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Severance pay is either a voluntary payment by an employer when an employee is terminated, where the employer will pay the employee some money to ease the transition while the employee looks for new employment. Sometimes there is a contractual obligation to pay severance pay in the employment agreement. Many executives, for example, have contractual severance provisions when there are high level employees of a company that if their employment is terminated, they are given a large amount of money that helps defray the expenses that they’re going to have while they seek other employment with another company. Other times, employers will have employees sign severance agreements, where the employer is being released of any claims the employee may have, and in exchange, the employer is giving a lump sum of money or money paid out over time, again, to help defray the expenses the employee is going to have while they look for new employment.

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