Hiring glossary
What is severance pay?
Severance pay is money an employer pays an employee when their employment ends, most often because of a layoff or redundancy, either because the law requires it or as part of an agreed severance package.
In the US, the Department of Labor is explicit: the Fair Labor Standards Act has no requirement for severance pay, and severance is a matter of agreement between employer and employee. Many employers still offer it, often in exchange for the employee signing a separation agreement that releases legal claims. A severance package can include a lump sum based on service, continued health cover, outplacement support and an agreed reference.
Other countries build a statutory floor into law. In Canada, federally regulated employees with 12 consecutive months of service who are dismissed other than for just cause receive the greater of two days’ wages for each completed year of service or five days’ wages, on top of notice; provinces set their own rules. In the UK, the statutory equivalent is redundancy pay, owed after two years’ service and based on age, service and a capped week’s pay. In Australia, redundancy pay under the Fair Work Act runs from four to 16 weeks’ pay by length of service, with exclusions for small business employers. In India, the Industrial Relations Code 2020 requires retrenchment compensation of 15 days’ average pay per completed year of service for workers with at least a year’s service, and gratuity is a separate end-of-service payment; under the labour codes in force since 21 November 2025, fixed-term employees become eligible for gratuity after one year instead of five.
Anything above the statutory minimum is contractual or discretionary, and it is where most negotiation happens. Be consistent: use a written formula (for example, a number of weeks per year of service) so similar people in similar situations get similar terms, and record any exception and the reason for it.
Get the paperwork right. State whether the payment depends on signing an agreement, give the person time to consider it and, where local law requires, to take independent advice, and confirm what is paid when and how tax applies. This is general information, not legal advice.
Also called: severance package, severance agreement, separation pay, retrenchment compensation (India).
Example
A US software company lays off 30 people. Its written policy offers two weeks’ pay per year of service with a minimum of four weeks, three months of continued health cover and outplacement support, in exchange for a signed separation agreement with a stated review period.
Related terms
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