What is Severance Pay and How to Calculate It

Quick Summary - The wave of cuts in 2023 in the hi-tech sector made companies say goodbye to over a hundred thousand workers. What does the severance package include, and who can claim it? What compensation can laid-off workers have? In this article, we analyze the approach to severance pay in different countries.

Severance pay

5 mins read

May 8, 2023

Severance: meaning, why you should pay, and who can claim it

Severance pay is a financial compensation to an employee after dismissal. It is usually paid to laid-off or terminated workers. Those who quit, as a rule, cannot claim benefits. But everything depends on the contract and local laws.

Federal law does not oblige employers to pay severance pay in the United States. Nor the Fair Labor Standards Act requires it, according to the US Department of Labor. But different states may have laws regarding this issue.

Although severance pay is not obligatory, employers often offer it as an attractive bonus for a candidate.

In addition, providing such compensation allows the company to maintain a positive image even among dismissed employees and to protect itself from possible lawsuits. After all, reputational losses lead to financial losses. A bad reputation increases the costs by 10 percent per hire, according to HBR.

How does severance pay work, and how to calculate it?

As a rule, the parties discuss the size of severance pay when signing a contract. It depends on numerous factors, including the industry, employee’s age, and the specialist’s seniority.

You also need to take into account whether the employee is a member of a trade union. In this case, the company must coordinate all procedures and payments the company with a trade union.

Therefore, there are no unified rules for severance pay

For example, federal employees in the United States, in case of dismissal, can have compensation in the amount of:

 – weekly payment for each year of service (up to 10 years);

 – biweekly payment for each year (over 10);

 – plus 10% of severance pay for each year of work for employees over 40.

In the private sector, the formula usually depends on the hierarchical position of a dismissed specialist. Severance payments vary in 1-2 weeks for lower-level workers. And payoffs for top managers and CEOs can reach a month, or even more, for each year in a company.


What is severance pay


What is a severance package and what can it include?

There is no one meaning of an “appropriate severance package” because it also depends on the contract and company’s policies.

In addition to the compensation described above, a typical severance package includes the payoff for unused vacations and day-offs, as well as the following:

  • Extension of health insurance

In the US, employers must offer COBRA for terminated workers in any case. So that they can continue their insurance coverage. However, the company is no longer obliged to pay the premium, and the entire amount can fall on the ex-employee’s shoulders. 

  • Stock options

A lot of companies offer their workers to buy shares. But the employee becomes the stocks owner for a fixed term. Thus, a severance package may provide an opportunity to acquire ownership of the shares or sell them back to the company.

  • Company bonuses

The possibility to keep a provided laptop or phone, employer-paid courses, or subscriptions may also be part of a compensation package.

Severance packages in tech: what giants promise to laid-off employees

Nearly 170,000 workers in the hi-tech sector received farewell messages from the companies in the first four months of 2023. 

Google has promised its 12,000 dismissed colleagues a severance package with a payoff starting at 16 weeks’ salary plus 2 weeks for each additional year in the company. The corporation has also offered them 16 weeks of GSU vesting, 6 months of health insurance, and outplacement assistance.

Microsoft has laid off 10,000 people. The corporation has promised dismissed workers “above-market severance pay,” 6 months of health insurance, stock awards, and career assistance.

Zoom’s got rid of 15% of the staff and offers laid-off “zoomies” severance pay of up to 16 weeks’ salary and health insurance, RSU and stock options vesting, and outplacement help.

Сompanies also promise compensation in accordance with local legislation for workers outside the United States.

Severance pay in Germany

Only workers under the social plan in case of massive cuts are entitled to severance pay, How To Germany says. In reality, the parties agree on such compensation. Typically, this is half of the monthly salary for each year of work. However, it may differ by the deals.

Nevertheless, the employer must comply with the notice period, and if there is a works council, you should agree with it on any steps and payoffs.

Severance pay in Israel 

In Israel, dismissed employees can have severance pay equal to one month’s earnings for each year of work, according to Altshuler. It includes all fixed allowances to the basic salary. However, additional benefits for convalescence, car, and telephone compensation do not count.

“Pitfalls” of severance pay and how to avoid them

As a rule, a company provides severance packages to avoid conflicts and potential lawsuits. However, if you work with an international team, you should be attentive to the nuances of local legislation. Laws may also vary from state to state in the US. So it is always better to work with qualified labor lawyers.

Outstaffing is another way to avoid compensation issues. You can terminate such cooperation after contract expires without any additional payments. 

If you are looking for highly qualified developers but are not ready to deal with the legal and administrative complications, we will offer you the most suitable outstaffing team. Contact us at PerceptionBox for a detailed consultation.


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