Severance Pay

What Is Severance Pay?

Severance pay is defined as the payment and benefits an employer grants an employee after their employment contract ends. Unlike earned wages, severance pay is awarded in specific instances when an employee leaves the company due to factors beyond their control, such as restructuring or layoffs.

Partial payment during this time helps ease the burden while the employee searches for new jobs. While there are no laws governing severance pay in most regions, including India, where only retrenchment compensation is provided under the Industrial Disputes Act of 1947, it is often set out in company policies, contracts, or executive negotiations.

Why Do Employers Offer Severance Pay?

Employers may decide to provide severance packages to their employees for numerous ethical and strategic business reasons.

Reducing Legal Concerns

Severance pay is often used by companies to get employees to agree not to sue them by signing a legal release form. Offering severance in this manner reduces the chances of lawsuits resulting from wrongful termination and other legal disputes, making it beneficial for both parties.

Maintaining Employee Morale and Employer Brand

Being empathetic when letting employees go, particularly during large-scale firings, can help maintain the morale of remaining employees and protect the organisation's reputation as a fair and responsible employer.

This matters when trying to attract talent in the future and impacts overall employer branding.

Encouraging Smooth Transitions

Severance payment can motivate departing employees to assist in the smooth transition of their duties, including the transfer of pertinent information, thus aiding the business in maintaining continuity.

Fulfilling Contractual Obligations

In certain situations, the payment of severance pay is clearly stated in the employment contract, especially for senior executives, as part of the terms of ending the employment relationship.

Ethical Considerations

Many companies see the provision of severance pay as an ethical responsibility, recognising the job loss’s impact, and offering assistance during a difficult time in their lives.

How Is Severance Pay Calculated?

Severance payment is one of those areas that have not been deeply researched, so it is open to variation since it is determined by several conditions:

Company Policy

Most businesses have some set policies that are based on an employee’s length of service with the company, e.g., an employee is entitled to one or two weeks' pay for every year worked.

Employment Contract

Specific clauses that are contained in a person’s employment contract.

Level of Position Held and Compensation

Positions with greater responsibilities or higher ranks may have more favourable terms.

Negotiation

For some employees, especially critical asset employees, the severance figure may differ based on discussions with the employer.

Statutory Requirements

In India, the Industrial Disputes Act of 1947 has set out certain boundaries which provide for retrenchment compensation for some classes of workers, including 15 days' average pay for each completed year of service for those with uninterrupted service for five years.

What Does a Typical Severance Package Include?

In addition to the direct payment, a full package may include:

Continuation of Health Benefits

Covers certain health benefits for a defined period after employment termination.

Outplacement Services

Helps with resumes, job searches, and interviews, and provides other professional services to assist in gaining new employment.

Accrued Unused Leave Pay

Payment for unpaid accrued leave, including vacation and sick leave.

Benefits of Employee Assistance Programs (EAPs)

Employers may provide their employees with access to EAPs, which can include counselling and other support services provided continuously during the period of pay.

Human Resource managers have legal requirements and corporate policies that must be followed when discussing severance agreements with departing employees. It is essential that all processes remain compliant with the organisation’s rules while extending decency and dignity to existing employees.