Legal Definitions - separation pay

Separation pay, also commonly known as severance pay, is a payment made by an employer to an employee upon the termination of their employment. This payment is typically in addition to any accrued wages, vacation pay, or other benefits the employee is already entitled to receive.

It is often provided in specific circumstances, such as layoffs, company restructuring, or when an employee is terminated without cause. Employers may offer separation pay in exchange for an employee signing a release of claims, agreeing not to sue the company. The amount and conditions of separation pay are usually determined by company policy, individual employment contracts, or collective bargaining agreements.

• Example 1: Corporate Downsizing

  A large technology company announces a significant reduction in its workforce due to a shift in market strategy. Hundreds of employees across various departments are informed that their positions are being eliminated. As part of the layoff package, the company offers each affected employee one month of salary for every two years of service, along with extended health benefits for a period. This financial package is separation pay because it is a payment provided by the employer to employees specifically due to the involuntary termination of their employment, beyond their final regular paycheck and any accrued vacation time.

• Example 2: Executive Contractual Agreement

  Maria, a Chief Financial Officer, has an employment contract that includes a clause stating that if her employment is terminated by the board of directors without "good cause" (e.g., not for misconduct or poor performance), she will receive a lump sum payment equal to 12 months of her base salary. When the company is acquired, the new ownership decides to bring in their own CFO and terminates Maria's employment without cause. The 12 months of salary she receives is separation pay, as it is a contractual payment triggered by the involuntary termination of her employment under specific conditions, compensating her for the loss of her position.

• Example 3: Voluntary Early Retirement Program

  A government agency, seeking to reduce its operational budget, offers a voluntary early retirement incentive program to employees who are within five years of full retirement eligibility. Employees who choose to participate receive a one-time payment calculated based on their age and years of service, in exchange for their agreement to retire early. David, a long-serving administrator, opts into this program and receives a substantial financial incentive. This payment is separation pay because it is a financial benefit provided by the employer to an employee who is voluntarily ending their employment, facilitating a planned reduction in staff.