For employers, managing job changes is key to strong people management, and severance packages make the process smoother for everyone involved. Thoughtful, fair agreements not only show employees that they’re valued but also help preserve positive relationships, even after they’ve moved on. For employees, they provide financial support during uncertain times, providing a safety net as they navigate the transition to their next opportunity.
This guide will explore typical severance packages and how they benefit both employees and employers. We’ll also explore common strategies businesses use for creating severance guidelines that align with their organization’s values.
What is a severance package, and how does it work?
To best understand how severance packages work, you’ll have to start by considering factors like the employee’s tenure and their specific role. Seasoned employees who lose their jobs due to layoffs, restructuring, or other non-performance-related reasons often receive a severance package as compensation.
A severance agreement offers employers multiple advantages, including safeguarding the company's reputation, maintaining positive relationships with departing employees, and minimizing legal risks. It also aligns with best practices in workforce management and ensures compliance with employment regulations.
How much is a severance package?
Crafting a severance package involves components that support employees while protecting your organization’s interests. While it varies greatly depending on the industry and government regulations, most people who receive severance can expect between two weeks and several months of severance, matching their existing wage.
What is typically included in the average severance package?
A common severance package example might consist of pay per year of service, extended health benefits, and career transition support. Here are five components employers typically include:
Severance pay
While many organizations do not offer severance payments upon involuntary termination (such as layoffs), many do. A standard guideline is one to two weeks of pay per year of employment, but the final total relies on years of service, job role, and employee base pay. The actual amount can vary significantly based on company policy and legal requirements in each country.
Health insurance continuation
Extending health benefits temporarily—like through COBRA in the United States—can make the process much less stressful. For employers, covering part or all of any healthcare premium during this time ensures a smoother offboarding and will reflect positively on your company.
Retirement and pension plans
Employers may allow workers to roll over or retain access to their retirement accounts, such as 401(k) plans. Some packages also include payouts of unvested funds, giving employees greater financial liquidity during their transition.
Career transition services
Offering outplacement services, such as resume building, interview preparation, and job search assistance, can help employees land their next opportunity. Including this in your severance plan reflects a commitment to employee success even after their departure.
Employee benefits and perks
Some companies offer perks like extended access to gym memberships, work laptops, or payouts for unused vacation days as part of their compensation packages. These small gestures can leave a lasting impression, ensuring that incoming employees have a positive view of the company.
Benefits of offering a severance package
Offering a severance package is a calculated approach to handling employee transitions. Here are six key benefits:
- Positive relationships with former employees: A well-structured severance package helps keep former employees on good terms, which can strengthen alum networks.
- Improved morale among remaining employees: When team members see that outgoing employees receive fair treatment, it builds trust and confidence within the organization.
- A stellar company reputation: How companies handle employee exits impacts how future hires and customers perceive their business. Supporting employees during offboarding—such as ensuring compliance with local laws like final paycheck laws by state—can enhance the employer brand.
- Support for your team: Severance pay provides stability to departing staff while they seek new opportunities. Coupled with benefits like an employer-sponsored health plan, a robust severance can mean the difference between an amiable parting and a stressful nightmare.
- Acknowledging employee dedication: Offering a severance package recognizes employees' years of service and contributions to the organization.
- Encouraging voluntary departures: Voluntary severance packages can motivate employees to self-select, simplifying difficult decisions for management. For guidance on navigating employee performance issues, see how to fire someone for poor performance.
How to know if you should offer a severance package
Whether to provide a severance package depends on various factors, including your company’s goals, resources, and values. In some cases, employers must determine if severance pay is mandatory legally, such as during mass layoffs or under specific labor laws in certain countries. Here are three key considerations to help guide your decision:
Evaluate your budget and employee seniority
Before committing to a severance package, assess your financial capacity. Long-tenured employees or those in senior roles may expect more comprehensive packages. Consider tailoring packages to available resources and employees' expectations if you have a limited budget.
Reflect with your company’s values
Offering severance packages can reinforce your organization’s commitment to fairness and care for employees. If your value proposition emphasizes a people-first culture, severance offerings extend this promise. Failing to uphold these principles during offboarding could negatively impact your employer brand and company reputation.
Explore alternative support options if severance isn’t feasible
If providing a complete severance package isn’t possible, consider other ways to support departing employees, such as offering career transition services, extending health benefits through an employer-sponsored health plan, or paying out unused vacation days. These more minor gestures can still demonstrate care and maintain goodwill.
Ensure compliance across the employee life cycle
Navigating the complexities of global employment can be challenging, but Oyster makes it seamless at every stage of the employee life cycle. From onboarding to offboarding, Oyster ensures compliance with employment laws across 180+ countries, allowing you to manage your team confidently and efficiently. Whether drafting contracts or navigating payroll, Oyster provides the expertise and tools to reduce risks and stay ahead of regulations.
With Oyster’s automated platform and in-house legal experts, you’ll have watertight protection around the globe, including 100% legal-reviewed agreements, expansive insurance coverage exceeding USD 8,000,000, and GDPR privacy practices. By integrating local laws and compliance support, Oyster empowers you to focus on scaling your business while we handle the legal intricacies.Build your global team with Oyster—hiring, payroll, and management in 180+ countries. Schedule a demo today.
FAQs
How are severance packages calculated?
An employee's tenure, role, and salary typically determine the calculation of severance pay. A usual formula is offering one to two weeks of pay for each year of service, though this can vary based on company policy, industry standards, and country-specific requirements. Senior roles or long-tenured employees may receive more generous packages.
Do companies have to give severance pay?
Whether severance pay is required depends on local laws and the provisions in the employment contract. However, some jurisdictions mandate severance under specific circumstances, such as mass layoffs. Ensuring compliance can also help avoid unfair dismissal claims.
What is a lump sum severance?
Upon termination, an employee receives a lump sum severance as a one-time payment instead of dividing the total amount into smaller installments. This approach simplifies the payout process for employers while providing immediate financial support to employees.
Can employees negotiate their severance package?
Employees can negotiate aspects of their severance package, including pay, benefits, or non-compete clauses. Employers open to discussions can often reach agreements that benefit both parties and maintain goodwill during offboarding.
About Oyster
Oyster is a global employment platform designed to enable visionary HR leaders to find, engage, pay, manage, develop, and take care of a thriving distributed workforce. Oyster lets growing companies give valued international team members the experience they deserve, without the usual headaches and expense.
Oyster enables hiring anywhere in the world—with reliable, compliant payroll, and great local benefits and perks.
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