Severance pay is compensation an employer provides to an employee when their employment ends, typically at the employer’s discretion in the US but required by law in countries including India, Brazil, China, and France when the applicable eligibility and termination conditions are met.
Unlike regular wages, severance pay is provided when employment ends and may be separate from pay in lieu of notice or other final payments. The amount, eligibility, and payment method can vary based on the employee’s length of service, salary, reason for termination, and local employment laws. For companies with employees in multiple countries, these rules can differ significantly from one location to another. This guide explains what severance pay is, how it works, how it is calculated, country-specific rules, and how severance can affect unemployment benefits.
What is severance pay?
Severance pay is compensation an employer provides when an employee’s employment ends. It is separate from the employee’s regular wages and may be offered as a lump-sum payment, continued salary for a set period, or additional benefits.
Whether an employee is entitled to severance depends on the country’s employment laws, the reason for termination, the employee’s length of service, and the terms of their employment contract or company policy. In some countries, employers must provide statutory severance when specific conditions are met. In others, such as the US, federal law generally does not require severance, and it may depend on the employer’s policy or an agreement with the employee.
Severance may also be separate from other final payments, such as unpaid wages, accrued vacation, or pay in lieu of notice.
How does severance pay work?
Severance pay is compensation employers provide to employees when employment ends, typically in cases of layoffs, redundancies, or mutual separations. Its primary purpose is to offer financial support during the transition period as the employee seeks new employment opportunities.
Severance pay can be taxed as regular income, meaning it is subject to federal, state, and, where applicable, local income taxes.
How severance pay works:
Severance pay can be delivered in various forms, including:
- Lump-sum payments: A one-time payment covering a specific amount based on factors like tenure and salary.
- Continued salary: Payments distributed over a set period, mirroring regular pay cycles.
- Additional benefits: Extensions of health insurance, outplacement services, or other perks to assist in the job transition.
The calculation of severance pay often considers the employee’s length of service, position, and the company’s policies. For instance, a common approach might be offering one to two weeks of pay for each year of service. However, the specifics can vary widely depending on the employer and jurisdiction.
In many cases, especially in the United States, severance pay is not mandated by law and is provided at the employer’s discretion. However, certain situations, such as mass layoffs, may trigger legal requirements for severance or advance notice under laws like the Worker Adjustment and Retraining Notification (WARN) Act. It’s essential for both employers and employees to be aware of local labor laws and any contractual obligations that may influence severance arrangements.
Navigating these localized regulations is a widespread struggle. Multiplier’s Global hiring gap report highlights that 37% of companies point to compliance complexity as the absolute biggest source of friction in their global operations.
How do companies determine severance pay?
Across regions, the decision often depends on a combination of legal obligations, company policy, and the circumstances of the termination. Typically, severance is considered for employees who are laid off due to restructuring, redundancy, or downsizing—situations where the termination is not the employee’s fault.
On employee termination, severance pay is generally determined by;
- The size of your organization.
- How long an individual has been working in your company; and
- The employee’s position and rank within your management.
Employers may also offer severance to long-tenured employees, senior-level staff, or those with specific contractual agreements that guarantee such compensation. In some cases, severance may be negotiated during an employee’s exit to prevent potential legal claims or as a gesture of goodwill. Eligibility depends on local law and the reason for termination. Serious misconduct may exclude statutory severance in some jurisdictions, while performance-related dismissal may still require payment. Contractual and company-policy entitlements must also be checked.
Here’s how you can calculate it for an employee (with example):
- Take a week or two of the salary of the employee.
- Multiply the considered salary by the number of years worked in your organization.
- Note that some employers offer up to four week’s salary for each year worked.
Example: Suppose an employee has worked in your organization for 10 years, and the individual made $2000 per week. If you decide to grant a severance of 4 weeks’ pay for each working year, the severance pay would be 80000(2000 per week x 4 weeks x 10 years worked at the company).
Bear in mind that in some countries, there are legal formulas or minimum severance standards.
Severance pay packages in different countries
Severance and termination rules vary significantly by country. Some jurisdictions require statutory severance or redundancy pay when specific conditions are met, while others leave severance largely to the employment contract or employer policy. Notice periods are also separate from severance pay and may apply in addition to it.
| Country | Notice period | Severance/redundancy pay | Statutory minimum? |
|---|---|---|---|
| United States | No general federal notice period for individual termination. The WARN Act requires covered employers to provide 60 days’ notice for certain plant closings and mass layoffs. | Generally determined by employer policy, employment agreement, or applicable state law. | No federal statutory severance requirement |
| Canada | Under the federal Canada Labour Code, at least 2 weeks after 3 months of service, increasing to 8 weeks after 8 or more years. | At least 12 months of continuous employment: the greater of 2 days’ wages per completed year or 5 days’ wages. | Yes, for federally regulated employees who meet the conditions |
| United Kingdom | Statutory redundancy notice ranges from 1 week to 12 weeks depending on length of service. | Statutory redundancy pay is based on age, weekly pay, and length of service, with service capped at 20 years. For redundancies from April 6, 2026, the weekly pay cap is £751 and the maximum statutory payment is £22,530. | Yes, for eligible employees |
| China | Generally 30 days’ written notice, or one additional month’s salary in lieu of notice in situations where the law permits payment instead of notice. | Generally one month’s salary for each full year of service, with half a month’s salary for service of less than 6 months. Salary and service caps can apply. | Yes, in specified termination situations |
| Australia | Statutory notice generally ranges from 1 to 5 weeks depending on length of service and circumstances. | Statutory redundancy pay can range from 4 to 16 weeks based on length of service, with 12 weeks applying at 10 or more years under the standard schedule. | Yes, for eligible employees |
Notes:
- Rules and eligibility can vary based on employment status, reason for termination, length of service, jurisdiction, and applicable exceptions. Employers should verify the applicable local rules before processing a termination.
- For the US, federal law does not require severance pay, although the WARN Act can require advance notice for certain covered mass layoffs and plant closings.
- Under the federal Canada Labor Code, eligible employees with at least 12 months of continuous employment can be entitled to severance in addition to notice or pay in lieu of notice.
- In the UK, statutory redundancy pay is separate from the notice period. The current statutory weekly pay cap is £751 for redundancies on or after April 6, 2026, with a maximum statutory redundancy payment of £22,530.
- China’s statutory economic compensation generally uses one month’s salary for each full year of service, with specific eligibility, salary caps, and service rules applying.
- In Australia, the National Employment Standards provide a redundancy pay schedule ranging from 4 to 16 weeks for eligible employees, with the standard entitlement reducing to 12 weeks for employees with at least 10 years of continuous service.
Severance pay and unemployment—What to keep in mind
Severance may delay or reduce unemployment benefits depending on state law, payment timing, and the period the payment covers. Receiving a lump sum does not automatically preserve immediate benefit eligibility.
Some companies issue severance over several months. These payments may also affect unemployment benefits under the applicable state rules, even when the employee is no longer working. Accrued vacation payments or continued paid leave may affect benefits as well. Employees should distinguish between filing a claim and qualifying to receive payments.
Severance pay can also affect unemployment compensation because employees often sign contracts when accepting their severance packages. In some cases, these agreements may state that the employee is resigning or waiving certain claims. However, whether or not this prevents the employee from receiving unemployment benefits depends on the state’s determination. Most unemployment agencies assess whether the separation was voluntary or involuntary, regardless of the language in the agreement.
Note that the laws related to severance pay and unemployment compensation or benefits differ by state. So, it is important to check with local authorities when applying for unemployment benefits.
Take control of severance pay with Multiplier
Calculating severance pay across regions is a complicated and time-consuming task. You can avoid this hassle by using a global payroll platform like Multiplier which automatically calculates payments for you with the help of local experts.
Book a free demo to find out more.
FAQs
What is severance pay?
Severance pay is compensation an employer provides to an employee when their employment ends. It may be paid as a lump sum, continued salary for a set period, or additional benefits. Whether severance is required depends on local employment laws, the employment contract, and company policy.
What is the typical severance pay?
A typical severance package usually provides one to two weeks of pay for every year of service at the company. However, the exact amount often depends on the specific employment contract, local labor laws, and the reason for termination. In many global jurisdictions, there are mandatory minimums that employers must strictly follow to remain compliant.
How does severance pay work?
Severance may be required by law, contract, or company policy and can be paid as a lump sum or continued salary for a set period. Employers sometimes offer additional discretionary compensation in exchange for a legally valid release of specified claims; this is not a condition of every severance payment.
How do you calculate severance pay?
A simple severance calculation is:
Weekly pay × weeks of severance per year × years worked = severance pay
For example, an employee earning $2,000 per week who receives four weeks of severance for each year worked would receive $80,000 after 10 years of service.
Actual calculations may also need to account for statutory minimums, salary caps, accrued leave, bonuses, and other payments required under local law.
Do you get severance pay if you resign?
Employees generally do not receive severance when they resign voluntarily unless the employment contract, company policy, or local law provides for it. Statutory severance rules typically apply to specific types of employer-initiated termination rather than voluntary resignation.
Is severance pay taxable?
Yes, in most jurisdictions, severance pay is considered taxable income and is subject to standard payroll withholdings. The specific tax rate can vary depending on whether the payment is made as a lump sum or spread out over several months. It is important for HR teams to calculate these deductions correctly based on the employee's tax residency.
What is included in a severance package?
Beyond base salary, a comprehensive severance package may include payment for unused PTO, extended health insurance coverage (COBRA), and outplacement services. Some employers also include a pro-rated portion of an annual bonus if the termination occurs late in the fiscal year. These additional benefits are often used as leverage to ensure a smooth transition.
Is severance pay mandatory by law?
The legality of severance pay varies significantly by country; it is mandatory in many European and Latin American countries but often at-will in parts of the United States. Employers must check the statutory requirements in the specific country where the employee is based. Failure to provide legally mandated severance can lead to heavy fines and legal disputes.
Can an employer withhold severance pay?
An employer may withhold severance if the employee was terminated "for cause," such as gross misconduct or a breach of contract. Additionally, if an employee refuses to sign the required separation agreement or release of claims, the employer is usually not obligated to pay the discretionary portion of the package. Statutory minimums, however, must often be paid regardless of the circumstances.
What is the difference between severance pay and redundancy pay?
Severance pay is a broad term for any compensation provided at the end of employment, whereas redundancy pay specifically refers to compensation when a role is eliminated. Redundancy pay is often a statutory requirement when a company downsizes or closes a specific department. In many regions, the calculation methods for both may be identical.
