---
title: "Severance Pay"
id: "10819"
type: "glossary"
slug: "severance-pay"
published_at: "2023-12-11T17:20:20+00:00"
modified_at: "2026-11-04T13:43:08+00:00"
url: "https://topsourceworldwide.com/glossary/severance-pay/"
markdown_url: "https://topsourceworldwide.com/glossary/severance-pay.md"
taxonomy_glossary_category:
  - "S"
---

##### Table of contents

# Severance Pay

## What is severance pay?

Severance pay is money an employer pays an employee when their employment ends, usually after a dismissal that is not the employee’s fault, such as a redundancy or a restructuring. It is also called separation pay, a severance package or, in the UK, redundancy pay. Depending on the country it is set by law, a collective agreement, the employment contract or company policy.

## Is severance pay legally required?

It depends on the country. There is no federal severance requirement in the United States, where it comes from contracts, company policy or a negotiated release. Most countries in Europe, Latin America and Asia set a statutory minimum based on length of service, while others, such as Germany and Singapore, leave it largely to negotiation.

Where severance is statutory, it normally applies to dismissals for business reasons and not to dismissals for gross misconduct. Some systems go further: in South Korea it is paid however the employment ends, including when the employee resigns. On top of the legal minimum, employment contracts, collective agreements and company policy can all add more, and the most generous source applies.

## Statutory severance pay by country

The table shows the legal minimum for a permanent employee dismissed for business reasons. Rules for senior staff, fixed-term contracts and collective dismissals can differ.

| Country | Statutory severance | How it works |
| --- | --- | --- |
| United States | None under federal law | Set by contract, company policy or a negotiated release. The WARN Act requires 60 days’ notice of a plant closing or mass layoff at employers with 100 or more employees, but that is notice, not severance. |
| United Kingdom | Statutory redundancy pay after 2 years’ service | Half a week’s pay per full year under age 22, one week from 22 to 40 and one and a half weeks from 41. Up to 20 years count and weekly pay is capped at £751, so the maximum is £22,530 (redundancies on or after 6 April 2026). |
| Canada (Ontario) | 1 week’s pay per year of service, up to 26 weeks | Only for employees with 5 or more years’ service where the employer’s payroll is at least $2.5 million, or 50 or more employees are let go within 6 months because of a closure. Paid on top of notice. Other provinces require notice only. |
| Germany | No general statutory right | Severance (Abfindung) is usually negotiated. Under section 1a of the Dismissal Protection Act, an employee dismissed for business reasons who does not sue can claim half a month’s salary per year of service if the employer offers it in the notice. |
| France | Legal severance after 8 months’ service | A quarter of a month’s pay per year for the first 10 years and a third of a month per year after that. Collective agreements often pay more. |
| India | 15 days’ average pay per completed year (workers) | Retrenchment compensation under the Industrial Relations Code, with one month’s notice or pay in lieu. Gratuity is separate: 15 days’ wages per year after 5 years’ service (1 year for fixed-term employees), capped at ₹20 lakh. |
| Brazil | 40% of the employee’s FGTS balance | The employer deposits 8% of pay into the FGTS fund every month. On dismissal without cause it pays a further 40% of everything deposited, plus notice (aviso prévio). |
| Mexico | 3 months’ salary for unjustified dismissal | Plus a seniority premium of 12 days’ pay per year (salary capped at twice the minimum wage) and, where reinstatement is refused, 20 days’ pay per year of service. |
| Singapore | No statutory retrenchment benefit | Set by the contract or collective agreement. The tripartite norm is two weeks’ to one month’s salary per year of service. |
| Japan | No statutory severance | Dismissal needs 30 days’ notice or 30 days’ average wages in lieu. Retirement allowances are common but come from company rules. |
| South Korea | 30 days’ average wages per year of service | For employees with 1 year’s service working 15 or more hours a week. Payable however the employment ends, including resignation. |
| Philippines | 1 month’s pay per year for redundancy | At least one month’s pay, or one month per year of service if higher. For retrenchment or closure it is one month or half a month per year, whichever is higher. Six months or more counts as a full year. |

Figures checked in November 2026 against the official sources listed at the end of this page.

## How severance pay is calculated

Statutory formulas usually combine four inputs:

- **Length of service.** Most formulas pay a set amount per year worked, often with a minimum qualifying period.
- **Salary base.** Usually basic or average pay before termination. Whether bonuses, commission and allowances count depends on the law.
- **Caps.** Some countries cap the weekly pay used (the UK) or the years counted.
- **Reason and age.** Gross misconduct normally removes the entitlement, and a few formulas pay more for older employees.

**UK example:** an employee aged 45 with 10 full years’ service earns £900 a week. Six years between 35 and 40 give 6 weeks, and four years from 41 give 6 weeks, so 12 weeks in total. Weekly pay is capped at £751, so statutory redundancy pay is 12 x £751 = £9,012.

**France example:** an employee with 12 years’ service and a reference salary of €4,000 a month receives 10 x ¼ x €4,000 = €10,000 for the first ten years and 2 x ⅓ x €4,000 = €2,666.67 for the rest: €12,666.67 in total.

## Forms of severance pay

- **Lump sum:** a single payment at the end of employment, the most common form.
- **Salary continuation:** regular pay continues for a set number of weeks or months.
- **Benefits continuation:** health or life cover extended for a period after the job ends.
- **Outplacement:** paid help with finding a new job, which some countries require in certain dismissals.
- **Equity:** accelerated vesting or a longer window to exercise share options.

## How severance pay is taxed

Severance is taxable income in most countries, but many give it special treatment. In the UK the first £30,000 of statutory redundancy pay and genuine ex-gratia severance is free of income tax and National Insurance, while unpaid wages, accrued holiday, bonuses and payment in lieu of notice are always taxed in full. In the United States severance is treated as wages, so income tax withholding and FICA apply.

Because the treatment differs so much, each part of a termination payment (final wages, holiday pay, notice pay and severance) has to be classified separately in the final payroll.

## Severance pay, notice pay and final pay

Three payments are often confused at the end of employment:

- **Final pay:** wages already earned and, in most countries, accrued but unused holiday.
- **Notice pay:** pay for the [notice period](https://topsourceworldwide.com/glossary/notice-period/) , either worked or paid in lieu.
- **Severance pay:** compensation for losing the job, paid on top of the other two.

## Severance agreements

Severance above the legal minimum is usually paid under a severance or settlement agreement. In return the employee typically releases the employer from claims connected with the employment and its end. Agreements also cover confidentiality, non-disparagement, return of company property and, where local law allows them, restrictive covenants.

Local rules decide whether a release is valid. In the United States, employees aged 40 or over must be given at least 21 days to consider a release of age discrimination claims (45 days in a group programme) and 7 days to revoke it after signing.

## How TopSource handles severance

When TopSource employs your team through our [Employer of Record](https://topsourceworldwide.com/employer-of-record/)
 service, we work out statutory notice and severance for each country, document the termination under local law and run the final payroll with the correct tax treatment. Our [global payroll](https://topsourceworldwide.com/global-payroll/)
 team does the same for employees on your own entities.

## Frequently asked questions

### Is severance pay mandatory?

It depends on the country. Many countries, including the UK, France, India, Brazil, Mexico, South Korea and the Philippines, set a statutory minimum. The United States, Germany, Singapore and Japan have no general statutory severance, so it depends on the contract, a collective agreement or negotiation.

### How much severance pay is normal?

Where the law sets a formula, it is usually somewhere between two weeks’ and one month’s pay per year of service. France pays a quarter of a month per year for the first ten years, South Korea 30 days’ average wages per year and the Philippines one month per year for redundancy.

### Do you get severance pay if you resign?

Usually not, because statutory severance is tied to dismissal. There are exceptions: South Korea pays severance however employment ends, and in India gratuity is paid on resignation once the employee has 5 years’ service.

### Is severance pay taxable?

In most countries, yes, although some exempt part of it. In the UK the first £30,000 of statutory redundancy pay and genuine severance is free of tax and National Insurance.

### What is the difference between severance pay and redundancy pay?

Redundancy pay is the UK term for statutory severance paid when a role is no longer needed. Severance pay is the wider term and can also cover contractual and negotiated payments.

## Related terms

- [Notice Period](https://topsourceworldwide.com/glossary/notice-period/)
- [Redundancy Rights](https://topsourceworldwide.com/glossary/redundancy-rights/)
- [Gratuity](https://topsourceworldwide.com/glossary/gratuity/)
- [Abfindung (Severance Pay)](https://topsourceworldwide.com/glossary/abfindung-severance-pay/)
- [Kündigungsschutz](https://topsourceworldwide.com/glossary/kundigungsschutz/)
- [Fixed-Term Contract](https://topsourceworldwide.com/glossary/fixed-term-contract/)
- [Employer of Record](https://topsourceworldwide.com/glossary/employer-of-record/)

## Sources

- [GOV.UK: Redundancy pay](https://www.gov.uk/redundant-your-rights/redundancy-pay)
- [Ontario: Your guide to the Employment Standards Act, severance pay](https://www.ontario.ca/document/your-guide-employment-standards-act-0/severance-pay)
- [Germany: Kündigungsschutzgesetz, section 1a](https://www.gesetze-im-internet.de/kschg/__1a.html)
- [Service-Public.fr: Indemnité de licenciement](https://www.service-public.fr/particuliers/vosdroits/F987)
- [India: Ministry of Labour and Employment (Labour Codes)](https://labour.gov.in/)
- [Brazil: Lei 8.036/1990 (FGTS)](https://www.planalto.gov.br/ccivil_03/leis/l8036consol.htm)
- [Mexico: Ley Federal del Trabajo](https://www.diputados.gob.mx/LeyesBiblio/pdf/LFT.pdf)
- [Singapore MOM: Retrenchment](https://www.mom.gov.sg/employment-practices/retrenchment)
- [Japan: Labor Standards Act (English translation)](https://www.japaneselawtranslation.go.jp/en/laws/view/3567)
- [Korea Legislation Research Institute: Labor Standards Act and Employee Retirement Benefit Security Act](https://elaw.klri.re.kr/eng_service/main.do)
- [Philippines: Labor Code (Presidential Decree 442)](https://lawphil.net/statutes/presdecs/pd1974/pd_442_1974.html)
- [U.S. Department of Labor: Severance pay](https://www.dol.gov/general/topic/wages/severancepay)
- [EEOC: Waivers of discrimination claims in severance agreements](https://www.eeoc.gov/laws/guidance/qa-understanding-waivers-discrimination-claims-employee-severance-agreements)