Dismissal pay definition and meaning
Dismissal pay, also known as termination pay, severance pay, or payments in lieu of notice, refers to the amounts paid to employees upon the termination of their employment. This can include payments made to compensate for notice periods not served, severance packages provided to support employees during the transition, or other forms of compensation mandated by law or company policy.
When do employers use dismissal pay?
Dismissal pay is provided to employees in certain circumstances after they lose their jobs through no fault of their own. Employers often offer it after workers leave a company due to a layoff, merger, acquisition, or downsizing initiative. In some cases, employees who resign or get fired also qualify for this benefit.
How does dismissal pay work?
To calculate severance pay, a company usually considers an employee’s position, salary, and length of employment. In some cases, additional benefits may also be included, such as health insurance, retirement savings, unused vacation time, or even career placement assistance. It’s common for employers to offer a dismissal pay package of one to two weeks’ salary for each year someone has been employed. However, managers and executives usually collect a higher amount than associates or entry-level employees.
Note that these packages are taxable and often presented in a lump-sum payment. In addition, severance pay isn’t always set in stone so some employees may be able to negotiate the terms of their severance pay. This may be done when they’re hired or after they’re offered this benefit following a termination.
Employers who choose to offer dismissal pay should outline how the policies work in the employee handbook. It’s also a good idea to clearly convey it in offer letters and/or employment contracts so that everyone is on the same page after a layoff.
Dismissal pay example
Company ABC is a large tech firm that decides to downsize. As a result, they must lay off five employees. The employees will be eligible for severance pay, which will be equal to their monthly salary for every year they’ve been employed with the organization. Bob is part of the five employees who have been affected by the company’s downsizing.
Since he’s worked at Company ABC for seven years, he will collect seven months of dismissal pay. His severance pay package will also include continued health insurance for a set period of time and extra funds for career placement services.
What is the purpose of dismissal pay?
According to the U.S. Department of Labor, severance pay is not a legal obligation. Instead, it’s an agreement created and agreed upon between an employer and an employee. Note that despite this, the Fair Labor Standards Act (FLSA) mandates that companies pay terminated employees until their last day of employment and include unused vacation in their final pay.
Even though it’s optional, many companies choose to offer dismissal pay for the following reasons:
- Legal protection: Dismissal pay can help reduce the risk of unwanted legal actions from employees. When an employee accepts a severance package, they agree to not file a wrongful termination case and attempt to sue the company.
- Employee morale: Those who provide severance pay prove that they value their employees, want to lighten the burden of unemployment, and ease the financial stress it may cause. It’s an investment that can foster loyalty and trust among employees, ideally boosting morale.
- Recruitment and reputation: Many companies that offer dismissal pay promote it in job descriptions when recruiting talent. By doing so, they can strengthen their reputation and attract quality candidates.
