Glossary

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Severance Pay

Severance pay is a reward for good performance and employment tenure. Severance pay is established by company policy, a company sponsored severance plan, and a contractual arrangement at the start or end of employment.

If severance is awarded by a company policy, the amount of severance pay is determined by company discretion. The executive cannot change the amount, unless he has valid legal claims to initiate a severance/settlement negotiation.

The existence of a company sponsored severance plan will provide a vested benefit upon termination. The company plan will indicate the number of years of service and the correlated amount of severance pay. Federal Law (Employee Retirement Income Security Act-"ERISA") controls the creation, function and enforceability of severance plans. In a severance negotiation, a settlement agreement itself, along with other written communications, may constitute a severance plan under ERISA, i.e. a severance plan for one employee. (See related articles in this section).

In an employment agreement, parties can contract in advance for the amount of severance pay that will be awarded, i.e. 1x, 2x or 3x base salary. The parties may also agree to change in control severance pay, in the event of changes in ownership and directorship.