Definition of Severance Pay

Severance pay is a form of compensation or benefit paid by the employer to the employee after the employment is over. This is a goodwill gesture by the employer to the employee to support him in the unemployment period. On a legal note, employers are not required to pay the severance pay unless the employee demands it.


Severance pay includes health insurance benefits, accrued vacations, or outplacement assistance to secure a new position in an organization.  Severance pay is offered when an employee loses his job due to downsizing or after retirement. Some employees who resigned or are fired from the organization also receive a severance package.

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