Your Severance Package: What to Expect
Severance packages are basically payments made to people on termination of services. In some scenarios they may include payments for years of service, or other payments based on service. Severance packages vary considerably. Some are considered excellent, some are considered anything but generous.
- Most severance packages are defined by the employer in their terms of employment and HR policy guidelines.
- A "severance package" in any form, is an offer of specific additional entitlements to employees over and above preexisting wages and benefits entitlements.
- Terminations whereby an employee is fired with due cause usually don't include additional payments or grounds for negotiation.
Types of Severance Package
There are two basic forms of severance package, the most common being the "layoff" type, the sort paid during major layoffs in industries. The other form is the "settlement" type. The two types are very different, and apply to different conditions of employment.
The "Layoff" Severance Package
This type of package is offered to permanent salaried workforce members. This comparatively simple package is commonly used in downsizing and other major layoff scenarios. It's usually applied across the entire workforce, rather than individuals, and normally isn't negotiable.
A typical layoff severance package works on a common formula like this:
- An additional week's wages for every year of service for those with less than 5 years service.
- An additional two weeks wages for every year of service with those having over 5 years service
- Maximum number of weeks payable is 26, 6 months wages.
This means that if you have 10 years service, you'd get 20 weeks wages in your severance package.
Not all layoff severance packages are this generous, but this is the basic type of formula. You need to understand on what basis a severance package of this type is calculated, because expectations and reality can differ a lot.
These severance packages may or may not include provision for additional support for insurance, or other benefits.
The "Settlement" Severance Package
This is a totally different form of severance package. This type of severance package usually applies to professional individuals on contracts, rather than basic salaries.
Contractors have entitlements within their contracts which must be "discharged", meaning paid out, by the employer as part of their legally binding contractual obligations. There may or may not be termination clauses within a contract that adequately cover premature termination. (Types of contract can be very different, depending on the nature of the employment.) So the parties have to settle claims. Most employers in this situation choose to negotiate a settlement.
The issues in this form of severance package are:
- Anticipated earnings
- Contractual benefits
- Superannuation and 401k benefits
In this situation, the employer is obligated under the contract to provide agreed terms of employment to the contractor over the term of the contract. The termination situation means the contractor is entitled to claim their entitlements under the contract. This can often become a legal battle, but usually both parties prefer to negotiate to save time and money.
In these situations, the value of employee entitlements over the
remaining time of the contract are assessed by both sides, and used as
the basis of their negotiations.