KembaraXtra - Legal Terms - Severance Pay

Severance pay is money payable to an employee upon the termination of employment. Under English law, there is no general statutory entitlement to severance pay merely because employment ends. Instead, entitlement usually arises under the common law contract of employment, an express contractual term, or specific statutory provisions.

At common law, severance pay commonly includes:

• pay in lieu of notice (PILON) where the employer terminates employment without giving the contractual or statutory notice period;
• outstanding salary and wages;
• accrued but untaken holiday pay;
• any contractual bonus or other payments due.

Where an employee is employed under a fixed-term contract containing no provision allowing early termination, dismissal before expiry of the term normally constitutes a breach of contract. The employee may recover damages representing the salary and benefits that would have been earned during the remainder of the contract, subject to the duty to mitigate loss by seeking alternative employment.

An employee dismissed for gross misconduct or another repudiatory breach of contract may lose entitlement to notice pay because the employer is entitled to dismiss summarily.

Severance pay should be distinguished from:

• redundancy payments, which arise under statute when employment ends because of redundancy;
• compensation for unfair dismissal, awarded by an Employment Tribunal; and
• damages for wrongful dismissal, arising from breach of the employment contract.

Many severance payments are negotiated through settlement agreements, where additional compensation is paid in exchange for the employee waiving legal claims against the employer.