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A severance package is pay and benefits employees receive when they leave employment at a company unwillfully. In addition to their remaining regular pay, it may include some of the following:

Packages are most typically offered for employees who are laid off or retire. 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, and in many countries, they are subject to strict government regulation. Severance contracts often stipulate that employees will not sue the employer for wrongful dismissal or attempt to collect on unemployment benefits, and that if they do so, they must return the severance money.


United StatesEdit

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 pursue a legal claim against the former employer. Also, an employee may be giving up the right to seek unemployment compensation. 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.[2]

Puerto RicoEdit

Employers are required to pay severance pay after an employee working in Puerto Rico is terminated.[3][4] Employees are not permitted to waive this payment.[5] Severance pay is not required if the employee was terminated with "just cause."[4]

Just cause is satisfied in any of the following situations: the employee had a pattern of improper or disorderly conduct; 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, or profits.[6]

An employee with less than five years of employment with the employer must receive a severance payment equal to two months of salary, plus an additional one week of salary for each year of 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.[7]


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.

For example, the amount of severance pay under the employment law is given in Ontario in Your guide to the Employment Standards Act's at Severance pay section [8] The amount of amount of severance pay under the employment law in Ontario may be calculated using the tool from Ontario Government. [9]

Common law provides above-minimal entitlements, in which factors such as age, skill level, job function, labour market conditions, a so forth. 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. Even if notice is limited to the employment contract, the wording must be precise in complying with employment law or it will be unenforceable. [10]

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. . [11]

United KingdomEdit

In the United Kingdom Labour Law provides for Redundancy Pay.[12] The maximum amount of statutory redundancy pay is £15,240.[13]


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. [14]

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.

See alsoEdit


  1. ^ Thibodeau, Patrick. "Displaced IT workers are being silenced".
  2. ^ "Application of Quality Stores Supreme Court Decision to Claims for Refund of Employment Taxes" (PDF).
  3. ^ Cheskin, Mark R.; Ramirez, Maria Eugenia (September 11, 2006). "Puerto Rico Labor Laws: Recent Amendments to Christmas Bonus Act and Law 80" (PDF). Hogan & Hartson, L.L.P.[permanent dead link]
  4. ^ a b Puerto Rico Law 80. Sections 185a-185l.
  5. ^ Puerto Rico Law 80. Section 185i.
  6. ^ Puerto Rico Law 80. Section 185b.
  7. ^ Puerto Rico Law 128.
  8. ^ "Severance pay".
  9. ^ "Severance Pay Calculator". Missing or empty |url= (help)
  10. ^ "Severance Pay: Reasonable Notice and Minimum Statutory Notice".
  11. ^ "Busting the myths about severance pay: There is no set formula but some key factors".
  12. ^ "Redundancy: your rights - GOV.UK".
  13. ^ "Redundancy: your rights". GOV.UK.
  14. ^ Labor Contract Law of the People’s Republic of China   This article incorporates text from this source, which is in the public domain.