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Severance Pay

Severance Pay

Definition

A sum of money that is paid to an employee at the time the employee is terminated or laid off. Employers are not legally required to make severance payments to a terminated employee. There are two exceptions to this rule. The first exception is when a terminated employee has an employment contract in place stating that the employee shall receive severance pay. (Such contracts typically specify the conditions under which severance will be paid, as well as the amount to be received or the formula upon which the amount of severance pay will be computed.) The second exception is when a severance plan is specifically provided for within a company's human resources (HR) policies. One motivation for offering severance pay is as legal consideration for the employee's agreement not to sue an employer. Therefore, when an employer offers a severance payment, that offer should be contingent upon the employee signing an agreement waiving his or her right to sue the employer for wrongful termination and/or discrimination as a consequence of being laid off. If the employee refuses to sign such an agreement or, if after signing it, decides to rescind the agreement, the employer should not provide any severance payment.

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