What is Severance Pay and When Do You Get It?

Understanding Severance Pay

Severance pay (also called a severance package or separation pay) is a form of compensation that employers provide to employees when the employment relationship ends. Unlike regular wages or earned benefits, severance is typically discretionary or contractual rather than a right earned through work.

The term "severance" comes from the idea of "severing" the employment relationship. While often associated with negative circumstances like layoffs, severance can also be part of positive separations like retirement or mutual agreements.

When Do Employees Receive Severance Pay?

Severance pay is typically offered in specific circumstances where the employer ends the relationship through no fault of the employee:

Common Severance Situations

• Layoffs: When employers reduce workforce due to economic conditions, restructuring, or cost-cutting. This is the most common trigger for severance.
• Position Elimination: When a specific job or department is discontinued, often due to automation, mergers, or strategic changes.
• Redundancy: Term common in UK/Europe when roles are no longer needed, often triggering statutory payments.
• Termination Without Cause: When employment ends not due to employee misconduct or performance issues.
• Mutual Separation: Negotiated departures where both parties agree to end the relationship, often with enhanced severance.
• Early Retirement Programs: Voluntary severance packages offered to encourage older employees to retire.

When Severance Is Usually NOT Offered

• Resignation: Employees who quit voluntarily typically don't receive severance
• Termination for cause: Misconduct, policy violations, or poor performance usually disqualify employees
• Contract completion: Fixed-term contracts ending as scheduled rarely include severance

Why Do Employers Offer Severance?

Since severance isn't legally required in many places, why do employers offer it? There are several business and ethical reasons:

• Release of claims: In exchange for severance, employees typically sign agreements releasing the employer from future lawsuits.
• Company reputation: Treating departing employees well maintains employer brand and helps with future recruiting.
• Morale: Remaining employees see how departing colleagues are treated, affecting trust and engagement.
• Legal compliance: Some jurisdictions require severance or notice periods that effectively result in severance payments.
• Contractual obligations: Employment contracts or company policies may require severance.
• Union agreements: Collective bargaining agreements often include severance provisions.

How Is Severance Pay Calculated?

Severance calculation methods vary widely, but the most common approaches include:

Weeks Per Year of Service

The most popular formula multiplies years of service by a set number of weeks of pay:

Common multipliers include:

• 1 week per year: Standard/minimum for many employers
• 2 weeks per year: More generous, common for professional positions
• 3-4 weeks per year: Executive-level packages

Fixed Amount

Some employers offer a flat severance amount regardless of tenure, such as 4 weeks or 8 weeks of pay for all qualifying employees.

Statutory Formulas

Countries with mandatory severance often use graduated formulas. For example, the UK's statutory redundancy pay depends on age and length of service:

• 0.5 week's pay per year for ages under 22
• 1 week's pay per year for ages 22-40
• 1.5 weeks' pay per year for ages 41+

Caps and Limits

Many employers cap severance at a maximum number of weeks (commonly 26 or 52 weeks) to limit costs for long-tenured employees.

Statutory vs. Contractual Severance

Statutory Severance

Statutory or legally mandated severance exists in many countries outside the US. These laws require employers to provide minimum severance based on factors like:

• Length of service
• Employee age
• Salary level
• Reason for termination

Countries with notable statutory severance requirements include the UK, Germany, France, Spain, Italy, and many others in Europe, as well as countries like Australia and Canada.

Contractual Severance

In the US and other countries without statutory requirements, severance is typically:

• Specified in employment contracts
• Part of company policy
• Negotiated at the time of separation
• Included in union agreements

Contractual severance can be more generous than statutory minimums and is often negotiable, especially for senior positions.

What's Included in a Severance Package?

A complete severance package may include more than just the base severance payment:

• Base severance pay: The main payment based on salary and service
• Unused PTO payout: Accrued vacation or sick time (may be separate from severance)
• Bonuses: Pro-rated bonuses or commissions earned but not yet paid
• Health insurance continuation: Extended coverage or COBRA subsidy
• Outplacement services: Career coaching, resume help, job search support
• Stock/equity: Accelerated vesting or extended exercise periods
• References: Agreed-upon reference letters or neutral reference policy

Severance Pay by Location

United States

The US has no federal severance requirement. The WARN Act requires 60 days notice for large layoffs (100+ employees), and some states have stricter "mini-WARN" laws. Otherwise, severance is determined by:

• Employment contracts
• Company policy
• Union agreements
• Individual negotiation

Use our US state severance calculators to estimate your potential severance.

International

Many countries have statutory severance requirements. The formulas and eligibility vary widely:

• UK: Statutory redundancy pay after 2+ years of service
• Germany: Generally 0.5 months per year of service for redundancy
• France: Statutory minimum plus often enhanced contractual amounts
• Australia: Redundancy pay after 1+ year of continuous service

Explore our international severance calculators for country-specific estimations.

Tips for Maximizing Your Severance

1. Know your rights: Understand any statutory entitlements or contractual obligations before negotiating.
2. Don't sign immediately: Take time to review the agreement; most employers allow 21+ days for consideration.
3. Negotiate: Severance offers are often starting points, especially for senior positions.
4. Consider the full package: Health insurance, references, and outplacement services may be as valuable as additional pay.
5. Get legal advice: An employment attorney can review the agreement and advise on negotiation strategies.