The key elements of a severance package

If you’re planning on offboarding some employees, you need to know all there is to know about severance packages as they are a key element to the whole process. That’s because they help any departing employees bridge the financial gap between roles, while simultaneously helping your business minimise the chances of a wrongful lawsuit and protecting your brand.

Combining a solid severance package with comprehensive outplacement services is a way of showing good faith. It demonstrates that you treat any outgoing employees fairly and in the right way as they exit. But the question is, how do you draw up effective severance packages and then communicate these to your affected employees? We’ve got the answers for you here, to make sure you’re on the path to severance package success.

Let’s start with the basics. A severance package is the entire compensation bundle given to an employee who has been made redundant. It can include a separation agreement, as well as other components such as lump sum payments and various benefits, the details of which will depend on the company and its policies.

The severance agreement is the legal agreement between the organisation and the departing employee, and acts as a waiver of liability that the employee would sign when leaving. Signing this agreement usually means that the member of staff forfeits the right to sue the employer on wrongful termination grounds covering race, age, sex, or any other form of discrimination. These agreements have to be watertight, complying with all relevant UK recruitment and employment laws.

When drawing up a severance package, it’s vital that you work in conjunction with the legal department to ensure the package is robust. If you’ve planned and executed the redundancies carefully, this should minimise any wrongful termination concerns. However, a severance agreement can further safeguard against any arising problems such as this.

There are several benefits for both the employee and the employer with severance packages, so check out the list below:

Gives financial support: being offered a severance package, when other stressful aspects of losing a job are prevalent, means financial assistance is on hand during the transition process. This greatly helps departing employees to manage financially while looking for a new position, thus reducing the worry of where the next bit of money might be coming from.

Offers emotional support: as mentioned, it’s a stressful time being made redundant and emotions are running high. A severance package, as part of outplacement services, can offer psychological support, helping workers to cope with the uncertainty of job losses.

Planning time: having the luxury of a severance package gifts employees the time and space to plan their next move, whether that’s searching for a new position, starting their own business, or returning to further education.

Access to resources: many severance packages involve an outplacement programme, where resources, such as coaching services, CV help, and assistance during the job search, can steer employees in the right direction for where they next take their lives.

Benefits: some severance packages include health insurance, plus other benefits, for a specified timeframe, providing additional peace of mind to those affected employees.

Maintains reputation: offering a realistic severance package to all departing employees demonstrates goodwill, helping sustain a positive image of the company which is crucial for attracting and retaining top talent further down the line.

Boosts morale: providing severance packages can boost the morale of those employees who are staying, as they prove that the company cares about its staff, especially during the tougher times.

Offers legal protection: severance agreements can reduce the risk of wrongful termination lawsuits and other legal claims by including waivers of liability.

Reduces disruption: making employees redundant can fire up those emotions, but a severance package can calm the waters by ensuring a smoother transition for all as it provides those affected workers with financial support and practical outplacement services.

Manages cost: by implementing severance packages, companies can manage the financial impact of redundancies better, avoiding unexpected expenses from possible lawsuits.

As an overview, a severance package can facilitate a more compassionate and professional approach when reductions to the workforce have to be enacted, benefiting both the employee and the employer.

Another important aspect to consider is determining who receives a severance package and who doesn’t. Realistically, not all employees will be legally entitled to severance pay. It should be well noted that severance pay is not a legal requirement in the UK, though it’s often used as compensation by employers at the end of employment. So, even if an employee has been with a company for over 10 years, there’s no requirement to pay severance to them. This is different to redundancy pay, which is a legal requirement in the UK.

The main purpose of offering a severance package is to avoid the risk of a lawsuit for the company involved. Despite the lack of legal obligation, severance is like a goodwill gesture and is still considered best practice. Before going down that road, it’s best to establish a company-wide severance package policy clearly outlining the terms, conditions, and eligibility criteria.

This proactive approach will show that you have a clear understanding of the financial impact of being made redundant and ensures employees receive a fair amount of severance pay.

Severance packages come in all shapes and sizes, varying widely depending on the company and circumstances. Below are some of the more common types of severance packages:

• Lump sum payment – a one-off payment given to the departing employee.
• Salary continuation – ongoing payment of salary for a specified period following the termination.
• Staggered payments – payments that are spread out over a few months.

• Health insurance – an extension of health insurance benefits for a set period.
• Life and disability insurances – continuing life / disability insurance benefits for a certain amount of time.

• Legal advice – access to legal services in order to review the severance agreement.
• Financial planning – services that help with financial planning during the transition period.

• Pension plan – a continuation of pension benefits or a lump-sum payout.

• Bonuses – pro-rated or full-year bonuses based on performance.
• Tuition reimbursement – continued education benefits or a reimbursement for any courses taken.
• Office equipment – letting employees keep their office equipment, such as mobile phones or laptops.

These are general severance packages but most companies will offer a combination of the above, customising what’s on offer to suit the requirements of their departing employees and company policies.

There are two key elements that are expected to be included within a typical severance package – severance pay and outplacement services. Let’s look at both in a bit more detail.

The amount paid out to employees in a severance package will depend on your business and the specifics that relate to the departing employee’s position. A severance pay calculator in the UK can help employers to determine any payment owed to an employee based on specific requirements, such as longevity. For example, a member of staff who was on commission would receive a different package from an employee on a salary. Another way of doing it is to offer a standard package to all affected employees, such as six months of salary in exchange for their signature.

It’s important to note that severance payments should be offered as an extra part of the severance package, so any holiday time owed or sick days, can’t be taken into consideration. It’s best to think of severance pay as an added value that’s specifically part of the severance package.

In addition to a lump sum payment, a severance package should include outplacement services which have further benefits themselves and help affected employees with securing a new position. These services support outgoing members of staff by assisting with CV enhancement, personalised career coaching, interview prep, and access to further resources.

Providing high quality outplacement services means that outgoing employees can deal with their redundancy more effectively, securing new roles quicker than if they were left to their own devices.

Including outplacement services and severance pay demonstrates goodwill to those employees who are remaining, as it shows the company is committed to supporting all staff – even if they are having to leave.  This can boost morale and help to retain those surviving employees.

Offering severance packages is an essential part of any offboarding process, providing essential support to departing employees while protecting your company from potential lawsuits. They also bridge the gap for employees forced to transition between roles, showcasing your company’s commitment to treating all employees with respect, care, and attention during difficult times.

By combining severance pay with outplacement services, not only are you helping departing employees with their job search, you’re signalling to remaining staff that your organisation values its workforce, wherever they are.

The key takeaways are:

• A severance package includes legal “agreements” that waive the employee’s right to sue the employer for wrongful termination
• For employees, they provide financial and emotional support, room to plan, access to resources, and further benefits
• For employers, severance packages offer legal protection, uphold the reputation of the company, boost remaining staff morale, offer up smoother transitions, and manage cost more effectively
• Severance is not a legal requirement in the UK, but is seen to be best practice
• Establishing a clear severance policy in advance helps to manage redundancies more effectively
• Common components within a severance package include severance pay, a continuation of benefits, retirement perks and bonuses, and legal / financial advice
• Providing outplacement services with career coaching, CV assistance, and job search support helps employees to transition more smoothly through the process while demonstrating the company’s goodwill

If you’re ready to find the right outplacement firm to help you protect your organisation’s reputation through its next redundancy event, contact us at the next available opportunity to find out how Careerminds can help you to move forward.

Elizabeth Openshaw

Elizabeth Openshaw has over 12 years of experience in the job search sector, including extensive expertise in outplacement and CV reviews. Previously a Journalist on national publications, she is Director of her own company, OpenDoor CV Expertise Ltd. You can connect with her at Elizabeth Openshaw | LinkedIn.