Let’s be real—layoffs happen, even at the best of companies. However, as an employer, it’s crucial not just to handle layoffs with empathy and fairness, but also to understand your legal and ethical responsibilities.
One of the most important aspects of this process is severance pay. Providing a clear, well-structured severance package can ease the transition for departing employees, protect your company’s reputation, and reduce the risk of legal complications.
In this article, we’ll break down what severance pay is and how to structure packages effectively to meet employee expectations.
What is severance pay?
Severance pay is the remuneration that an employer offers to an employee at the end of their contract. This can involve both monetary and non-monetary benefits like health insurance or placement assistance to help employees get a new position.
Severance pay is common for employees who might lose their positions due to company downsizing. It is also offered to retired employees who resign or are fired.
Severance pay is generally a goodwill gesture that an employer shows towards their employee. However, India, Brazil, China, and France, severance pay is more than a courtesy—it’s a legal obligation.
How does severance pay work?
Severance pay is a form of compensation provided by employers to employees upon termination of employment, 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:
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Lump-sum payments: A one-time payment covering a specific amount based on factors like tenure and salary.
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Continued salary: Payments distributed over a set period, mirroring regular pay cycles.
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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.
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. However, employees terminated for cause—such as misconduct or poor performance—are generally not eligible for severance, unless required by law or a prior agreement.
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
We have talked about severance pay, individual severance payouts, and severance laws. But what we know as severance pay might be known or handled differently in other countries. So, let’s see what severance pay by country is all about in 2025.
Canada
In Canada, severance agreements are more than a token of gratitude from employers. The amount of the severance check varies between common law and employment standards legislation.
The goal of severance here is to provide sufficient notice—or pay in lieu of notice—for the employee to find suitable new employment.
Termination practices in Canada vary by province. Based on the Canada Labour Code and federal labor standards, employers must provide a termination letter with the cause of termination. As of February 1, 2024, federally regulated employers must follow new rules under the Canada Labour Code, which include a graduated notice period that increases with years of service.
If the employee has worked for at least 3 months, a 2-week notice is required—or equivalent pay. Additionally, for employees with one year of continuous service, severance pay is required at a rate of 2 days’ pay for every completed year of service or 5 days’ wages—whichever is greater.
United States
The U.S. Fair Labor Standards Act has no provision requiring employers to provide severance pay.
In the U.S., severance pay is based on company policy or mutual agreement between the employee and employer. It may also be negotiated in individual employment contracts or collective bargaining agreements.
United Kingdom
In the United Kingdom, there is no single formal termination process. Employers can terminate employment at their discretion, provided the dismissal is fair and justified. Employers are generally expected to issue warnings and give the employee a chance to improve, except in cases of gross misconduct.
Employees are entitled to a statutory minimum notice period before dismissal. This period depends on the length of continuous service:
- One week – for employees employed between 1 month and 2 years.
- One additional week for each further year of service, up to 12 years.
- 12 weeks – for employees with more than 12 years of service.
In redundancy situations, the employer must show a valid reason for eliminating the position. Employees are eligible for redundancy pay if they have:
- Worked for at least 2 years.
- Worked under a formal employment contract.
- Been laid off, dismissed, or placed on reduced hours.
Note: Employees who voluntarily retire are not entitled to redundancy pay.
As of April 2025, the maximum statutory redundancy pay is £21,570, with weekly caps of £719.
China
In China, it’s often difficult to terminate an employee once their probation period has ended. Employers must first offer retraining or job reassignment opportunities. Only if these fail may they proceed with termination.
Written notice of 30 days is mandatory in most cases. Severance is usually required unless termination is due to specific exceptions, such as inability to perform during probation or violation of company rules.
For severance pay:
- Employees who worked for more than one year receive one month’s salary for every year of service.
- Those who worked less than six months receive half a month’s salary.
- For employees who worked between six and twelve months, the amount is rounded up to one full year.
- Severance is capped at three times the local average monthly wage, and payments are limited to a maximum of 12 months.
Redundancy does not have a special legal framework, so employers must negotiate mutually acceptable terms with employees when eliminating positions.
Australia
In Australia, employers must provide written notice with a valid reason before termination.
Notice periods vary based on tenure:
- Less than 1 year – 1 week’s notice
- 1 to 3 years – 2 weeks’ notice
- 3 to 5 years – 3 weeks’ notice
- More than 5 years – 4 weeks’ notice
- Employees over 45 with at least 2 years of service receive an extra week of notice. Employers do not need to provide notice for dismissals due to gross misconduct.
Redundancy pay is based on years of continuous service:
- 1–2 years: 4 weeks’ wages
- 2–3 years: 6 weeks’ wages
- 3–4 years: 7 weeks’ wages
- 4–5 years: 8 weeks’ wages
- 5–6 years: 10 weeks’ wages
- 6–7 years: 11 weeks’ wages
- 7–8 years: 13 weeks’ wages
- 8–9 years: 14 weeks’ wages
- 9–10 years: 16 weeks’ wages
- 10+ years: 12 weeks’ wages
Note: Redundancy pay reduces from 16 to 12 weeks after 10 years of service due to entitlements already accrued under long service leave.
Severance pay and unemployment – What to keep in mind
Severance pay does affect unemployment compensation. It can happen in two ways:
As an employer, if you pay the employee their severance pay in a lump sum, the dismissed employee can apply for unemployment insurance immediately, as they are no longer receiving wages from your organization.
However, some companies choose to issue severance pay over several months. Depending on state law, this can delay unemployment benefits because the employee is still receiving compensation—even if they are no longer working. In the same way, if the employee is using accrued vacation or paid leave, they may remain on the company’s payroll during that period, which can also delay unemployment eligibility.
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.
