Understanding severance pay when you resign: what managers need to know

What is severance pay and how does it usually work

Defining Severance Pay in Employment Contexts

Severance pay is a financial benefit that an employer may offer to employees when their job ends, typically due to termination, layoff, or sometimes resignation. The main goal is to provide a financial cushion during the transition period after employment ends. Severance packages can include not just monetary payments, but also continued health insurance, outplacement services, and other benefits. The structure and amount of severance pay often depend on factors such as years of service, job level (for example, executive roles may receive more generous packages), and the company's policies.

How Severance is Typically Calculated and Offered

There is no universal formula for severance payments. Many companies calculate severance based on the employee’s length of service, offering a set amount per year worked. For example, a company might offer one or two weeks of pay for each year of service. Severance can be paid as a lump sum or in installments. The terms are usually outlined in the employment agreement or company policy. In some cases, especially for executives, severance packages may be negotiated at the time of appointment or during exit discussions.

• Severance pay is not required by federal law in many countries, but some local or state laws may impose requirements.
• Employers may offer severance to terminated employees as part of a standard policy or on a case-by-case basis.
• Written notice of termination and severance benefits may be required under employment law or contract terms.

Severance is different from regular wages or notice pay. It is a separate benefit designed to support employees after their employment ends. For managers, understanding the difference between severance and other forms of pay is crucial when handling employee departures. If you’re interested in workplace best practices, you might also find this resource on addressing foul language in the workplace helpful for maintaining a professional environment.

Severance packages can be influenced by company culture, industry standards, and legal considerations. In some cases, offering severance can help protect the company from potential claims of wrongful termination or disputes. The specifics of who is entitled to severance, and under what circumstances, will be explored further in the following sections, including how resignation impacts eligibility and what legal factors managers should consider.

Do you get severance if you resign: the general rule

Severance Pay When an Employee Resigns: The Standard Practice

In most cases, severance pay is not automatically offered when an employee resigns from their job. Severance packages are typically associated with situations where the employer initiates the termination, such as layoffs or organizational restructuring. When an employee chooses to leave on their own, the company is generally not required by law to provide severance payments or benefits.

This standard applies across many industries and is reflected in both federal law and common employment practices. Severance pay is usually seen as a gesture to support terminated employees as they transition out of the company, not as a benefit for those who voluntarily resign. Unless there is a specific employment agreement, company policy, or executive contract that states otherwise, resigning employees are not entitled to severance packages or lump sum payments.

• Severance is more common in cases of job elimination or wrongful termination, not voluntary resignation.
• Employers are not legally obligated to pay severance to employees who resign, unless stipulated in a contract or policy.
• Written notice of resignation does not usually trigger severance benefits.

However, there are exceptions and special cases where a company may offer severance even after a resignation, which will be discussed further in the next section. It’s also important for managers to be aware of how company policies, years of service, and employment agreements can influence severance eligibility. For more on maintaining a respectful workplace during transitions, see this memo to all employees about workplace conduct.

Exceptions and special cases in severance eligibility

When Resignation Doesn’t Mean No Severance

While the general rule is that employees who resign are not entitled to severance pay, there are notable exceptions. Understanding these can help managers navigate complex situations and avoid legal pitfalls. Here are some scenarios where severance packages may still be offered, even after a resignation:

• Mutual Agreements: Sometimes, an employer and employee may mutually agree to end the employment relationship. In these cases, a severance package can be part of the agreement, especially for executives or long-term employees. This is often documented in a written notice or employment agreement.
• Constructive Dismissal: If an employee resigns due to significant negative changes in job conditions—such as a drastic pay cut, demotion, or hostile work environment—this could be considered constructive dismissal. Employment law in many regions treats this as a form of wrongful termination, making the employee eligible for severance payments. Consulting an employment attorney is advisable in such cases.
• Company Policy or Precedent: Some companies have policies that offer severance benefits to employees who resign under certain circumstances, such as after a set number of years of service or during organizational restructuring. Always review the company’s written policies and past practices.
• Executive Contracts: Executives and senior managers often have employment agreements that specify severance pay upon resignation, especially if the resignation follows a change in company ownership or a significant shift in job responsibilities.
• Legal Settlements: In some cases, severance packages are negotiated as part of a legal settlement to resolve disputes about the end of employment. This can include lump sum payments, continued health insurance, or other severance benefits.

It’s important for managers to recognize these exceptions and understand how federal law, state law, and company policy interact. Failing to offer severance when required can lead to costly legal disputes or claims of wrongful termination. For a deeper look at eligibility nuances, including recent legal developments, you can read more in this guide to eligibility for severance in settlements.

Managers should always document the circumstances of a resignation and review all relevant employment agreements before making decisions about severance packages. When in doubt, seeking advice from an employment attorney can help ensure compliance with employment law and protect both the company and its employees.

Legal considerations for managers handling resignations

Key legal obligations for managers during resignations

When an employee resigns, managers must navigate a range of legal considerations related to severance pay and employment law. Unlike terminations, where severance packages are sometimes required, resignation situations are less clear-cut. However, legal risks can still arise if company policies, employment agreements, or federal law are not properly followed.

Compliance with employment law and contracts

• Review employment agreements: Always check if the employee’s contract or executive appointment letter includes provisions for severance payments upon resignation. Some agreements, especially for executives or long-serving employees, may specify severance benefits even if the employee resigns.
• Follow company policy: Company handbooks or written policies may outline when severance pay is offered, how it is calculated (lump sum or installments), and eligibility criteria. Failing to adhere to these policies can expose the employer to legal claims.
• Observe notice requirements: In some jurisdictions, employees must give a certain amount of written notice before resigning to be eligible for any severance package. Managers should ensure both parties meet these notice periods to avoid disputes.

Risks of wrongful termination claims

Even when an employee resigns, there is a risk they may later claim constructive dismissal or wrongful termination if they felt forced to leave due to workplace conditions. In such cases, the employer may be required to pay severance or offer additional benefits. Consulting with an employment attorney can help assess the risk and determine the best course of action.

Documenting the resignation process

• Keep detailed records: Document all communications regarding the resignation, including the employee’s notice, any severance offer, and the final agreement. This protects the company in case of future disputes.
• Confirm final payments: Ensure all owed pay, accrued vacation, and any agreed severance payments are processed according to law and company policy. This includes health insurance continuation or other benefits as required by federal law.

When to seek legal advice

If there is uncertainty about whether to pay severance or how to structure a severance package, especially for executives or long-term employees, it is wise to consult an employment attorney. Legal counsel can help interpret employment law, review agreements, and minimize the risk of costly litigation.

How company policies and contracts influence severance

How Internal Policies and Contracts Shape Severance Outcomes

When it comes to severance pay, company policies and employment agreements play a major role in determining what an employee or executive may receive after resignation. While employment law sets the minimum standards, many organizations go beyond these requirements, especially for long-serving employees or those in senior positions.

• Company Policies: Many employers have written policies outlining severance packages for terminated employees. However, these policies may not always apply to resignations. Some companies offer severance as a goodwill gesture, while others reserve it for specific situations, such as restructuring or mutual agreements.
• Employment Agreements: Executives and key employees often have contracts that specify severance benefits, even in cases of resignation. These agreements may include conditions like a required notice period, years of service, or a non-compete clause. Always review the employment agreement to understand what severance pay or benefits may be available.
• Severance Packages: The details of a severance package can vary widely. It may include a lump sum payment, continued health insurance, or other benefits. The terms are usually set out in writing, either in a company handbook or an individual contract.

Managers should ensure that any severance offer or severance payments made during a resignation comply with both company policy and employment law. It’s also important to provide clear written notice to employees about what they are entitled to receive, if anything, upon leaving the job. Consulting with an employment attorney can help clarify obligations and avoid potential claims of wrongful termination or disputes over severance benefits.

Ultimately, the combination of federal law, company policy, and individual contracts will determine whether an employee is entitled to severance, how much they may receive, and what benefits are included. Always check the most current documents and seek legal advice when in doubt.

Negotiating severance during resignation: practical tips

Approaching Severance Negotiations When Resigning

Negotiating severance pay during a resignation can be challenging, especially since most companies do not automatically offer severance packages to employees who voluntarily leave. However, there are situations where it is possible to secure severance benefits, particularly for executives or employees with long years of service. Here are some practical tips for managers and employees navigating this process:

• Review your employment agreement: Before starting any negotiation, carefully examine your employment contract or appointment letter. Some agreements include clauses about severance payments, notice periods, or other benefits upon resignation. Understanding these terms is crucial for both the employee and employer.
• Assess company policies: Company handbooks or HR policies may outline whether severance pay is offered to resigning employees. Some organizations provide severance packages as part of their standard practice, especially for long-serving employees or executives.
• Consider your years of service: Employees with significant tenure or those in key positions may have more leverage to negotiate a severance package. Highlighting your contributions and the value you brought to the company can strengthen your case.
• Prepare your case: When requesting severance, be ready to explain why it is justified. This could include the impact of your departure, the time needed to transition your responsibilities, or the desire for a smooth handover. Providing written notice and offering to assist with the transition can sometimes encourage an employer to offer severance benefits.
• Understand legal considerations: Employment law varies by jurisdiction, and in some cases, federal law or local regulations may influence whether severance pay is required. Consulting with an employment attorney can help clarify your rights and obligations, especially if you believe you are entitled to severance due to wrongful termination claims or other legal grounds.
• Negotiate the terms: If the company is open to negotiation, discuss the structure of the severance package. This might include a lump sum payment, continuation of health insurance, or other benefits. Ensure all terms are documented in writing to avoid misunderstandings.

Key Points for Managers

• Be transparent about company policy and legal requirements regarding severance payments.
• Document all communications and agreements related to severance offers.
• Ensure that any severance package offered complies with employment law and does not create unintended obligations for the company.

Negotiating severance during resignation is not always straightforward, but with careful preparation and a clear understanding of employment agreements, company policies, and legal considerations, both employees and employers can reach a fair outcome.