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The Divorce Encyclopedia
Severance Pay


Term Definition Severance Pay - compensation paid an employee, often when he or she is involuntarily terminated by an employer.
Application in Divorce In the past generation, millions of American workers have squeezed out the workforce early as a result of the continuing restructuring of the economy. Many longtime employees retire voluntarily (but not genuinely by their own choice), or they retire involuntarily. When this happens, employees are often awarded severance pay based upon the number of years of service. For example, a furloughed worker may be given one week’s pay for every year of service.

Sometimes, severance pay is called separation pay, and it is part of what is called a "buyout" package, by which employers divest themselves of older workers without exposing themselves to allegations of age discrimination. In this routine, the older worker voluntarily departs, having waived any rights to charge age discrimination. In the case of reductions in force ("layoffs," as they are called,) sometimes the severance pay is sweetened by employer’s promise not to contest unemployment benefits.

As it applies to divorce, retirements under these circumstances may obscure an easy distinction between types of severance pay and early involuntary retirement benefits, particularly when a person retires early after a divorce. Sometimes early retirement benefits can be seen as compensation to an employee for a specific service, that is, retiring early. Courts face the challenge of deciding what portion of these benefits are separation pay (and separate property) and what portion are retirement benefits earned during a marriage (and marital property).

See Retirement.

See also Defined Benefit Plan, Defined Contribution Plan, Qualified and Nonqualified Plan, Pension Plan; ERISA; PBGC.

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