What is a typical severance package? What employers need to know

You’re staring down the barrel of a difficult layoff. People who’ve given years to your company are about to lose their jobs, and you want to do everything you can to do right by them on the way out. That’s where a severance package comes in. More than just a final paycheck, it’s a way of acknowledging their contributions and extending a financial bridge. 

Forty-two percent of finance leaders expect layoffs in the next year, which means severance planning isn’t just theoretical. It’s something your organization may need to face head-on. 

In this article, we’ll explain what a severance package usually entails, from compensation and health benefits continuation to outplacement services. We’ll also break down how packages are typically calculated and flag compliance issues to keep in mind so your severance agreements are fair and legally sound.

What is a severance package? 

A severance package is the combination of pay and additional benefits that an employer offers an employee when their role is eliminated, most often because of a layoff or a restructuring. It usually includes some form of monetary compensation linked to how long the person worked for the company. Some employers add continued health benefits, a payout for accrued vacation and PTO, or even outplacement services. 

Example: Alex is a project manager at Acme Co. whose role is being eliminated for structural reasons. They’ve been with the company for seven years and earn $1,500 per week. 

Jordan, the HR leader, meets with Alex to explain that they will receive two weeks’ pay for each year of service. That’s 14 weeks’ salary, or $21,000, delivered as a lump sum. Along with the severance check, Alex will receive three months of continued health benefits and access to outplacement services. Jordan also confirms that Alex gets paid for 10 days of accrued vacation, valued at $3,000. 

What goes into the package varies based on a number of factors, like role, company size, and even location. A senior leader who delivered major wins might see generous terms, likewise an executive who negotiated severance as part of an employment contract. Someone earlier in their career might receive base severance pay. Company policy, industry norms, and local labor standards can also impact the details. 

When is a severance package offered?

A severance package is typically offered when someone is laid off or terminated because of factors outside their control, like a restructuring or a reduction in force (versus due to disciplinary action). Some companies also extend it to long-tenured staff as a show of appreciation for their loyalty. And if it’s part of an employment contract, as for many executives, it’s a legal requirement. 

Timing depends on company policy and local rules, but it usually happens right at the end of employment, so the terminated employee knows exactly what kind of compensation and support they can count on as they hunt for a new job. 

How do severance packages work?

Ideally, your severance package will follow a predictable process as part of your employee exit checklist:

• Calculate how much to offer. The employer decides this, usually through HR in consultation with leadership and guided by company policy, industry practice, or terms of employment contracts. 

• HR drafts a termination letter and formal severance agreement. These outline payment terms, conditions like non-compete clauses, and any extras like benefits continuation or outplacement support.

• The employee  meets with HR to walk through the offer. In most cases, it’s best practice to provide written documentation of the terms and allow the employee time to consider the options or consult with an employment attorney. Some states, like Illinois, may mandate a review period before the agreement can be signed. 

• After the employee accepts, the company shifts its focus to delivering what was agreed. The severance pay goes out, either as a lump sum or a series of installments processed through payroll. At the same time, HR takes care of supporting items, like payout of accrued vacation, COBRA enrollment, or career transition support. 

What is considered a standard or typical severance package?

There’s no single definition of a “standard” severance package, but most employers follow a similar playbook. Across industries, the most common approach is to base severance pay on service time, with more years with the company working out to a larger payment. 

Factors like role, company size, and geography matter, too. A big corporation with deeper pockets might be able to offer more comprehensive severance benefits, such as extended outplacement services or subsidized benefits. Smaller businesses with tighter budgets might stick to more straightforward financial support. 

Legal frameworks also play a role. The federal government doesn’t mandate severance payments, but individual states and countries have their own regulations. Employment contracts can also create obligations, as can collective bargaining agreements.

What does an average severance package include?

If you’ve ever wondered, “What is a typical severance package?” the answer usually comes down to a mix of pay and support benefits. An average severance package combines direct compensation with measures to help your departing employee navigate the (hopefully brief) period of unemployment before finding a new job. 

The exact mix depends on company policy, role, and tenure, but most severance agreements include a few common elements. More senior employees or long-tenured staff might see enhanced benefits like extended health coverage, while entry-level roles typically receive support focused primarily on replacing base pay. 

• Monetary compensation. Most packages start with a cash payout, often calculated as one or two weeks of pay for every year of service, but senior employees might receive added bonuses or larger multiples. 

•  Benefits continuation. Health insurance and other benefits sometimes continue for a limited period, either by extending coverage or subsidizing COBRA in the US.  

• Outplacement services. Some employers offer outplacement services like career counseling or resume support to help laid-off employees kick-start their job hunt.  

• Accrued vacation or paid time off. Some state laws and employment contracts require that accrued vacation time and unused PTO be paid out. Even when not mandated, many companies include it as part of an exit package for reasons of fairness.

• Non-compete or confidentiality clauses. In exchange for the severance payment, some employers may ask the former employee to sign a non-compete clause or reaffirm their confidentiality obligations. Whether or not these provisions hold up depends heavily on employment law, so be sure to consult with an attorney if you’re considering including them in a severance agreement.

Manage employee transitions effortlessly

See Rippling

Benefits of offering severance packages as an employer

The most obvious benefit of severance pay belongs to laid-off employees: a financial cushion that helps cover essential expenses while job hunting. But it also has real advantages for your business. A thoughtful severance package helps manage risk, protects morale, and strengthens your reputation as a fair employer. Thinking beyond compliance, severance packages can be a strategic tool for protecting your organization during difficult moments.

Protects company reputation during layoffs

When a layoff or a reduction in force happens, the way you treat your terminated employees shows everyone else who might be watching, like staff, candidates, and even customers, that you value your people. Providing severance benefits demonstrates that commitment in a highly visible way. 

Reduces the risk of legal disputes

Clear severance agreements consistently applied can reduce the likelihood of wrongful termination lawsuits and discrimination claims. By offering fair compensation as part of a documented process, you lower the chances of a misunderstanding and create a transparent termination procedure that’s easier to defend if you’re challenged..

Demonstrates goodwill and maintains positive relationships

Offering severance pay is a way of saying “thanks” and “no hard feelings” with monetary compensation. It also eases the transition for your former employees, hopefully with reduced bitterness, and can help maintain a positive impression. That sense of respect often extends to the workforce that remains, reminding them that they’d be treated well if their own jobs were affected. 

Encourages smoother transition processes

A lump sum payment, continued benefits, or outplacement services can help departing employees land on their feet and find new jobs faster. Supporting individual team members also reduces disruption and anxiety from a poorly managed exit that can ripple through an entire department. (Just because you’ve removed Slack access doesn’t mean your ex-employees aren’t sharing all the details in the team group chat.)

Enhances employer branding to attract talent

Candidates pay attention to how companies handle exits. When word gets around that your organization provides comprehensive exit packages with meaningful financial and practical benefits, it strengthens your employer brand. That reputation can make it easier to attract and retain talent, especially in niche industries where people can easily compare how employers treat their workers at every stage of employment. 

How to determine if your business should offer a severance package

Most employers choose to offer a severance package to preserve relationships, reduce legal risk, and support terminated employees through a difficult period. Providing something tangible at the end of an employment relationship can soften the blow of a layoff or termination. It also sends a strong signal that you respect the work your terminated employees put in during their time with your company. 

Deciding what to offer, however, or even whether to offer something at all, means weighing consistency, financial impact, and compliance burden. 

Review company policies and past practices

Consistency is one of the biggest reasons to formalize severance pay. If your business offered it in prior terminations, continuing to do so demonstrates commitment and builds trust. Deviating from past practice, on the other hand, can create resentment among departing workers and may even invite disputes if employees perceive uneven or discriminatory treatment.

Consider industry standards

Reputation is another driver in structuring a severance package policy. Employees talk, and so do candidates in your talent pipeline. Looking at common severance packages in your industry helps you avoid standing out for the wrong reasons. Offering at least the baseline—typically one or two weeks' pay for every year of service—also helps reassure current staff that they won’t be out in the cold if their roles are ever eliminated. Extras like outplacement services or extended benefits show that your commitment doesn’t end on their last day.

Evaluate financial capacity

Goodwill gestures do have a price tag attached, at least in the case of severance pay. A lump sum payout can offer closure for a former employee, but it might also strain your cash flow. Breaking payments into installments might spread out the impact, but it also prolongs your obligations. 

Consult legal counsel for compliance requirements

Finally, many employers offer severance to reduce legal exposure. Even though the Fair Labor Standards Act doesn’t require severance, state laws, employment contracts, or collective bargaining agreements sometimes do. Having an employment attorney review any severance agreement can help you stay on the right side of employment law and avoid expensive disputes down the line.

Compliance considerations around severance packages

Don’t be fooled by the absence of federal laws around severance packages—they still carry legal and compliance obligations depending on the jurisdiction. Overlooking state and local regulations can create risk for your business, especially when multiple employees are involved. Understanding the rules that apply where you operate and aligning severance practices with company policy and the law.

Compliance with local labor laws and regulations

Every jurisdiction has its own rules around severance pay. While federal law may not require it, some states do mandate it in specific situations, like after a mass layoff. 

New Jersey, for example, requires companies planning to downsize to notify their employees in advance and pay severance equal to one week’s pay for each year of service. And Massachusetts law states that employees terminated due to a change in company control are entitled to a lump sum payout equal to twice their weekly salary.

International terminations can come with their own set of unique challenges. Severance pay requirements, notice periods, and even definitions of termination vary from country to country, which makes consistency difficult for global employers. 

Mandatory notice periods

The federal WARN Act requires employers with more than 100 workers to give 60 days' notice for layoffs of more than 50 employees at a single employment site when those employees make up at least 33% of the site workforce.  Some states go even further. New York mandates 90 days ’ notice before mass layoffs or plant closures for companies with more than 50 employees.

Severance pay obligations

If an employment contract or union agreement spells out severance benefits, you’ll need to honor the terms. These obligations can exceed statutory minimums, requiring additional weeks' pay, bonus payouts, or extended benefits. Skipping this review step is one of the fastest ways for an employer to end up in a dispute.

Tax implications for both employer and employee

The IRS treats severance payments like regular wages, which means they’re taxable income for the former employee and subject to withholding and payroll taxes for the employer. These requirements apply regardless of whether you issue a lump sum or spread the payments over time. 

Non-discrimination laws related to layoffs

Unequal treatment of terminated employees can raise claims of wrongful termination or discrimination under federal laws like Title VII or the Age Discrimination in Employment Act. Using clear criteria and documenting decisions helps keep exit packages defensible.

Because rules can vary so widely, it’s best practice to loop in an employment attorney before finalizing any severance plan. They’ll work with you to ensure that you stay compliant with federal, state, and local requirements.

Compliance is at Rippling’s core

See Rippling

Simplify severance package management with Rippling

Severance packages are still payroll, which means they need to be calculated, taxed, and delivered with the same accuracy as any other paycheck. With Rippling, you can handle severance payments right alongside regular payruns with no need for manual workarounds.

Rippling offers full-service payroll built on top of a single source of truth for employee data. That means your employee data isn’t tied to one specific app—it’s the same across payroll, time and attendance, onboarding, performance management, and any other apps you use within our unified platform. 

That means Rippling’s natively built payroll software offers a seamless data pipeline that consolidates all your payroll functions on a single platform for a globally compliant pay run.  Combined with Rippling’s suite of benefits management and time and attendance tools, it transforms operations for a 42% efficiency lift across payroll, HR, and finance.

With Rippling, you can: 

• Pay employees and contractors on the same platform

• Manage time and attendance natively 

• Run unlimited off-cycle pay runs at no extra cost 

• Set up multiple pay schedules, pay rates, and pay types in just a few clicks 

• Add recurring reimbursements (like cell phone payments, gym memberships, etc.) that are automatically paid out every pay period, monthly, or at whatever interval you choose

• Automatically calculate prorated pay runs for new or promoted employees 

• Make changes after submitting payroll

FAQs about typical severance packages

What happens when a layoff includes multiple workers?

When a layoff includes multiple workers, federal rules like the WARN Act may come into play. This law requires any employer with more than 100 employees to give 60 days’ notice before a mass layoff or plant closing. Even if WARN doesn’t apply, you’ll need to think carefully about how to ensure that severance packages, outplacement services, and communication are handled fairly across the group to help laid-off workers transition and reduce the risk of wrongful termination claims.

How are severance packages calculated?

Severance packages are usually calculated by tying pay to tenure. An employee might receive the equivalent of a week’s salary for each year of service, for example. For those in leadership positions or who demonstrated exceptional loyalty over a long period of employment, you might be more generous. Because there’s no federal standard, the exact formula you use to work out specific packages will hinge on company policy and what’s spelled out in the employment contract.

How much severance is normal?

How much severance is “normal” depends on the company, the role, and how long the employee worked for your organization. Many employers use a simple rule of thumb: one to two weeks’ pay for every year of service. Some companies offer more, however, particularly for more senior roles or for long service. Severance can come as a lump sum or installments, sometimes with extras like health coverage or outplacement services. 

This blog is based on information available to Rippling as of August 26, 2025.