Severance pay: What you need to know
Losing a job is never easy, no matter the circumstances, but severance pay can help soften the blow. Understanding this pay will better prepare you for the unexpected and help ensure you are fairly compensated for your situation.
In this article, we take a look at what severance pay entails. Whether you’re facing redundancy or anticipating an end to your employment, here’s a guide to severance pay so you’re aware of your rights and entitlements.
What is severance pay?
Severance pay is financial compensation provided to workers when their employment contract is terminated by their employer (severance pay meaning the payout you receive when your employer ends your job against your will.) It’s an important part of the employment package, usually given to employees who are laid off for reasons beyond their control or are ‘fired’ for underperforming. Severance pay can also be offered to someone who leaves under mutual agreement with their employer.
The purpose of this pay is to help cover living expenses while the employee searches for new employment. In some countries, employers are legally obligated to give their employees a certain amount of severance pay for layoffs and redundant roles, but that is not the case in New Zealand.
Legal obligations around severance pay in New Zealand
The legal side of severance pay is important to understand, so that you know your rights and your employer’s responsibilities to you. In New Zealand, employers are not legally obligated to pay severance or redundancy - unless they have specifically outlined the payment of redundancy in your employment contract.
The amount of redundancy pay is typically based on the length of service and can vary depending on the size of the organisation - but it is dependent on the conditions outlined in your contract.
Employees’ eligibility and entitlement during a retrenchment
When a workplace undergoes downsizes due to financial hardship), is acquired by another company or merges with another company, certain roles might not be needed anymore. In these cases, an employer is legally permitted to make workers redundant.
Employee eligibility for severance pay
Determining whether you’re eligible for severance pay involves looking at different factors, including:
- Your individual employment contract.
- Your role or level within the organisation. Certain executive or managerial positions might have specific clauses in their contracts outlining severance pay.
Employment contracts should include specific clauses when it comes to severance pay, outlining the conditions under which it’s paid out, the method of calculation, and any exclusions. For example, a contract might state that severance pay is only given in the event of involuntary termination but not for resignation or misconduct.
Factors affecting redundancy pay
The actual amount of a redundancy payment will vary depending on several different factors. You should always be aware of what's outlined in your employment contract before accepting redundancy.
Duration of employment
How long you’ve been at a company or organisation is one of the biggest factors when it comes to calculating your redundancy pay. Generally, the longer you have been with the same employer, the higher the severance payment you’re entitled to.
Employee’s salary and benefits
The calculation of severance pay typically includes:
Base salary: severance is often calculated based on the employee's regular earnings.
Unused annual leave.
Additional benefits: bonuses, allowances and other regular benefits may also be considered in the calculation, depending on the organisation’s policy and the terms of the employment contract.
Policies and employment contracts
The specific terms outlined in organisation’s policies and individual employment contracts can also impact the calculation of severance pay. These may include:
- Organisation-specific formulas: some workplaces have their own formula for calculating severance pay, which may be more generous than the legal minimum.
- Contractual clauses: individual employment contracts should contain specific provisions regarding severance pay.
For employees facing redundancy, it’s important to understand how severance pay works and workers’ legal entitlements. Several elements play a significant role in determining eligibility and the amount of severance pay. For specific queries related to severance pay, it’s always best to seek professional advice. Contractual terms can be complex, and expert guidance ensures that both employees and employers are clear on entitlements and obligations.
FAQs
What are the key factors that determine eligibility for severance pay?
The key factors determining eligibility for severance pay typically include:
- Your employment contract
- Length of service
- Type of employment (part time or full time)
- Reason for termination
How is severance pay calculated, and what are the main components considered in the calculation?
Severance pay is usually calculated based on the employee’s length of service, base salary and any terms laid out in the contract. The standard approach involves multiplying a set number of weeks’ pay by the number of years of service, often factoring in unique contract terms. Terms should be outlined in your employment agreement.
Can an employee negotiate their severance pay with their employer?
Yes, sometimes employees can negotiate their severance pay with their employer. While employers often have standard policies, there can be room for negotiation, especially with higher-level positions or in unique circumstances. It's easier to negotiate before signing an employment contract.
Are there any legal requirements for employers to provide severance pay?
In New Zealand, severance pay is not legally required. It's important for employees to make sure redundancy is addressed in their employment contract before they sign.
How does severance pay differ for part-time and full-time employees?
Severance pay for part-time employees is often calculated similarly to that for full-time employees, based on their equivalent years of service and salary. However, the overall amount may be less for part-time employees due to the fewer hours worked compared to full-time employees.
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