University of California

Office of the President


Senior Vice President—

Business and Finance





Costing Policy & Analysis

Research Administration Office

No. 03-06

August 18, 2003







Subject:  Severance Pay Charges on Grants and Contracts




The University of California has recently implemented severance pay policies for career employees in various

classifications and collective bargaining units.  Personnel Policies for Staff Members (PPSM) Policy 60.,

“Layoff and Reduction in Time from Professional and Support Staff Career Positions,” effective July 1, 2003,

sets forth the layoff and severance pay policy for career position professional and support staff. (


Exclusively represented employees covered by collective bargaining agreements are governed by the specific

layoff and severance pay terms and conditions stated in their respective contracts. (  These policies and

contracts provide affected career employees with an option for severance pay in lieu of the right of recall

and preference for reemployment.


”Limited appointees” (employees hired with time-limited appointments) are not career employees and are

not eligible for severance pay.


Implementation of Severance Pay Policy for Extramural Funds: 


  Severance payment in lieu of recall and preferential reemployment rights should be charged

entirely to the last  payroll fund source(s) of the severed individual (distributed proportionately

if the individual is paid from multiple fund sources).


  Departments may choose to charge any or all of the severance payment to discretionary,

unrestricted fund source(s) available to the department. 


   Some non-federal extramural awards may contain specific restrictions on the allowability of

severance payments.  In such cases, charges must be made in compliance with the conditions of

the award(s).  Other departmental fund sources may have to be used.


Allowability of Charging Severance Pay to Extramural Awards:


OMB Circular A-21, Cost Principles for Educational Institutions, allows severance pay to be charged

to federal funds in accordance with section 43., Severance pay, below:


a.  Severance pay is compensation in addition to regular salary and wages which is paid by an

institution to employees whose services are being terminated. Costs of severance pay are allowable

only to the extent that such payments are required by law, by employer-employee agreement, by

established policy that constitutes in effect an implied agreement on the institution's part, or by

circumstances of the particular employment.


b.  Severance payments that are due to normal recurring turnover and which otherwise meet the

conditions of subsection a may be allowed provided the actual costs of such severance payments

are regarded as expenses applicable to the current fiscal year and are equitably distributed among

the institution's activities during that period.


c.  Severance payments that are due to abnormal or mass terminations are of such conjectural nature

that allowability must be determined on a case-by-case basis. However, the Federal Government

recognizes its obligation to participate, to the extent of its fair share, in any specific payment.


d.  Costs incurred in excess of the institution's normal severance pay policy applicable to all

persons employed by the institution upon termination of employment are unallowable.


Thus, severance pay is an allowable cost if it is part of an institutional program or policy that is

consistently applied to all applicable employees (not just federally funded employees).  The

University’s policies meet these standards.


Policy for Charging Severance Pay:


To charge severance pay to extramural fund sources, the University must have a consistent policy that

determines the amounts to be charged to individual fund sources.  The policy set forth above provides

the basis for direct charging severance pay.  However, campuses should be aware of some of the

possible issues that could arise in implementing this policy:


  Extramural awards may not have the funds in their budgets to pay severance pay since severance

pay was not budgeted in the original award.


 When the severance policy applies to an extramural award due to the “bumping” based on

seniority of another employee, the award’s budgeted salary is still needed to complete the project. 


  The severance pay for career employees terminated due to the end of the funding period may no

t be available in the budget and may require early termination of the employee in order to have the

funds required for severance pay.



Refer: Jorge Ohy

(510) 987-9842


Subject: 07



David Mears

Director, Research Administration

Jorge Ohy

Manager, Costing Policy & Analysis




Cc:  Vice Chancellors for Research

        Extramural Funds Managers