It is the compensation or benefits given to an employee by an employer after being removed or terminated from the employment. Let us explore the meaning of severance pay with an example.
Consider an organization with 100 employees; the organization is now planning for a lay-off. The organization should notify those employees and have to proceed with a legal notice before 60 days of their termination. Suppose the organization failed to do this according to the Workers Adjustment & Training Notification Act (WARN Act). In that case, the company has to pay the severance pay legally for the employees who they are planning to lay off.
It is a form of courtesy an organization shows their employees to find a new job with the least amount of pay but without being on the job. This is not because the employees were terminated due to low performance but because of lay-offs or budget cuts etc.
The main disadvantage is that the severance pay is not mandatory, affecting the employees as they may suffer a financial crisis after being terminated.