A severance package is pay and benefits employees may be entitled to receive when they leave employment at a company unwillfully. In addition to their remaining regular pay, it may include some of the following:
- Any additional payment based on months of service
- Payment for unused accrued PTO vacation time, holiday pay or sick leave unless the employee is picked up by the new buyer wherein all benefits become the responsibility of the new employer.
- A payment in lieu of a required notice period.
- Retirement accounts (such as 401(k)) or 403(b) benefits
- Stock options
- Assistance in searching for new work, such as access to employment services or help in producing a résumé.
Packages are most typically offered for employees who are laid off or retire. Severance pay was instituted to help protect the newly unemployed. Sometimes, they may be offered for those who either resign, regardless of the circumstances, or are fired. Policies for severance packages are often found in a company's employee handbook. Severance contracts often stipulate that employees will not sue the employer for wrongful dismissal or attempt to collect on unemployment benefits, and that if they do so, they must return the severance money.
Severance packages vary by country depending on government regulation.
In the United States, there is no requirement in the Fair Labor Standards Act (FLSA) for severance pay. Instead it is a matter of agreement between employers and employees.
Severance agreements, among other things, could prevent an employee from working for a competitor and waive any right to pursue a legal claim against the former employer. Also, an employee may be giving up the right to seek unemployment compensation. An employment attorney may be contacted to assist in the evaluation and review of a severance agreement. The payments in some cases will continue only until the former employee has found another job.
In February 2010, a ruling in the Western District of Michigan held that severance pay is not subject to FICA taxes, but it was overturned by the Supreme Court in March 2014.
Employers are required to pay severance pay after an employee working in Puerto Rico is terminated. Employees are not permitted to waive this payment. Severance pay is not required if the employee was terminated with "just cause."
Just cause is satisfied in any of the following situations: the employee had a pattern of improper or disorderly conduct; the employee worked inefficiently, belatedly, negligently, poorly; the employee repeatedly violated the employer's reasonable and written rules; the employer had a full, temporary, or partial closing of operations; the employer had technological or reorganization changes, changes in the nature of the product made, and changes in services rendered; or the employer reduced the number of employees because of an actual or expected decrease in production, sales, or profits.
An employee with less than five years of employment with the employer must receive a severance payment equal to two months of salary, plus an additional one week of salary for each year of employment. An employee with more than five years but less than fifteen years of employment must receive a severance payment equal to three months of salary, plus an additional two weeks of salary for each year of employment. An employee with more than fifteen years of service must receive a severance payment equal to six months of salary, plus an additional three weeks of salary for each year of employment.
Severance agreements are also more than just a "thank you" payment from an employer in Canada. The amount of severance pay an employee is owed when dismissed without misconduct varies between common law (judge-made law) and employment law.
Under employment law
In Ontario, the amount of severance pay under the employment law is given in Ontario by Employment Standards Act (ESA), which is also explained in 'Your Guide to the Employment Standards Act's Severance Pay Section'. The amount of severance pay under the employment law in Ontario may be calculated using the tool from Ontario Government. It is stated in ESA's Guide Wrongful dismissal section: "The rules under the ESA about termination and severance of employment are minimum requirements. Some employees may have rights under the common law that are greater than the rights to notice of termination (or termination pay) and severance pay under the ESA. An employee may want to sue their former employer in court for wrongful dismissal".
Under common law
- the length of service of the servant,
- the age of the servant,
- the character of the employment (more senior, longer time needed to reach the similar seniority, job function)
- the availability of similar employment, having regard to the experience, training and qualifications of the servant (the likelihood of getting a similar job in the future).
There is a severance pay calculator based on common law "Bardal Factors" that predicts the amount of severance pay owed as determined by the court. The goal is to provide enough notice or pay in lieu for the employee to find comparable employment. Unlike statutory minimum notice, the courts will award much more than 8 weeks if warranted by the circumstances, with over 24 months' worth of pay in damages possible. Other factors considered may include:
- Inducement: If you were convinced to leave a previous job for one which quickly let you go, you may be able to get extra compensation, especially if your previous position was very stable and you were not looking for a new job.
- Bad faith: If you were fired in a particularly cruel manner, harassed or lied to by your employer, extra compensation may be required. Also see Wallace v United Grain Growers Ltd.
- Duty to mitigate: You must show that you are actively looking for another job.
- Wilful misconduct by the employee: This is more than simply not doing a good job, but involves being deliberately and recklessly negligent or disobedient.
The biggest factor in determining severance is re-employability. If someone is in a field or market where they will have great difficulty finding work, the court will provide more severance. The reason being that the primary purpose of severance is to provide the wrongfully dismissed employee the opportunity to secure other employment within the period provided. (See also Canada section in wrongful dismissal for related litigation cases in Canada.)
Dismissal with cause and termination without cause
In Canadian common law, there is a basic distinction as to dismissals. There are two basic types of dismissals, or terminations: dismissal with cause (just cause) and termination without cause. An example of cause would be an employee's behavior which constitutes a fundamental breach of the terms of the employment contract. Where cause exists, the employer can dismiss the employee without providing any notice. If no cause exists yet the employer dismisses without providing lawful notice, then the dismissal is a wrongful dismissal.
Litigation for wrongful dismissal
There is a time limit of two years from the date of termination for suing the employer in Ontario. This litigation follows civil procedure in Ontario. Before starting a court case, there are other options, such as, negotiation, mediation, and arbitration.
Typically in a civil lawsuit, in 2019, it can cost $1,500–$5,000 to initiate an action and have a lawyer deliver a Statement of Claim. Responding to the opposing side's documents and conducting examinations for discovery will likely involve another $3,500–$5,000. The preparation and presentation of your case at trial is likely to add another $5,000—$15,000 to your legal costs. These legal expense is income tax deductible.
There are free Legal information and referral services offered on a confidential basis funded from government (The Access to Justice Fund) for all areas of law in major cities, such as, Ottawa Legal Information Centre.
In Italy, severance pay (TFR) is provided in all cases of termination of the employment relationship, for whatever reason: individual and collective dismissal, resignation, etc. The law recognizes subordinate workers the right to receive severance pay, pursuant to article 2120 of the civil code.
The severance payment in China shall be based on the number of years the employee has worked for the employer at the rate of one month salary for each full year worked. Any period of no less than six months but less than one year shall be counted as one year. The severance payment payable to an employee for any period of less than six months shall be one half of his/her monthly salary.
If the monthly salary of an employee is higher than 3 times local average monthly salary where the employer is located, the rate for the severance payment to be paid shall be 3 times local average monthly salary and shall be for no more than 12 years.
Where any employee obtains lump-sum compensation income (including economic compensation, living allowances and other subsidies granted by an employer) from the employer's termination of labor relationship with him/her, the part of the income which is no more than three times the average wage amount of employees in the local area in the previous year shall be exempt from individual income tax.
The fraction of the compensation that exceeds 3 times the local annual average salary shall be taxed as individual income tax as follows: For those employees receiving a lump sum compensation, the lump sum can be considered as receiving monthly salaries in one time, and shall be allocated to a certain period in average amount. This average amount will be calculated dividing the lump sum by the service years with the current employer, and will be taxed as monthly salaries. For the number of service years with the current employer, the actual number of years should be considered. If the number of years is more than 12, only 12 will be considered.
- Compromise agreement
- Golden handshake
- Golden parachute
- Voluntary redundancy
- Wrongful dismissal
- Unfair dismissal
- Just cause
- Unemployment benefits
- Thibodeau, Patrick. "Displaced IT workers are being silenced".
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- Cheskin, Mark R.; Ramirez, Maria Eugenia (September 11, 2006). "Puerto Rico Labor Laws: Recent Amendments to Christmas Bonus Act and Law 80" (PDF). Hogan & Hartson, L.L.P.[permanent dead link]
- Puerto Rico Law 80. Sections 185a-185l.
- Puerto Rico Law 80. Section 185i.
- Puerto Rico Law 80. Section 185b.
- Puerto Rico Law 128.
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- "Your guide to the Employment Standards Act, Severance pay".
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- "Your guide to the Employment Standards Act, Wrongful dismissal".
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- "Judging Reasonable Notice".
- "Ontario and BC Severance Pay Calculator".
- "Bad faith damages in wrongful dismissal cases: Post-Wallace jurisprudence" (PDF).
- "Busting the myths about severance pay: There is no set formula but some key factors".
- "Severance Pay in Canada".
- "Manitoba Employment Standards> Just Cause".
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- "Things to consider before deciding whether to sue".
- "Costs of bringing a lawsuit".
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- "The Access to Justice Fund".
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- "Redundancy: your rights". GOV.UK.
- "Disciplina del trattamento di fine rapporto". Italian Government.
- Labor Contract Law of the People’s Republic of China This article incorporates text from this source, which is in the public domain.