Severance pay

What it is

Severance pay is money an employer pays to an employee when their job is ended, most often because of a layoff, restructuring or redundancy. It is paid on top of the final paycheck, which covers wages already earned. Severance is meant to help the person while they look for new work.

Whether severance is required depends on the country. In the US, federal law does not require it, as the US Department of Labor explains, so it comes from contracts, policies or agreements. In the UK, many other European countries and parts of Asia, a minimum payment is set by law for eligible employees. Rules vary by country, so this is general information, not legal advice.

Why it matters

Severance helps people through a hard moment, and it protects the company too. A fair package lowers the chance of disputes and keeps trust with the people who stay. Many employers ask for a signed release of claims in return for extra severance. This means the person agrees not to bring certain legal claims later.

How you handle severance also shapes your reputation. Former staff talk, and the way a layoff is managed affects future hiring and employee retention.

How it works

Most severance packages follow a simple pattern:

• Check what local law requires as a minimum.
• Check the employment contract and any company policy.
• Set the formula, often a number of weeks of pay for each year of service.
• Decide on extras, such as continued health cover or outplacement help.
• Put the terms in a written agreement and give the person time to review it.
• Pay on the agreed date and record it correctly for tax.

Example: a company closes a regional office. Its policy offers two weeks of pay for every year worked, with a minimum of four weeks. An office manager with five years of service and a weekly salary of 1,000 receives 10 weeks of pay, which is 10,000, plus three months of health cover. She signs a release agreement and gets the money with her last payroll.

Best practices

• Write a clear severance policy before you ever need it.
• Apply the same formula to people in similar roles.
• Give the person enough time to read the agreement and get advice.
• Explain the package face to face, then follow up in writing.
• Run every exit through one offboarding process so pay, access and paperwork stay in sync.

Common mistakes

• Paying less than the legal minimum where one exists.
• Treating similar employees differently with no clear reason.
• Rushing people to sign a release on the spot.
• Forgetting tax and benefit rules that apply to severance.

FAQ

Is severance pay required by law?

It depends on where you are. US federal law does not require it, though a contract or policy can. Many other countries set a legal minimum for eligible employees, often based on length of service.

How is severance pay calculated?

A common formula is a set number of weeks of pay for each year of service. For example, two weeks per year for someone with six years of service gives 12 weeks of pay.

Do you get severance if you resign?

Usually not. Severance is normally paid when the employer ends the job, not when the employee chooses to leave for a new role. A contract or a negotiated exit can change that, so check the written terms.