Severance benefits ordinarily take the form of cash payments made by an employer to an employee whose employment is involuntarily terminated because of circumstances beyond the employee’s control. In many industries and in many parts of the country, providing severance benefits to involuntarily terminated workers has been commonplace for a long time, and the custom of providing severance pay pre-dates Employee Retirement Income Security Act (ERISA) by many years. Although severance payments often are no longer made as a matter of course, severance policies still remain a very common feature of employer-provided benefit packages.
Yet in spite of their long history and their relative simplicity when compared with pension or group health plans, severance plans remain one of the most misunderstood and litigation-prone types of employee benefit arrangements. At least four factors have contributed to this phenomenon: