Severance pay is compensation an employer may provide to an employee after termination of employment. Sometimes you have to part ways with your talent, and sometimes due to business needs, it can come suddenly. You don’t want your ex-employees to leave with a bad impression of your company, and that’s where severance pay comes in.
While not always legally required, severance pay is a common practice that helps you reduce legal risk, maintain goodwill with former employees, and protect your brand’s reputation.
Note that severance pay is typically separate from the eliminated employee’s final wages, owed paid time off (PTO), or benefits continuation you may provide.
When is severance pay offered?
Severance pay usually comes into play when a company needs to make tough business decisions, like layoffs, organizational restructuring, or role eliminations. It’s a way to soften the impact for employees whose roles are being eliminated, helping them manage the transition while the company moves forward with its new direction.
In some cases, severance pay isn’t tied to a layoff at all. It may be written into executive employment contracts as part of a negotiated compensation package or included in company policy to ensure consistency across departures. Collective bargaining agreements (CBAs) often outline specific severance terms as well, ensuring fair treatment for unionized employees. You need to write crystal-clear contracts as ambiguity may cause legal problems.
Severance pay is sometimes linked to a signed release of claims. In plain language, this means that the employee agrees not to pursue legal action related to their termination. This approach helps create a clean break for both sides and adds a layer of legal protection for the company.
Severance pay is typically off the table when an employee is terminated for cause, such as misconduct or policy violations.
Which factors determine the severance pay amount?
The amount of severance pay an employee receives can vary widely and is dependent upon several factors. Understanding them helps employers make fair, consistent decisions that align with both legal standards and company values.
Common factors include:
- Employee tenure. Many employers calculate based on years of service (e.g., one or two weeks pay per year worked).
- Job level. Executives and senior leaders often receive more generous packages (Employee tenure and job level are the most common factors for calculating severance).
- Employment contracts or CBAs. Legally binding agreements may specify severance terms.
- Company policy and precedent. Maintaining consistency across employee terminations helps limit disputes. Keeping policies up-to-date with country-specific regulations and clear documentation is essential.
- Local laws. Some countries mandate severance by law (Brazil, India, and Mexico, to name a few), while in the U.S., it’s typically up to employer discretion.
There’s no universal formula for calculating severance pay. The above factors should come into play as you determine the appropriate amount, as do the current standards in your industry. Tech, for instance, typically offers severance pay to their terminated employees.
Why should employers care about severance pay?
To stay compliant
Each country has its own rules on who qualifies for severance, how it’s calculated, and when it must be paid. Getting it wrong, whether through miscalculation, missed deadlines, or inconsistent application, can expose your company to legal penalties, disputes, or reputational harm. For example, in Germany, severance packages for mass layoffs should be negotiated with the local Works Council, an organization that represents employees.
To reduce risk
Severance pay can be a powerful tool for risk mitigation. A well-structured severance agreement, often paired with a release of claims, can help protect your company from wrongful termination lawsuits, discrimination claims, or other employment disputes. By offering fair compensation and clearly outlining terms, you create a smoother separation process that reduces the likelihood of lingering conflicts.
To help your employer brand
Offering fair severance pay says a lot about how your company values people, even when parting ways. Treating departing employees with respect and compassion helps maintain trust with your remaining team and shows potential hires that your organization does the right thing, even under tough circumstances.
Respect and compassion will help you maintain solid relationships with the employees you let go, too. This is more important than you might think. A Harvard Business Review thinkpiece warns that “Failing to treat a fired employee graciously can also come back to hurt the business: Some industries are small, and the person you’re firing today may work for a customer or a supplier tomorrow.”
To budget better
According to the LHH study, “If you’re a CEO, CFO, CHRO, or any member of the C-Suite, it’s critical to understand the costs and liabilities associated with severance and separation packages”, which includes severance pay. You are wise to anticipate potential severance costs during layoffs, restructuring, or mergers to avoid unexpected financial strain.
Building these obligations into workforce budgets helps preserve business stability during organizational changes. Thoughtful planning ahead of time, not during rocky economic times, allows you to make difficult, but strategic workforce decisions without disrupting cash flow or backburnering long-term growth goals.
5 best practices for employers
The best employers approach severance strategically, using it to protect their organization while supporting their people through transition. From clear policies to transparent communication, strong practices help reduce your risk, boost trust, and strengthen your reputation as an employer that handles change the right way.
Here are five best practices:
- Clearly document severance policies. Ideally, these should be spelled out clearly in employee handbooks or employment contracts.
- Ensure compliance with local labor laws. Labor laws, along with cultural norms regarding severance pay, differ dramatically depending on where your employee lives. Make sure your approach to severance aligns with where your employees work.
- Apply calculations consistently. To avoid claims of bias or discrimination (a common issue in wrongful termination claims), every effort should be made to ensure that terminations are done equitably among employees.
- Seek legal review of severance agreements. If you plan on offering severance, have an employment law expert review or write your severance agreement. This is especially important if your severance agreement involves a release of claims.
- Communicate packages respectfully and transparently during termination processes. How you treat your employees as they exit your company is extremely important to improving (or maintaining) your employer brand.
Terminating employees is an unfortunate component of doing business, but following the above tips can help protect you.
Make severance simpler with Pebl
In a perfect world, you’d never have to worry about severance pay. But in this world, Pebl makes it easy.
When you need to calculate fair severance or manage offboarding, we offer hands-on support in 185+ countries worldwide, keeping every transition smooth, compliant, and fair, so you can focus on your business. Contact us when you’re ready to manage severance and global HR needs with confidence.
If calculating fair severance or managing offboarding feel confusing, Pebl can deliver clarity and peace of mind.
This information does not, and is not intended to, constitute legal or tax advice and is for general informational purposes only. The intent of this document is solely to provide general and preliminary information for private use. Do not rely on it as an alternative to legal, financial, taxation, or accountancy advice from an appropriately qualified professional. The content in this guide is provided “as is,” and no representations are made that the content is error-free.
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