Severance Pay Definition and Legal Meaning

On this page, you'll find the legal definition and meaning of Severance Pay, written in plain English, along with examples of how it is used.

What is Severance Pay?

The wages received by an employee for a specified period of time after being laid off from a job.

History and Meaning of Severance Pay

Severance pay has its origins in industrialization, and emerged in the United States as a contractual agreement between labor unions and employers. Its purpose was to provide financial assistance to workers who were being laid off or whose jobs were being permanently eliminated. The goal was to soften the financial shock of sudden unemployment and provide workers with the opportunity to adjust to their new financial circumstances.

In the US, there is no federal law requiring employers to provide severance pay. Instead, it is usually provided through a written agreement or policy implemented by the employer. The amount of severance pay offered can vary, depending on factors such as job level, length of employment, and reason for termination.

Examples of Severance Pay

  1. After working at the company for 10 years, Maria was laid off and received 2 months' of severance pay.
  2. As part of their CEO's retirement agreement, the company paid out $1 million in severance pay.
  3. The union negotiated a severance package for the factory workers, providing compensation for up to 6 months if they were laid off.

Legal Terms Similar to Severance Pay

  1. WARN Act - The Worker Adjustment and Retraining Notification Act, which requires certain employers to provide advance notice of layoffs.
  2. Unemployment benefits - Government-provided financial assistance for workers who are laid off or unemployed due to no fault of their own.
  3. Separation agreement - A legal agreement between an employer and employee that outlines the terms of separation, which may include severance pay.