Severance Pay

Severance pay is authorized for full-time and part-time employees who are involuntarily separated from Federal service and who meet other conditions of eligibility.

severance pay is the compensation or benefit paid in the form of money by employer at the time of resignation on mutual agreement, retirement, laid off or employee leaving the company on any reason expect on dismissal by misconduct.Typically, severance pay amounts to a week or two of pay for every year that the employee was with the company. Executives may receive a month's pay for each year of service and senior executives generally receive severance pay as outlined in the employment contract. In addition to pay, severance packages can include extended benefits, such as health insurance and outplacement assistance to help the employee secure a new position.

Severance pay amounts may have peaked in 1999 when employers were giving laid off workers an average of twenty-four weeks of pay, according to a study by finance publisher Kiplinger. The study observed that the decline was a result of employees changing jobs more frequently than in previous years, since severance pay is based on the length of employment.

The Severance package may include the following:
  1. The employees remaining regular pay
  2. An additional payment based on months of service
  3. Payment for unused vacation or sick leave
  4. A payment in lieu of a required notice period
  5. Medical, dental or life insurance - Some employers offer a continuation of insurance benefits but they would not foot the paying of the bills
  6. Retirement benefits
  7. Stock options
  8. Unemployment benefits - Fired employees can claim unemployment benefits if they were fired for reasons other than serious misconduct.

2017:-The US-based Cognizant an IT firm in its performance reviews suggested that thousands of employees in the sector could be shown the door over the next few weeks.The company had rolled out a voluntary separation programme for directors, associate VPs and senior VPs, offering them 6-9 months of salary. The development came at a time when Indian IT firms have been facing challenges in the business environment and stricter work permit regime in countries like the US, Singapore, Australia and New Zealand.

Facts:Dell India has laid off around 70 people in the Dell software group (DSG) that was set up some nine months ago in Bengaluru. DSG, which has nearly 110 people in India spread across Bengaluru and Hyderabad, was expected to become a 400-500 people strong unit in Bengaluru, but the plans were drastically scaled back following Dell's $67 billion acquisition of EMC. It's not clear if the unit became redundant following the EMC acquisition or whether Dell's business priorities changed after that expensive acquisition.

The company offered a three month severance package to the affected employees. Company executives told the employees that the layoffs were due to a "strategic decision".
TNN | Mar 3, 2016, 02.45 AM IST


A severance package's worth varies from company to company, as well as from employee to employee. Employers may consider the following circumstances when determining how much severance to offer:
  • Pay level/salary received prior to termination
  • Duration of employment
  • Position at company
  • Performance
  • And other pertinent factors
It is important to remember that although you may feel like you deserve severance, employers are not required to provide one in the event of a layoff.

Facts [+]

May 2012 Google Inc acquired (buyout) Motorola Mobility for $12.5 billion, following this in August 2012 Google Inc cut 4000 jobs in the United States due to drop in its profits due to drop in sales and announced severance package costs about $275 million for the retrenched employees . Google stated that his decision was taken to minimise its costs and make business profitable in future.

Eligibility for Severance Pay

To be eligible for severance pay, an employee must be serving under a qualifying appointment, have a regularly scheduled tour of duty, have completed at least 12 months of continuous service, and be removed from Federal service by involuntary separation for reasons other than inefficiency (i.e., unacceptable performance or conduct).

Computation of Severance Pay Fund


An employee's severance pay fund may consist of two parts-the basic severance pay allowance and an age adjustment allowance, if applicable.
Basic severance pay allowance

The basic severance pay allowance consists of-
One week of pay at the rate of basic pay for the position held by the employee at the time of separation for each full year of creditable service through 10 years;
Two weeks of pay at the rate of basic pay for the position held by the employee at the time of separation for each full year of creditable service beyond 10 years; and
Twenty-five percent of the otherwise applicable amount for each full 3 months of creditable service beyond the final full year.

Age Adjustment Allowance

The basic severance pay allowance is augmented by an age adjustment allowance consisting of 2.5 percent of the basic severance pay allowance for each full 3 months of age over 40 years.

Thus, any severance pay you may have received in the past is taken into account when applying the limit. Severance payments will be equal to your weekly pay at the time of separation and will be paid out at regular pay period intervals (usually biweekly) until the severance pay is exhausted. The only deductions made from severance pay are taxes, social security (if applicable), and Medicare.

Facts [+]

Potential new-hires are increasingly negotiating severance packages and outplacement assistance as a condition for accepting job offers, according to a USA Today article. Executives are likely to negotiate these employment terms but the practice is spreading down through the ranks. Career experts agree that this form of negotiation was once considered bad form but is now generally accepted.


"There is no law which compel to pay severance pay"


There is no legal requirement in the U.S.A to provide severance pay to terminated employees. Many employers routinely give severance packages to employees in order to bridge the gap between one job and the next and to hedge themselves against lawsuits. On average, severance-paying organizations provide terminated employees between one and two weeks pay for each year of service.


Employers are not legally required to give severance pay to fired employees. However, they may do so only under two circumstances:

o Some states require employers to give a small severance pay when they close down a facility or laying off a large number of employees

o An employer is legally required to give severance pay if workers are led to believe they would be paid when they leave employment. This is evidenced by:
  • A written contract stating the severance would be paid
  • A promise that employees will receive severance pay
  • A history of the company giving severance pay to other employees in the same position
  • An oral promise to the employees that severance will be paid
Some employers routinely give severance packages to long-serving employees who were fired for reasons other than serious misconduct, as a way of softening the blows of being laid-off.


Employers with formal severance policies spend less on severance packages than those that do not, according to a study by Right Management Consultants Inc. Companies with informal policies tend to incur higher administrative and severance costs associated with the packages due to policy decisions that are made on a case-by-case basis, often resulting in more generous packages.


In INDIA there is a law which compel to pay gratuity to terminated employee.
Not in the name of severance pay, unlike United States and other countries, There are certain labour laws in India compel for payment of certain an amount for  retrenched or terminated employee from the employment by his employer. 

In India there is a law (Payment of Gratuity Act, 1972) for payment of an amount to an employee who is having minimum of five years of continuous service in concern organisation get terminated by his employer. According to section 4 of  Payment of Gratuity Act, 1972, the gratuity is to be calculated at the rate of 15 days salary last drawn by an concerned employee who is having minimum five years of continuous service in concern organisation. For this purpose, in the case of Lalappa Lingappa v. Laxmi Vishnu Textile Mills (All India Reporter 1981 Supreme Court 852), it was held that the interrupted service by reason of sickness, leave, Lay-off, strike, lockout or cessation of work not due to any fault of employee should not be regarded as a break in continuity of service.  Payment of gratuity is not applicable to employee who has been dismissed from the service for the reason of indiscipline or misconduct.

In the case of Babu Ram V. Phoenix Mills (1999 (1) labour law Journal 2 58), the court held that there was a service of petitioner has been terminated by dismissal, it cannot be said that he was in continuous service from the date of employment will the date of superannuation.

In INDIA there is a law which compel to pay retrenchment compensation to retrenched employee. 
In India there is a law ( Industrial Dispute Act, 1947 ) compels for payment of retrenchment compensation to retrenched employees .according to section 25F(b). The retrenchment compensation shall be 15 days of last drawn salary multiplied with number of years of service completed by an employee in the concerned organisation. Honorable Supreme Court of India held that retrenchment compensation is intended to give relief for sudden and unexpected elimination of employment.

The compensation to the employee has been eliminated retrenched but not dismissed, such employee he's having the right to claim  an amount in the form of compensation or gratuity under  above mentioned labour laws. This sort of compensation or gratuity may be treated as Severance Pay in India. In fact, many of the employees or not aware of these labour laws which gives them the right to  claim an amount for the retrenchment or termination but not dismissal due to misconduct or indiscipline.

Severance Package as Goodwill to Employees

Many companies offer severance package as a sign of goodwill to former employees. A good severance package says a great deal about the humanity of a business manager. It may be designed in such a way that the size and the financial capacity of a business company are also considered. The severance package need not be elaborate; it just has to be an honest gesture on the part of the employer.

Having a good severance package to offer a departing employee creates a lasting impression of understanding and goodwill.

A severance agreement is a contract, or legal agreement, between an employer and an employee that specifies the terms of an employment termination, such as a layoff. Sometimes this agreement is called a "separation" or "termination" agreement or "separation agreement general release and covenant not to sue." Like any contract, a severance agreement must be supported by "consideration." Consideration is something of value to which a person is not already entitled that is given in exchange for an agreement to do, or refrain from doing, something.

Severance contracts often stipulate that the employee will not sue the employer for wrongful dismissal or attempt to collect on unemployment benefits, and that if the employee does so, then they must return the severance money.

Severance agreements are more than just a "thank you" payment from an employer. They could prevent an employee from working for a competitor and waive any right to possibly pursue a legal claim against the former employer. Also, an employee may be giving up the right to seek unemployment compensation. It is important to review a severance agreement carefully and contact an employment attorney to assist with the review.

If you were promised a certain amount of severance by your former employer and you have not seen that money or have only seen a portion of it, your employer has violated a contract and you can sue for that money and breech of contract.

While severance is not the same as an actual wage-as you did not actually work for that sum of money-the fact that you entered into a contract stating that a certain amount of severance pay would be granted is enough to justify a lawsuit.