What is a severance package?
A severance package is a set of compensation and benefits an employer offers to an employee upon termination of employment, typically when the separation is involuntary (e.g., layoffs, restructuring, position elimination) and not due to employee misconduct.
Common components:
- Severance pay — A lump sum or continued salary payments, often calculated as one to two weeks of pay per year of service, though formulas vary by company, industry, and seniority.
- Extended benefits — Continuation of health insurance (in the U.S., often via COBRA, sometimes with employer-subsidized premiums) for a defined period.
- Accrued compensation — Payment of unused vacation or paid time off, where required by law or company policy.
- Outplacement services — Career coaching, résumé assistance, and job-search support.
- Retirement/stock considerations — Vesting acceleration, extended exercise windows for stock options, or 401(k)-related provisions.
- References and neutral termination language — Agreement on how the departure will be characterized.
Key legal and practical points:
- In the United States, severance is generally not legally required unless mandated by contract, collective bargaining agreement, or specific laws (e.g., the WARN Act, which requires advance notice or pay for mass layoffs).
- Employers frequently condition severance on signing a separation agreement, which may include a release of legal claims and non-disparagement clauses.
- Severance pay is typically taxable income and may be subject to withholding.
- Terms are often negotiable, particularly for senior employees or where no formal policy exists.