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What is a golden parachute?

On Behalf of | Jan 15, 2025 | Employment law |

In the context of employment compensation, the term golden parachute is often used. This refers to compensation that will be given to an employee if they lose their job under specific conditions. It typically applies to executives or other high-level employees—like a CEO or CFO—within a business, and it is often tied to job loss resulting from a merger or acquisition, rather than termination for cause.

For example, an executive at a business may become redundant after a merger, leading to the termination of their position. They haven’t done anything wrong, but their role is no longer necessary because the business has been purchased by a larger company. As a result, they may receive a severance package worth $10 million and stock options in the new company. This “golden parachute” is written into their contract to provide them with financial security for circumstances beyond their control.

Do all employees receive severance pay?

While most employees will not receive such substantial severance packages, do they receive any severance pay when terminated?

In general, the answer is no. For instance, an at-will employee can be fired at any time and for almost any reason (as long as it’s not illegal), and they are not entitled to severance pay if they are earning an hourly wage.

Severance packages are typically written into employment contracts. As a result, they generally apply to contractual employees who are working on a salary basis, rather than hourly workers.

Understanding employment contracts

Given these distinctions, it is important to understand how employment contracts work, what rights and responsibilities they create, and what legal steps may be necessary while utilizing them.