Severance Pay | Meaning and Definition

Severance pay meaning

It is the compensation or benefits given to an employee by an employer after being removed or terminated from the employment. Let us explore the meaning of severance pay with an example.

Consider an organization with 100 employees; the organization is now planning for a lay-off. The organization should notify those employees and have to proceed with a legal notice before 60 days of their termination. Suppose the organization failed to do this according to the Workers Adjustment & Training Notification Act (WARN Act). In that case, the company has to pay the severance pay legally for the employees who they are planning to lay off.

Why is severance pay needed? 

It is a form of courtesy an organization shows their employees to find a new job with the least amount of pay but without being on the job. This is not because the employees were terminated due to low performance but because of lay-offs or budget cuts etc.

Advantages of Severance pay

• The severance pay benefits both the employers and employees.
• It helps the employees to search for a new job with additional pay, even for a short period.
• The management has to decide whether to pay severance pay or not to the employees. Hence, it has to be paid as per the discretion of the management.
• It certainly helps in building goodwill for the organization in the industry. 
• It motivates the employees to search for new jobs with confidence.

The main disadvantage is that the severance pay is not mandatory, affecting the employees as they may suffer a financial crisis after being terminated.