntarily resigns. Well-publicized "golden parachutes" are examples of voluntary resignation severance payments to executives who receive generous payments upon their departure from the company.
Severance Pay Practices
There are no laws that require employers to provide severance pay, and there are few practices that provide for severance pay to be paid to employees who voluntarily resign. In certain cases, however, some employees may be entitled to severance pay when they leave the company voluntarily. Payments for voluntary resignation could result from an employer's request for volunteers, while others are part of an employment agreement negotiated before the employee started work.
Waivers of Claims
The U.S. Equal Employment Opportunity Commission strongly recommends that employers follow guidelines for ensuring their severance agreements inform employees of their rights. Most severance agreements require employees to waive the right to hold the employer liable for wrongful discharge. Long-term employees may be over 40 years of age, who are afforded protection under the federal Age Discrimination in Employment Act and the Older Workers Benefit Protection Act. The EEOC is particularly concerned that employers construct severance agreements with the ADEA and the OWBPA in mind.
Employees who are offered early retirement or buyouts should carefully consider the details and ramifications of receiving a lump sum payment and benefits in exchange for quitting their jobs. As many severance payments are tendered in a large check, the taxable amount can be significantly higher than the employee's paycheck. Incremental payments may reduce the sting of high tax rates. On the other hand, a Delaware court refused to order a bankrupt employer to pay the amounts it promised for benefits on behalf of an employee who took early retirement. The court in Aclin US Holding's bankruptcy matter concluded the employer's promise to pay for the employee's benefits weren't subject to federal rules governing employee retiree benefits; they were simply part of the employee termination. If your company ultimately closes or becomes insolvent, you risk losing future payments.
- U.S. Equal Employment Opportunity Commission; Understanding Waivers of Discrimination Claims in Employee Severance Agreements; July 2009
- Pillsbury Winthrop Shaw Pittman; "Client Alert"; Court Interprets "Retiree Benefits" Under Bankruptcy Law Without Reference to ERISA; Rick B. Antonoff, et al.; October 2009
- U.S. Department of Labor. "Severance Pay." Accessed Aug. 16, 2020.
- U.S. Department of Labor. "Wages and the Fair Labor Standards Act." Accessed Aug. 16, 2020.
- NBC News. "While Sears executives get $25 million in bonuses, laid-off workers struggle during Christmastime." Accessed Aug. 16, 2020.
- New York State Department of Labor. "Dismissal or Severance Pay and Your Unemployment Insurance Benefit." Accessed Aug. 16, 2020.
Ruth Mayhew has been writing since the mid-1980s, and she has been an HR subject matter expert since 1995. Her work appears in "The Multi-Generational Workforce in the Health Care Industry," and she has been cited in numerous publications, including journals and textbooks that focus on human resources management practices. She holds a Master of Arts in sociology from the University of Missouri-Kansas City. In addition, she is a certified facilitator for the Center for Creative Leadership Benchmarks 360 Assessment Suite, and is a Logical Operations Modern Classroom Certified Trainer . Ruth resides in North Carolina and works from her office in the nation's capital, Washington, D.C.