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Why do employers offer severance packages and what do they include?

Some employers choose to offer severance pay to employees who are terminated, either involuntarily or voluntarily. The primary reasons for offering a severance package are to soften the blow of an involuntary termination and to avoid future lawsuits by having the employee sign a release in exchange for the severance.

Common benefits in severance packages include:

  • Salary continuation—usually an amount based on years of service or position.
  • Insurance benefits—Although an organization's insurance plan may not allow a terminated employee to remain on the group health plan, COBRA benefits may apply, and the employer may pay the COBRA premium (or a portion thereof) for a specified period of time.
  • Uncontested unemployment benefits—an employer may agree not to challenge an exiting employee's application for unemployment benefits.
  • Outplacement services—assistance with finding a new job or time-off flexibility to apply or interview for new jobs.
  • References—an agreement on what information will be disclosed to future employers. Be sure to obtain legal advice before agreeing to omit information if there is a chance that the employer may, in the future, be held liable for that omission.
  • Miscellaneous—other factors that may be relevant to the individual employee's situation, such as loan forgiveness or transfer of an employer cell phone to the employee.

The majority of employers offer a standard one or two weeks of pay for every year of service.

When offering severance in exchange for a waiver from the employee, be aware that no enforceable waiver of statutory claims may exist under a few laws, such as the Fair Labor Standards Act (FLSA), in a private settlement between an employer and employee. In addition, the Older Workers Benefit Protection Act has strict guidelines for waivers and only allows an employee to waive his or her Age Discrimination in Employment Act rights if the waiver is "knowing and voluntary." Employers are encouraged to seek legal advice when drafting and requiring waivers for exiting employees. Additionally, some states have severance pay laws. 


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