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Severance Pay: Answers to the 4 Most Common Questions

There are common questions about severance pay, as represented by a magnifying glass highlighting a severance agreement.

Having an established policy regarding severance is a best practice for any company—not only to make the difficult process of layoffs easier, but also to protect the company from potential legal action. But what should you consider when creating your policy and administering severance packages? Read our answers to the four most common questions about severance pay.

What is typical severance pay?

Generally speaking, companies will provide one to four weeks of pay per year of service, which may vary depending on seniority. Entry-level employees may receive payment on the lower end of the spectrum, while executives receive more weeks per year of employment.

Employees have the right to review and consider their severance agreement before signing it, and may ask to negotiate. If what your company is offering does not follow precedence, or you are letting an employee go without cause, that employee will have more room for negotiation. 

What is included in a severance package?

In addition to the pay calculated discussed previously, Business News Daily reports that severance pay may also take into account bonuses, unused sick and vacation time, other benefits, and policies specific to your organization. Having this information detailed in your policy is important and will increase the likelihood that your terminated employee accepts and signs the severance agreement rather than pursuing further negotiations or legal action.

What states require severance pay?

While there are few laws dedicated to severance pay, requirements vary by state. For example, in January 2020, New Jersey became the first state to make severance pay mandatory during mass layoffs, as reported by HR Dive. Because laws can change, check to see what the current laws are regarding severance in your state.

Why should a company provide severance pay?

Most companies care about the welfare of their employees, both while they are employed and when they are departing, especially as a result of layoffs. But while offering severance may be a moral factor in your policy, it’s also good practice for your employer brand

Including severance as a part of your company policy can also protect you from lawsuits, and enforce NDA agreements, reports Business.com. In addition, rounding out your benefits package with a severance offering can help your recruitment efforts (as an incentivized layer of protection to the employee) and can build your employer brand reputation, as departing employees may post about their experiences on sites like Glassdoor, whether good or bad.  

Remember, severance pay is just one part of a severance agreement

Once you have reviewed and factored in the considerations above, make sure you examine the other pieces that go into administering a severance agreement, such as when it should be provided, and whether additional benefits–such as outplacement services or extended health coverage–should be included. For more information, read Intoo’s Complete Guide to Severance Packages.