what is severance pay 
severance pay is the compensation and or benefits an employer provides to an employee after employment is over severance packages may include extended benefits such as health insurance and outplacement assistance to help an employee secure a new position employers offer packages to employees who are laid off whose jobs are eliminated because of downsizing or who retire some employees who resign or are fired may also receive a severance package severance pay can be a goodwill gesture on the part of the employer and can provide the employee with a buffer between working and unemployment investopedia theresa chiechiunderstanding severance payseverance pay is offered to employees in certain circumstances after their employment ends the amount an employee receives often depends on how long they were with the employer most employers have policies in their employee handbooks that outline how they handle severance pay packages offered by employers usually come in a lump sum and are taxable they generally include an employee s regular pay along with some or all of the following severance and unemployment benefitsseverance pay can affect unemployment compensation in two ways if the employer pays the employee severance fee in a lump sum the employee can apply for unemployment insurance right away as they are no longer on the company s payroll 1however in some cases companies issue severance pay over several months through that process the employee is still technically on the payroll even if they do not go to work this means they cannot apply for unemployment similarly if an employee has unused vacation time they are on the payroll as they use it 1the laws concerning unemployment and severance pay vary by state so it s important to check with your local employment office about when to apply for unemployment benefits in other cases severance pay affects unemployment compensation because of the contracts many people sign when they accept severance pay in exchange for offering severance packages some companies make their employees sign statements saying they voluntarily resigned from their posts these agreements prohibit the employee from claiming unemployment insurance which is reserved for people who are dismissed from their jobs involuntarily it is wise to read any documents carefully before signing them legal advice may also be in order as it is sometimes possible to improve the initial severance package that was offered example of severance paycompany a is a large technology company based on the east coast that is seeking to expand its footprint on the west coast in its efforts to expand it decides to purchase small company b based in california which has a footing in the same business company a wants to keep the bulk of the employees at small company b as they have experience in the local market however one division at company b is similar in operations to an existing division at company a which is larger and has more experience company a decides that this division at small company b is redundant and both companies would be better served by completely replacing the division with members from company a s existing team as such the 10 person division at small company b is notified that they will be laid off all 10 employees will be offered severance pay which will be equal to one month s salary for every year that they have worked there so if an individual has worked at the company for five years they will receive five months severance pay 