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A severance package is pay and benefits that 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 A vacation (American English American English (AmE, AE, AmEng, USEng, en-US), sometimes called United States English or U.S. English, is the set of variety (linguistics), varieties of the English language native to the United States. C ...
time,
holiday payIn some jurisdictions, holiday pay is an allowance which an employee earns through work in the calendar year prior to the year of the holiday. It is usually a percentage supplement to the salary that has been paid the year before the holiday pay is t ...
or
sick leave Sick leave (or paid sick days or sick pay) is paid time off Paid time off, planned time off, or personal time off (PTO), is a policy in some employee handbook An employee handbook, sometimes also known as an employee manual, staff handbook, or ...
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 Retirement is the withdrawal from one's position or occupation or from one's active working life. A person may also semi-retire by reducing work hours or workload. Many people choose to retire when they are old or incapable of doing their job d ...

Retirement
accounts (such as
401(k) In the United States, a 401(k) plan is an employer-sponsored defined contribution, defined-contribution pension account defined in subsection 401(k) of the Internal Revenue Code. Employee funding comes directly off their paycheck and may be matched ...
or
403(b) In the United States The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country Continental United States, primarily located in North America. It consists of 50 U.S. state, state ...
benefits) *
Stock options In finance, an option is a contract which conveys to its owner, the ''holder'', the right, but not the obligation, to buy or sell an underlying asset or financial instrument, instrument at a specified strike price on or before a specified expir ...
* Assistance in searching for new work, such as access to employment services or help in producing a
résumé A résumé, sometimes spelled resume, called a CV in English outside North America, is a document created and used by a person to present their background, skills, and accomplishments. Résumés can be used for a variety of reasons, but most oft ...

résumé
. Packages are most typically offered for employees who are
laid off A layoff or downsizing is the temporary suspension or permanent termination of employment of an employee or, more commonly, a group of employees (collective layoff) for business reasons, such as personnel management or downsizing (reducing the s ...
or
retire Retirement is the withdrawal from one's position or occupation or from one's active working life. A person may also semi-retire by reducing work hours or workload. Many people choose to retire when they are old or incapable of doing their job d ...
. 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 An employee handbook, sometimes also known as an employee manual, staff handbook, or company policy manual, is a book given to employees by an employer. The employee handbook can be used to bring together employment and job-related information wh ...
. Severance contracts often stipulate that employees will not sue the employer for
wrongful dismissal In law, wrongful dismissal, also called wrongful termination or wrongful discharge, is a situation in which an employee's contract of employmentAn employment contract or contract of employment is a kind of contract A contract is a legally bind ...
or attempt to collect on
unemployment benefits Unemployment benefits, also called unemployment insurance, unemployment payment, unemployment compensation, or simply unemployment, are payments made by authorized bodies to unemployed Unemployment, according to the OECD The Organisatio ...
, and that if they do so, they must return the severance money. Severance packages vary by country depending on
government regulation Regulation is the management of complex systems according to a set of rules and trends. In systems theory, these types of rules exist in various fields of biology and society, but the term has slightly different meanings according to context. For ...
.


United States

In the United States, there is no requirement in the
Fair Labor Standards Act The Fair Labor Standards Act of 1938 (FLSA) is a United States labor law that creates the right to a minimum wage, and "time-and-a-half" overtime pay when people work over forty hours a week. It also prohibits employment of Minor (law), mino ...
(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 Unemployment benefits, also called unemployment insurance, unemployment payment, unemployment compensation, or simply unemployment, are payments made by authorized bodies to unemployed people. In the United States, benefits are funded by a compul ...
. 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.


Puerto Rico

Employers are required to pay severance pay after an employee working in
Puerto Rico Puerto Rico (; abbreviated PR; tnq, Boriken, ''Borinquen''), officially the Commonwealth of Puerto Rico ( es, link=yes, Estado Libre Asociado de Puerto Rico, lit=Free Associated State of Puerto Rico) is a Caribbean island and Unincorporated ...

Puerto Rico
is terminated.Puerto Rico Law 80. Sections 185a-185l. 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 Disorderly conduct is a crime In ordinary language, a crime is an unlawful act punishable by a state or other authority. The term ''crime'' does not, in modern criminal law, have any simple and universally accepted definition,Farmer, Li ...
; 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 Sales are activities related to selling or the number of goods sold in a given targeted time period. The delivery of a service for a cost is also considered a sale. The seller, or the provider of the goods or services, completes a sale in ...

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 A salary is a form of periodic payment from an employer to an employee, which may be specified in an employment contract An employment contract or contract of employment is a kind of contract A contract is a legally binding agreement that def ...
, plus an additional one week of salary for each year of
employment Employment is the relationship between two parties Image:'Hip, Hip, Hurrah! Artist Festival at Skagen', by Peder Severin Krøyer (1888) Demisted with DXO PhotoLab Clearview; cropped away black border edge.jpg, 300px, ''Hip, Hip, Hurrah!'' ...

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.


Canada

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 In law, wrongful dismissal, also called wrongful termination or wrongful discharge, is a situation in which an employee's contract of employmentAn employment contract or contract of employment is a kind of contract A contract is a legally bind ...
".


Under common law

Common law provides above-minimal entitlements, using a well-recognized set of factors from Bardal v Globe and Mail Ltd. (the "Bardal Factors"). Bardal Factors include: * 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 In law, wrongful dismissal, also called wrongful termination or wrongful discharge, is a situation in which an employee's contract of employmentAn employment contract or contract of employment is a kind of contract A contract is a legally bind ...
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 Just cause is a common standard in United States labor law United States labor law sets the rights and duties for employees, Labor unions in the United States, labor unions, and employers in the United States. Labor law's basic aim is to remedy t ...
) 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 In law, wrongful dismissal, also called wrongful termination or wrongful discharge, is a situation in which an employee's contract of employmentAn employment contract or contract of employment is a kind of contract A contract is a legally bind ...
.


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 . Before starting a court case, there are other options, such as, negotiation,
mediation Mediation is a structured, interactive process where an impartial third party assists disputing parties in resolving conflict through the use of specialized communication and negotiation techniques. All participants in mediation are encourage ...

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.


United Kingdom

In the United Kingdom Labour Law provides for ''Redundancy Pay''. The maximum amount of statutory redundancy pay is £15,240.


Italy

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.


China

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.


Hong Kong

In Hong Kong, an employee employed under a continuous contract for not less than 24 months is eligible for severance payment if: * he is dismissed by reason of redundancy; * his fixed term employment contract expires without being renewed due to redundancy; or * he is laid off


See also

* Compromise agreement *
Golden handshakeA golden handshake is a clause In language, a clause is a part of the sentence that constitutes or comprises a predicate (grammar), predicate. A typical clause consists of a subject (grammar), subject and a predicate, the latter typically a verb p ...
*
Golden parachute A golden parachute is an agreement between a company and an employee (usually an upper executive) specifying that the employee will receive certain significant benefits if employment is terminated. These may include severance pay, cash bonuses, s ...
*
Layoff A layoff or downsizing is the temporary suspension or permanent termination of employment of an employee or, more commonly, a group of employees (collective layoff) for business reasons, such as personnel management or downsizing (reducing the ...
*
Voluntary redundancy Voluntary redundancy (VR) is a financial incentive offered by an organisation to encourage employees to voluntarily resign, typically in downsizing or restructuring situations. The purpose is to avoid compulsory redundancies or layoffs. Reasons A ...
*
Wrongful dismissal In law, wrongful dismissal, also called wrongful termination or wrongful discharge, is a situation in which an employee's contract of employmentAn employment contract or contract of employment is a kind of contract A contract is a legally bind ...
*
Unfair dismissal Unfair may refer to: * The negative form of the adjective ''fair A fair (archaic: faire or fayre) is a gathering of people for a variety of entertainment or commercial activities. It is normally of the essence of a fair that it is temporary w ...
*
Just cause Just cause is a common standard in United States labor law United States labor law sets the rights and duties for employees, Labor unions in the United States, labor unions, and employers in the United States. Labor law's basic aim is to remedy t ...
*
Unemployment benefits Unemployment benefits, also called unemployment insurance, unemployment payment, unemployment compensation, or simply unemployment, are payments made by authorized bodies to unemployed Unemployment, according to the OECD (Organisation for Ec ...


References

{{Authority control Termination of employment Employment compensation