The Layoff Payoff: A Severance Package

Find out all you need to know about severance pay, including how to work out what you're owed.

Reviewed by Hayley Ramsey

Employee being given severance pay after negotiating their severance package with their employer

Getting fired your job from your job is never easy, but for many people, the shock and loss can be countered at least a little bit through severance payments. Severance payments are commonly offered as part of redundancy or restructuring processes and are designed to support good employees who are losing their job involuntarily. They serve an important legal purpose, as well as a moral one, providing protection for the employer for court cases.

We aren’t often exposed to severance payments (and we hope to never see one!), but this article takes you through what they are, how they’re calculated and also how to negotiate your severance payment: yes, that’s totally possible!

What is a severance package?

The best way to explain what a severance package is is by comparing it to an employment contract. In the same way a contract governs the legal conditions of your entry into a role, a severance package governs the provisions surrounding your exit, including terms and conditions that benefit both the company and the leaver. This is bundled into a lump sum financial payment (or payments) that you will be legally entitled to in the event of an exit from work, be it a standard resignation, redundancy, or (in some limited cases) being terminated for some form of performance or conduct issue.

Severance packages will include salary payments (such as pay in lieu of notice), holiday payments, redundancy pay (if applicable), benefits payments (or cash in lieu of benefits), bonus payments, and so on. These payments are designed to facilitate an employee’s exit from the company by helping them avoid financial hardship.

How does severance pay work?

Severance pay is usually the outcome of a structured process. This begins with the employer planning to terminate an employee or employees. They will then set up a meeting with the employee to discuss this and, in the case of redundancies, a way to avoid job loss (this is called a “consultation meeting”). In other cases, the meeting will simply be to communicate to the employee a notice of termination.

As part of this meeting, the employer would offer the employee a severance package. They will outline to the employee the terms of this package, which might be contingent on their conduct, the reasons for termination, as well as length of service and, in some countries, age as well. The employee might have the opportunity to ask questions about this, as well as negotiate for a higher package. The employee might also be able to take a draft of the offer away for consideration, or for a lawyer to look over it. Legal fees relating to severance agreements are sometimes covered by the employer.

Once this process has concluded, the employee will sign the severance agreement, subject to their lawyer’s approval. The agreed amount will then be paid to them (usually within 30 days of the date of termination), either as a lump sum payment or over the course of a few months. If the employee doesn’t sign the severance agreement, the amount of severance pay might be significantly less.

Why do employers offer severance packages?

Severance packages are most commonly used when a termination is involuntary, but not related to misconduct. Sometimes, if an employee is underperforming, a severance agreement might be a quicker and cheaper way to manage employees out than to go through months of performance management and meetings. Nevertheless, the most common reasons for severance packages to be used are in cases of redundancy or restructure.

The main reason employers want to offer these packages is to mitigate the risk of the terminations they need to make. A severance package will usually mean that the employee is unable to take the organization to court for wrongful dismissal or discrimination.

Another reason these payments are offered is that it confirms the contractual rights of employees in terms of termination payments. The package will guarantee that nothing is missed out and contractual terms are being honored.

One final reason employers might wish to offer severance payments is to ensure the employee’s service ends on a positive note. These packages can be enhanced beyond contractual right, and are used as a gesture of goodwill, or a warm farewell to good employees who are leaving through no fault of their own. In the UK, these payments are often referred to as “golden handshakes”.

What is a severance agreement?

Severance agreements refer to the legal paperwork that outlines a severance package. These need to be reviewed by both parties legally and signed by everyone. The agreement doesn’t just outline the pay and benefits the employee is entitled to, they also outline the terms and conditions of separation, as well as termination particulars. A typical severance agreement will begin with outlining these points. This will include employee information, such as job title, location, length of service, and the reason for leaving.

The next section will outline the package, broken down in terms of notice pay, redundancy pay, accrued vacation, and so on. This section will also confirm the status of any benefits (for example the end date of health coverage or pension payments), as well as any benefits or support offered during the transition period, such as a period of time off for job-searching and interviewing, counseling sessions, or career coaching.

The final section will outline legal provisions, such as waiving all rights to take the organization to court, or a time limitation governing a non-compete clause, stipulating that the employee cannot work for a direct competitor for a set period. The severance agreement concludes with signature lines, where employers, witnesses and employees sign.

How much are you entitled to?

In the US, the Fair Labor Standards Act (FLSA) doesn’t set a guarantee for severance pay to be paid. In practice, however, severance is determined by your length of service, the reason for leaving, whether you are hourly or salaried, and, depending on the employer or your contract, how senior you are. Severance pay is usually calculated in terms of the number of weeks of pay you are entitled to (for example, you might get 1 week of pay for every full year you have worked at the company). This is often capped at a set number of weeks (for example, 20 weeks).

Here are a couple of different examples of how much pay an employee might receive and how it can be calculated.

Example 1:

An hourly employee entitled to 1 week of severance pay for every year he’s worked at the company, with average weekly earnings of $900 and 5 years’ service:

Severance pay = weekly pay x # years of service.

$900 x 5 = Severance pay of $4,500.

Example 2:

A salaried employee entitled to 2 weeks of severance pay for every year she’s worked at the company, with a salary of $70,000 and 15 years’ service:

Severance pay = (weekly pay x2) x # years of service.

$70,000 / 52 = weekly earnings of $1,346.

1,346 x 2 = $2,692.

$2,692 x 15 = Severance pay of $40,380.

Remember to check your own employment contract and your organization’s severance policy before working out your pay, and ensure you are aware of your tax obligations when the payment is processed.

How to negotiate your severance package

It’s a common misconception that severance packages are static and cannot be changed. However, with a little preparation and knowledge of what can and cannot be done you can negotiate your severance package, as they’re dealt with on a case-by-case basis. Here are a few tips on how to accomplish this:

1. Seek legal advice

Even if legal support is not provided as part of the terms, it is prudent to engage a lawyer and discuss your severance package to see what their opinion might be in terms of negotiation. Sometimes, you might be offered less than what is fair, in your contract, or what is legal. In these cases, negotiation might be quite simple! In other cases, you might try to ask for a little more, and a lawyer can help you with the basis for this negotiation and the right approach.

2. Share your success

Employers are reasonable people, and they will want to ensure that their top talent — even if they have been made redundant — are rewarded justly. If you want to negotiate your payout, highlight to your employer all the good things you accomplished while with them. It will help if you prepare a list of your achievements and review your résumé prior to the negotiation discussion so you can succinctly share all the reasons why you might deserve a higher payment.

3. Consider all elements of the severance package

Some employers might be unable or unwilling to increase the basic severance amount, which is usually the bottom-line monetary figure. Understanding all elements of severance will help you here. Try requesting payment for unused vacation, sick leave, lieu days, or even non-contractual bonuses that could be paid out. Some benefits, such as health plans, might have a cash value that could be awarded. Sharing these thoughts with your employer as part of the negotiation discussion might help them find a way to increase what is paid out to you in a way that is “win-win”.

4. Communicate calmly and confidently

Success in negotiations is very much on a case-by-case basis. When it comes to negotiating your severance package, the way you communicate your intentions is critical. Be confident and knowledgeable in your negotiation skills, as this will encourage your employer to take you seriously and listen to what you have to say, as well as giving your argument added credibility. Although the discussion might be stressful, it’s vital that you remain calm and polite when talking things through, as any ill-will or emotive language might work against you.

5. Be reasonable

When negotiating your package, don’t overplay your hand or ask for far more than is reasonable. Know what your employer can do and what they cannot do, and if you are in a difficult position for any reason (such as being selected for redundancy based on performance), then you will probably not be able to negotiate as much as you would like to. Employers are under no obligation to negotiate with you, so when they refuse to concede any more ground, politely accept this, and move on. It’s vital that you leave your job on good terms, so as not to burn any bridges.

Key takeaways

Losing your job can be a terrible experience and the prospect of unemployment can be daunting, but severance payments can be lucrative and help you get back on your feet, and quickly. Here are some of the key things to be aware of when it comes to severance payments:

  • Severance agreements and payments have many purposes, ranging from looking after employees to mitigate legal risk.
  • Always check your contract of employment, any applicable severance policies, and with a lawyer to understand what you are entitled to.
  • Severance payments can be negotiated.

By understanding severance payments, as well as what can be included in them, you will be in the best possible position to control the severance discussion and hopefully enhance what you will take home at the end of the process.

Have you ever been through severance pay negotiations? What was the outcome? Let us know in the comments below!