What is a severance package?

A severance package is a set of benefits offered to employees after they’re laid off or otherwise permanently separated from the company. These packages often include a lump-sum payment, continuation of health benefits, assistance with retirement contributions or other transitional support.

Severance is often structured as either a lump-sum payment or payments over a defined period after termination and can help the employee maintain financial stability while searching for a new role. For employers, offering severance can enhance goodwill, help reduce the risk of disputes and demonstrate a values-driven approach to offboarding.

“A well-designed severance package does more than support departing employees. It signals how your company handles difficult moments. When done thoughtfully, severance can protect the brand, reduce friction and reinforce trust with both current and former employees.”

—Jennifer Ghoshray, LL.M.

Benefits of offering severance pay

Letting employees go is never easy, but offering severance pay can make the transition smoother for both the departing employee and the organization. Severance packages typically offer more than financial support. They also provide strategic advantages that can protect the brand, strengthen company culture and reduce the likelihood of disputes.

These are some benefits of offering severance pay:

• Positive employee relationships: Severance pay is a gesture of goodwill that shows appreciation for an employee’s service. It helps maintain positive relationships with former team members, who may one day return as rehires or refer others to the company.
• Improved workplace culture: How you treat departing employees can impact the trust and loyalty of the remaining staff. A fair severance process demonstrates that a company values its people, even in challenging times.
• Brand reputation: News of layoffs can impact public perception. Offering severance shows responsibility and empathy, which can enhance an employer’s image among customers, job seekers and the broader public.
• Financial stability for employees: Unexpected layoffs or furloughs could negatively affect employees’ and their families’ health and wellbeing. Offering a severance package shows them an employer cares about their financial stability. It helps them take care of themselves and their families until they find work elsewhere.
• Rewards for contributions: For employees who’ve invested years in an organization, severance can serve as a tangible expression of gratitude.
• Voluntary departures: Voluntary severance programs can provide employees with the option to resign or retire, reducing the need for difficult layoff decisions and helping preserve jobs for those who rely on them most.
• Compliance considerations: In some cases, employers may be expected to offer a severance package. While the Fair Labor Standards Act (FLSA) doesn’t require severance pay on the federal level, certain state laws or employment agreements may address severance in specific circumstances. Employers should review state labor laws to determine if this applies. An employment contract might also require an employer to pay an employee severance.
• Reduces legal exposure: Employers can condition severance pay on the signing of a release agreement, which can help limit future disputes related to the separation, depending on the circumstances.
• Protecting proprietary information: Including a nondisclosure agreement as part of a severance package can help safeguard sensitive company information after employment.

Overview and examples of what a severance package offers

The compensation and benefits provided through a severance package can vary based on a company’s policies, the employee’s role and the circumstances of separation. However, most severance packages tend to include common elements:

Pay

Most employers include severance pay in their packages. Severance pay is typically calculated based on the employee’s salary and length of service. A common (but not universal) practice is to offer about one to two weeks of pay per year of service, though severance is generally not required by law.

However, an employee’s role or seniority may influence this. For example, executive or upper-management employees often receive more customized or substantial severance offers.

Insurance

Many severance packages also offer continued health insurance coverage for a specific period. If an employer is subject to the Consolidated Omnibus Budget Reconciliation Act (COBRA), eligible employees may generally continue group health coverage for up to 18 months after a qualifying termination event, but they usually must pay the full premium.

While employers are not required to pay for the employee’s COBRA coverage, contributing to some or all of the cost can help preserve goodwill and support a smooth transition.

Retirement and pension plan

Employees retain rights to vested retirement benefits after termination, though they generally cannot continue contributing once employment ends. Even if contributions cease, employees are typically entitled to a rollover of vested retirement funds upon termination of their employment.

Offering clear guidance on retirement options, such as 401(k) rollovers or pension distribution options, can help reduce confusion and maintain goodwill during the transition.

Job search assistance

A common option to include in an employee’s severance package is funding for a job search service. This service works with the employee during their unemployment period and helps them find a role well-suited for their skills, interests and experience.

Many services offer a variety of support options, including resume development, mock interviews and job search training or courses. These services can help former employees transition more smoothly and may reflect positively on an organization’s offboarding practices.

Other perks and benefits

Beyond pay and health coverage, severance packages can include extra perks that help ease the transition for the departing employee and reflect well on the company. In some cases, employers may allow employees to retain certain items (such as a laptop), subject to company policy and data security considerations.

These gestures, while small in cost, may influence how the offboarding process is perceived. How a company lets someone go says as much about that company as how it brings them in. A human-centered severance process is both a reputation safeguard and a reflection of the company’s values.

Tips to determine if a company may offer severance pay

Severance packages involve a significant financial commitment, so evaluating the advantages and disadvantages before making a decision is understandable. These are key considerations to help you evaluate whether offering severance aligns with the company’s goals:

Establish your budget

Companies should work with finance and HR teams to determine what they can realistically afford. Consider different scenarios, such as department-level reductions or company-wide layoffs and calculate projected costs based on employee tenure and seniority.

Many organizations offer one to two weeks of pay per year of service, with adjusted or more generous packages for long-term or executive-level employees.

Considering values and company reputation

Offering severance may help reinforce the employer brand and support your employee value proposition. In competitive industries, offering severance can be a factor in attracting top talent who want to work for a company that supports its employees, even during challenging transitions.

Determining company resources

If a budget doesn’t allow for competitive severance pay, consider other forms of meaningful support. Covering a portion of health insurance premiums, offering career counseling or funding outplacement services can greatly assist in helping employees navigate the transition. These alternatives demonstrate the company’s commitment to doing what it can, even with limited resources, to support former employees in their job search.

Offering a thoughtful severance package can be both compassionate and strategic. It may help employees maintain stability during transitions, reduce potential legal risks and uphold the company’s reputation. When aligned with company values, it can also demonstrate leadership and build lasting goodwill.