Severance pay: an employer’s monetary gesture of goodwill to an employee separating from employment.

In times of layoffs and position elimination, this term has become more relevant to the modern workplace.  It’s a nice gesture to be able to provide severance pay to good employees leaving the business, even if it’s not a legal requirement.  (Be mindful, though, that severance policies might be written into certain employees’ contracts or in the employee handbook, which would create an obligation to pay severance.)

What does a typical severance package look like?  Usually, the higher the climb up the corporate ladder, the higher the severance package.  A severance package for a typical worker would be 1–2 weeks of pay per year of service.  At the executive level, severance may mean up to a month’s pay for each year of service.  An employment contract often imposes severance packages for the most senior positions.  In these cases, severance packages could go beyond additional pay to include extended benefits and outplacement services.

In some cases, a laid-off employee may try to negotiate a more favorable severance package.  If no precedent or written policies exist for severance packages, negotiations may be feasible.  Legally, however, an employee’s attempt to negotiate constitutes rejection of the severance package and entitles the employer to withdraw the offer altogether.  While that seems tempting, it may be best to tell the employee up front that the offer is nonnegotiable, especially if you are laying off other employees and want them to sign release of claims forms.

A release of claim form prevents the laid-off employee from bringing suit against the business in the future, and a severance package is the incentive to sign that form.  Obtaining this form is important; last thing any business needs after downsizing is a torrent of lawsuits!  Also be sure to get a separate release from workers over age 40 to prevent age discrimination suits.  Pay careful attention to any legal deadlines regarding extending and accepting these offers.

In this tumultuous economy, offering severance packages to laid-off employees is a goodwill gesture that acknowledges their dedicated service.  A severance package can also help calm angry, departing employees and can help save the business from legal troubles.  At the end of the day, the decision to offer a severance package is at the employer’s discretion, but a short-term payout may be well worth the long-term benefits of an act of kindness.