What can we say? Layoffs are the worst. 

For those being laid off, HR teams, and employees who are left behind – layoffs can wreak havoc on an organization’s morale, productivity, and perception in the marketplace.

But companies can – and should – think proactively about how to create “softer landings” for their departing employees. One of the best ways to do this?

Well thought out severance packages.

When layoffs occur, severance packages often become a key part of the transition for both employers and employees. The problem is – most employers scramble to piecemeal them together and employees don’t understand how they work.

In this article, we’re going to share the nitty gritty details about severance agreements. From definitions, to pitfalls, to real-world examples – we’ll walk you through how to navigate severance packages with proactivity, ease, and clarity.

What is a Severance Package?

Let’s start with the basics. 

A severance package is a form of financial and benefits support provided to employees who are laid off or whose positions have been eliminated. Severance packages aim to cushion the impact of sudden job loss, offering departing employees resources to help them transition to new opportunities while protecting a company’s reputation.

Typically, a severance package may include financial compensation, extended health benefits, and other perks like outplacement services, which provide career counseling, resume support, and job search assistance. 

Severance packages can vary widely, with terms often based on factors such as the employee’s length of service, position, and the company’s financial policies.

Why should an employer offer severance packages?

We get it – it seems counterintuitive. In many instances, companies are conducting layoffs because they are trying to cut costs. Why would an employer spend more money on severance?

We encourage companies to think about three things:

Moral obligation
Employer Branding
Legal Risks

Employers often provide severance packages as a goodwill gesture, helping employees transition smoothly and mitigating potential legal risks. Severance is especially common in industries where layoffs are more frequent or in situations where companies aim to maintain a positive reputation among remaining employees and in the broader job market (aka: preserving their employer brand).

For employees, severance packages can provide essential financial support, healthcare continuity, and access to retirement benefits, which can be critical during periods of job search and reorientation. No one enjoys being laid off. But employees that are taken care of in the layoff process, are more likely to have favorable sentiments towards the organization and may even be interested in working for the organization again.

Providing this softer landing for exiting employees can provide peace of mind – for both parties involved.

When Should an Employer Offer Severance Packages?

While most employers think to utilize severance packages during downturns, there are numerous opportunities for employers to offboard well and provide severance packages to departing employees:

Layoffs Due to Economic Downturns or Restructuring

Again the most obvious – if a company is undergoing restructuring to cut costs during an economic recession, it may need to lay off employees. 

Downsizing or Right-Sizing the Workforce

When a company decides to downsize due to an excess workforce or a shift in business strategy, severance packages can support affected employees and signal that the company values its staff, even during difficult changes. We saw these types of layoffs post-COVID after the hiring spree in 2020 and 2021. Some well-known companies that experienced these types of workforce reductions included Stripe, Peloton, and Meta.

Mergers and Acquisitions

During a merger or acquisition, positions may become redundant or relocated. Whether two companies are merging or a private equity company purchases the organization, taking care of loyal employees is imperative to smoother transitions.

Role Elimination or Redundancy

Sometimes departments are no longer needed. Perhaps a plant is being shut down or a business line is failing. Those that work in those departments may need to be let go. Providing severance helps a company demonstrate empathy and mitigate negative responses from affected employees – and those that remain.

Company Relocation or Return to Work

If a company moves its headquarters to another city or state, employees who cannot relocate may be offered severance to support them financially while they seek new employment locally. Also, if a company is changing their policies from remote to in-office they may want to consider severance packages to those who choose not to comply. Especially for those that were hired under the pretense of remote work, providing severance could preserve the company’s reputation and trust with employees.

Changes in Business Model or Technology

Over the past couple of years, AI has been a hot topic of conversation – especially when it comes to workforce planning. As we see more AI technology come into the marketplace, we’re going to see more people’s jobs being replaced. If the company doesn’t plan to upskill their employees, they should consider offering severance packages to those impacted.

Termination of Long-Tenured Employees or Executives

For employees or executives who have been with the company for many years, severance packages can recognize their contributions and help them manage the change in employment status. Severance can be especially important for executives whose skills may be niche and for whom finding a comparable position may take longer.

High-Level or Sensitive Positions

When terminating employees in high-level or sensitive positions (like legal, HR, or IT security roles), severance packages can act as goodwill gestures, protecting company information, and reducing the risk of negative feedback or legal disputes.

Performance-Related Terminations with Legal Risk

In cases where a performance-related termination could potentially lead to legal disputes, employers may offer severance as a proactive measure to avoid litigation and to ensure that the transition is smooth for both parties.

Voluntary Layoff Programs

Companies sometimes offer voluntary separation programs to incentivize employees to leave. Severance packages in these programs can provide an appealing incentive, helping the company reduce staff count while avoiding involuntary layoffs.

Severance Package Guide: What Employers Need to Consider

As we mentioned, offering a severance package is a strategic decision with significant impacts on company reputation, employee morale, and legal risk management. Crafting a well-thought-out severance package demonstrates a commitment to employees during layoffs or restructuring, helping to maintain positive relationships with both departing and remaining staff. 

Here are some severance package best practices for companies:

Understand Legal Requirements for Severance Packages in the U.S.

Federal law doesn’t require severance in most cases, but some state laws and employment contracts may impose other obligations. The federal WARN Act (Worker Adjustment and Retraining Notification Act) mandates that companies with over 100 employees provide at least 60 days’ notice before a mass layoff or plant closure or pay compensation in lieu of notice. Employers should understand and comply with these requirements to avoid potential lawsuits and penalties. (aka: Don’t take our word for it – talk to your legal counsel!) Here are more details on the WARN Act:

What is the WARN Act and How Do Companies Comply? 

The WARN Act law exists to give people a heads-up so they have time to find a new job, train for something new, or make plans to help them manage until they find another job. This way, they’re not caught off guard.

Who Does It Apply To?

It’s for companies with 100 or more full-time workers. It also applied to companies that plan to lay off 50 or more employees at once or close a big location. Again, always consult with your legal team to confirm because laws are always changing.

How Much Time Do They Have to Give?

Companies need to give at least 60 days’ notice—this means two months before the layoffs actually happen.

Who Do They Tell?

The company has to let employees know about the layoffs via written communication. This notice can be given in writing like a letter or email so that everyone knows when and why the layoffs or closure are happening.

What Is a Normal Severance Package?

1. Pay Duration: Most severance agreements offer 1-2 weeks of salary for every year worked, with some companies providing more generous packages. For executives or long-tenured employees, severance might extend to several months or even over a year of pay. Some companies are even transitioning toward more flexible structures, such as lump-sum payments or continued salary installments to accommodate employees’ tax preferences or financial needs.

2. Additional Support: No leader wants to blow up someone’s life. No company wants their laid off employee to never find another job. Everyone wants the employee to find another opportunity STAT! But the reality is, it takes time. Outplacement and career transition firms can help expedite this process and provide the emotional and strategic support your exiting employee needs.

Shameless Plug:  At Recruit the Employer, we provide human-centered career transition solutions that take care of your employees and heal your employer brand. Our proven roadmap has helped thousands land jobs. To learn more, reach out today.

3. Benefits Continuation: Many organizations provide a continuation of health insurance through COBRA or direct coverage for a set period, typically between 3 to 6 months. Some choose to offer partial coverage, often between 50% and 80% for a limited time while employees pay the remainder. If you’re looking for a provider to help with minimizing COBRA costs, we recommend checking out When.

4. Severance Packages for Executives: Executive severance packages are often more comprehensive, including longer pay durations, extended benefits, and equity considerations. These packages are designed to reflect the unique contributions and risks associated with executive roles.

All in all, employers should seriously consider their offboarding practices and create policies that promote compassionate layoffs. Robust severance packages are not only compassionate, they make business sense. From preserving an employer brand to mitigating legal risk, severance packages that include pay, benefits, and outplacement can help your organization weather the messy storms of layoffs and firing.

What Employees Need to Know About Severance Packages

What if you’re an employee? How do you interpret your severance agreement? What are your rights? Can you negotiate?

We get it. Getting laid off is a traumatic event. The last thing you want to think about is all the legal jargon getting thrown at you. But, understanding the terms of your severance package is crucial for navigating the transition to new opportunities. Plus, you don’t want to leave money on the table!

Our hope is that this guide will provide you with some guidelines and things to watch out for if you do get the dreaded call that you’ve been a part of a reduction-in-force. 

Note: As always, please consult your own legal advisor who can speak to your specific situation.

Step One: Review Your Employment Contract

When you started your job, you probably signed a paper or an agreement that said what you would get paid, what your job is, and what happens if you leave. This paper might also say what you’ll get if you are laid off, like extra money or health benefits. It’s important to read it carefully so you know what you should expect when leaving the company.

Think of it like reading the rules before playing a game—you need to know what’s fair!

Step Two: Understand Severance Pay

Severance pay is like getting a paycheck after you’re no longer working. It’s meant to help you while you look for a new job. The amount depends on things like how long you’ve worked at the company, your role, and the company’s rules. Usually, the longer you’ve been there, the more weeks of pay you’ll get. Let’s do some math. Here’s how to calculate your severance pay.

Most companies offer 1-2 weeks of pay per year of service. For simplicity, let’s go with 1 week of pay per year of service.

Next, we want to calculate your weekly pay. Gross weekly pay = annual salary / 52 weeks. For example if your annual salary was $52,000, your gross weekly pay is $52,000/52 = $1,000.

Next, we multiply that by years of service. Let’s say you’ve worked for the company for 5 years. The formula is: $1,000 * (5 years x 1 week) = $5,000 in severance pay

Your severance pay may also include stock options, bonuses or unused vacation/PTO. Make sure to include this as well.

Note: Severance is taxed as regular income.

Step Three: Know Your Health Insurance Rights (COBRA)

Losing a job can also mean losing health insurance. However, under COBRA, you may be able to continue your existing health coverage for up to 18 months. Be aware that while COBRA allows you to keep your insurance, you may have to cover the full premium yourself. Look in the severance package to determine if your employer offers to pay premiums and for how long.

Step Four: Retirement Benefits Access

If you’ve been saving for retirement through your job, you may still be able to keep that money. But be careful: taking money out too early can mean paying extra fees or taxes. Instead, you can move that money into a special account called an IRA or another retirement plan, so you don’t lose any of it or pay penalties.

Step Five: Take Advantage of Outplacement Services

Many companies offer outplacement services (like what we do at RTE!) to help laid-off employees find new jobs. These services typically include resume writing assistance, interview coaching, and job search resources. For us at Recruit the Employer, we have an entire training dedicated to restoring and rebuilding your confidence. 

Make sure you ask if they are available to you and take advantage of these resources because they are free to you! While outplacement services don’t technically place you in new roles, they can help you transition faster to your next opportunity. 

If your company did not offer you outplacement or career transition services, we’ve made our resources available in our shop. 

Step Six: Negotiate When Possible

Did you know that severance deals aren’t always final? Sometimes you can ask for more, like extra pay, more time with health benefits, or additional job search help. It never hurts to ask HR if there’s room to make changes—especially if you’ve been a long-time employee or have special circumstances.

If you want more information on how to do this well, consult your legal counsel or check out Dan Goodman Employment Advisory. They specialize in helping folks negotiate their severance agreements.

Whether you’re an employer planning a layoff or an employee facing one, understanding the ins and outs of severance packages is essential. For employers, severance packages can protect your business from legal risks, improve morale, and help preserve your company’s reputation. For employees, these packages provide vital financial support and other benefits that can help ease the transition to new opportunities.

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To learn more about including transition support and outplacement services in your severance packages, learn more about RTE’s solutions here.

Have you been laid off and your company didn’t provide quality outplacement? We can help.