What Is Severance Pay?

Severance pay refers to payments made by an employer when employees are laid off or accept voluntary early retirement. Usually, you won't receive severance pay if you quit or are fired for cause, but there are exceptions.

Types of Severance Pay

Most people think of severance pay as a check the company writes you, but it can take other forms. For example, US news notes that companies may be willing to extend your insurance coverage and provide assistance in finding a new job. Some employers may even pay for outside consultants to help you find a new job.

Check Your Contract

According to the U.S. Department of Labor, severance pay is not required by law. So, it's up to your employer to decide whether to give you severance pay when it lets you go from your job. However, if you negotiate severance pay into your employment contract when you're hired, the employer is required to pay it based on the terms of the agreement.

Amount of Severance Pay

The amount of severance pay you receive when you're let go is often calculated by a formula. The factors include how long you worked for the company, how high your position, what your salary was and how big the company is. Of course, if you have severance pay written into your employment contract, the contract will state precisely how to figure the amount. For example, a company might give you one week's salary for every year you've worked for the company.

Beware Giving Up Legal Rights

Sometimes a company will offer you severance pay in exchange for giving up legal rights, such as your right to sue the company for wrongful termination. Make sure you read the fine print of such an agreement before signing it, even if the money looks tempting. In addition, consider negotiating a higher severance pay amount.

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