On its face, it's an easy distinction: a settlement ends a lawsuit, a severance ends an employment relationship. If an employee sues an employer, the parties can exchange money (from the employer) for voluntary dismissal of the lawsuit (from the employee) - a settlement. If an employer ends the employment relationship, it often gives an employee money to transition out of their employment - a severance.
Easy enough. What's the confusion? Well, a severance agreement usually includes more than just an exchange of employment termination for cash. It includes other terms, such as a waiver of claims. The waiver usually includes discrimination claims... including sexual harassment. So, the employee agrees not to file any discrimination lawsuits, and receives money (or other benefits) in exchange.
Now, let's say the employee makes an internal complaint of sexual harassment before termination. Well, the severance agreement starts to sound a little bit more like a settlement agreement, doesn't it? The employer is paying the employee, and the employee is dropping his or her sexual harassment lawsuit before it even gets filed. Essentially, it's a preemptive strike.
Returning to the original question: Is it a settlement or a severance? I think reasonable minds can differ. As a technical matter, an agreement to end the employment relationship with a waiver of future claims is a severance. As a practical matter, the employer is really just settling a lawsuit before it gets filed. You're all big boys and girls - I'll let you make the final determination yourselves.
Posted by Philip Miles, an attorney with McQuaide Blasko in State College, Pennsylvania in the firm's civil litigation and labor and employment law practice groups.