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What Is Separation Pay?

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Separation pay is defined as money or benefits that are paid to an employee who is laid off or separated due to conditions that she cannot control. Downturns in the economy, environmental conditions, changes in management or ownership or governmental regulations are just a few examples of instances where an employee might be eligible for separation pay. If an employee resigns or quits her job, then she is usually not eligible for separation pay. Electing to provide separation pay to an employee is a decision that each employer can make.

What is Separation Pay

There are times in a company's history when separation pay is used to provide assistance to employees. This pay is usually based on years of service to a company, typically one or two weeks for every year that the associate worked for an organization. This pay is usually in the form of a check and usually does not include benefits, such as health insurance, which are covered under other programs such as the Consolidate Omnibus Reconciliation Act (COBRA), that allows employees to continue their health care coverage for a fee.

Why is Separation Pay Used

There is no legal obligation to provide separation pay to employees. Many companies offer this type of compensation to their employees who are terminated through no fault of their own. Employers choose to award separation pay to assist employees during their search for new employment when the associate is terminated due to unusual circumstances. Typically, if conditions were different, the company offering separation pay would prefer to retain the employee, but the business environment does not allow the employer to continue paying their associate.

When it is Used

Separation pay is used when circumstances require a company to terminate employees who it would otherwise elect to maintain on its payroll. Sometimes, governmental regulations or situations force employers to lay off some of their workforce. Natural disasters, like hurricanes or earthquakes, often damage facilities and force employers to terminate employees. Changes in customer behavior and sometimes even traffic patterns, cause business to decline and employers are faced with reductions in their workforce. Mergers, acquisitions and ownership change are other reasons to use separation pay.


Employers should explore all options before using separation pay to reduce their workforce. Market conditions change and these upheavals are not always permanent. Workers can be retrained for other positions; frequently, other employment options, including temporary leave, can be considered. Providing job counseling training and exploring alternative methods of working are also possible, as is job sharing and temporary reductions in pay.


Based in Bethlehem, Pa., Kermit Burley has been writing articles for over 30 years. His articles have appeared in "Training" magazine, as well as numerous company publications throughout the course of his career. Burley holds a Masters of Education in instructional design from Penn State and is certified as a trainer and instructional designer.

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