What is a Severance Package?

A severance package, also known as an exit package or separation agreement, is a combination of benefits and compensation that an employer may offer to a departing employee upon termination of employment. Navigating severance packages can be complex and stressful. In addition to the emotional toll of job loss for the employee and compliance obligations for the employer, there are also financial considerations. 

Let's explore what’s typically included in severance packages and why they can be important for employers and employees alike.

What is Included in a Severance Package?

Regardless of whether a formal severance package is offered, a departing employee must receive their final paycheck, which should include any wages or salary owed for the work they completed, as well as accrued vacation or sick time owed to the employee, per the company’s policy and any state-specific compliance requirements that apply. 

Compensation above and beyond what the employer owes the employee may be offered a severance package, which can vary depending on the company’s practices, the reason for the separation, the employee's position, and other factors. Severance packages usually include the following components:   

Severance Pay

Severance pay is additional money a company may pay to an employee upon termination of employment beyond what is owed to them for work they performed for the employer. It can be a lump sum payment or additional compensation paid out over time. 

The amount of severance pay can vary, but it is typically based on the employee's length of service with the company, their salary, and – sometimes – the circumstances leading to their separation from employment. For example, employers often offer severance packages in downsizing that leads to layoffs,  when the employment of a high-level or long-term employee is terminated. 

Additionally, when a U.S. employer offers exit packages to employees who are protected under the Age Discrimination in Employment Act (ADEA), they must provide severance that includes compensation to which an employee who accepts their agreement would not otherwise be entitled. For example, a company that needs to reduce its head count or payroll expenses may choose to offer certain groups of employees, often those who have been there the longest and/or may be closest to retirement a voluntary “early out” package. Employers that choose to do this must follow ADEA regulations, which include (but are not limited to) requiring the employer to provide consideration (ordinarily a severance package) to employees who accept such an offer, in exchange for signing away specific rights as specified under the ADEA.

Continuation of Benefits

Direct financial payments aren’t the only type of compensation often included in a severance package. This type of post-employment compensation package often includes employer-paid continuation of health insurance or other employee benefits for a certain period of time. This can provide a safety net for employees who may not have immediate access to other benefits.

Outplacement Services

Outplacement services are resources provided to employees to help them find new employment. These services include resume writing assistance, job search support, and career counseling or training. Outplacement assistance is most commonly made available to departing employees who are being let go due to a shutdown, outsourcing, or a reduction in force brought on by other factors.   

Non-Disclosure Agreements

Some severance packages include a non-disclosure agreement (NDA) that a departing employee must sign in order to receive severance offered by the company that extends above and beyond what the company is legally obligated to provide to them. 

An NDA is intended to prevent a former employee from sharing confidential information per the terms specified in the agreement they sign. It may cover confidential company information and/or details about the circumstances leading to the employee’s departure. 

Why is a Severance Package Important for Employers?

A severance package is not just a benefit for employees; it is also important for employers. Here are some reasons why:

Protects the Company's Reputation

When an employee is terminated, it can reflect poorly on the company and its brand, especially if an affected individual feels they were treated particularly unfairly and makes their thoughts known publicly. Offering a severance package can help mitigate their negative feelings and protect the company's reputation. Additionally, severance agreements often include language that requires employees to agree not to disparage the employer as a condition of receiving the offered compensation. 

Encourages Employees to Sign a Release of Claims

In most cases, a severance package is contingent upon the employee signing a release of claims against the company. This means that the employee agrees not to sue the company for any reason related to their termination. By offering a severance package that is appealing enough to encourage employees to sign this release, the company can help avoid potential legal issues.

Helps with Employee Retention

The way an employer treats people when they leave not only affects those who receive a severance package but also impacts how those who remain with the organization perceive their employer. Knowing that their employer offered a generous severance package to former coworkers can help provide remaining employees with a sense of security and may encourage them to stay with the company longer. In this way, severance packages can positively impact employee retention and help reduce turnover costs for the company.

Why is a Severance Package Important for Employees?

A severance package can help affected employees navigate the stress and uncertainty that follows job loss in a number of ways, such as: 

Financial Support

Losing a job can be a financial burden, especially if the employee was not expecting it. A severance package can provide employees with compensation and benefits for a period of time after unexpected separation from employment, which can help ease the financial strain they experience while searching for and securing a new job. 

Helps with Job Search

Outplacement services included in a severance package can be extremely beneficial for employees looking for a new job. These resources can help employees update their resumes, improve their job search skills, and find new employment faster. This is especially beneficial to long-term employees who may not have a current resume or be familiar with how the job search, interviewing, and hiring process has evolved in recent years. 

Protects Employee Rights

In some cases, a severance package may include a non-disclosure agreement. While these agreements protect the employer, they also help protect the rights of employees and ensure they do not violate any legal agreements with the company.

Justworks Is Here to Help

Navigating severance packages and other employment-related compliance concerns can seem overwhelming for companies of all sizes, but especially small business owners. You’re focused on growing your business…who has time for complicated and time consuming HR tasks?

Contact Justworks today to find out how we can help with the full spectrum of employee lifecycle, from onboarding and payroll to severance and offboarding...and so much more in between.