In July 2025, the U.S. Bureau of Labor Statistics reported 5.3 million total separations, a 3.3 percent rate. With workforce changes common, employers often face decisions on how to manage the end of employment relationships.

Since at-will employment  allows termination at any time, with or without notice, a severance package becomes an important consideration, particularly during layoffs, restructuring, or individual separations.

So what is a severance package, and what does it include? Read on to explore its components and the reasons employers provide severance benefits.

What is a severance package?

A severance package , or exit package, is a set of benefits given to employees who are laid off, terminated, or sometimes leave voluntarily. Its main purpose is to provide financial support and ease the transition for employees as they move on from the organization.

Most often, it includes:

• financial compensation,

• continued benefits, and

• services to help employees find a new job.

When considering severance pay, employers can use Salary.com’s Compensation Market Data to see industry salary and benefits trends. This helps design fair severance offers and allows employees to benchmark their compensation.

Moreover, employers recognize how difficult layoffs are on affected workers and retained employees; it is not an action taken lightly. To ensure fairness, organizations are expected to follow a consistent methodology when offering severance benefits.

Key considerations include:

• Employers must establish a documented, justifiable business reason for the layoff and its effect on various protected classes, such as age, gender, race, and national origin.

• Executives and HR professionals typically agree on a formula of how to offer a severance agreement that is fair and equitable given the circumstances.

• Many use years of service to apply for severance benefits and provide one to two weeks of pay for each year of service on average.

Last paycheck vs severance package

The difference between a last paycheck and a severance package is that a last paycheck often covers wages for all time worked up to the termination date, accrued vacation payouts, required deductions, and any elected benefits. Depending on company policy, it may also include accrued sick leave or bonus payouts. On the other hand, a severance package contains the severance pay and benefits that employers elect to offer beyond the last payment.

Why do employers offer severance packages?

Many employers offer generous severance packages to ease the impact of job loss, reduce legal risks, and protect their reputation:

• Employee care: Job loss is never easy. Severance pay is often viewed as a sign of respect and appreciation, particularly for employees with long tenure. It helps cushion the financial impact when a departure is sudden or tied to factors beyond the employee’s control, such as organizational restructuring.

• Protecting company image: Handling layoffs without severance can appear harsh and short-sighted. This not only affects the morale of those who remain but may also raise concerns among investors and future hires. Providing severance demonstrates responsibility and helps safeguard the organization’s reputation in the market.

• Limiting legal challenges: Ending employment without any form of support can promote resentment, which may lead to legal claims, even if those claims lack strong merit. According to SHRM, the primary reasons for offering it are to “soften the impact of an involuntary termination and help prevent future lawsuits.”

Components of a severance package

As mentioned, such package usually includes financial compensation, continued benefits, and services to help employees find a new job. Here’s what employers need to know about these components:

1. Severance payment

   Severance pay is "often granted to employees upon termination of employment," and not required under the Fair Labor Standards Act (FLSA). Employees may receive severance pay based on their length of service and the agreement between the employer and employee.

   Here is what employers may offer severance pay:

   1. Severance pay based on terms of service

   2. Commission, bonus, and deferred compensation payouts due

   3. Rights under a pension, profit sharing, and 401(k) plan

   4. Stock option statement and exercise schedules

   5. Restricted stock and acceleration schedules

   6. Loan repayment terms

   7. Unreimbursed business expenses

   For hourly employees or lower-wage staff, knowing minimum wage levels ensures severance calculations comply with federal, state, and local wage laws. Salary.com provides data that helps employers avoid underpayment and legal issues across different jurisdictions.

2. Continuation of insurance benefits after termination

   Health benefits are one of the most critical concerns for departing employees. Under COBRA (Consolidated Omnibus Budget Reconciliation Act), employers must offer eligible employees the option to continue group medical and dental coverage after termination.

   Employers may choose to cover the company’s share of healthcare premiums for a set period (employer continuation period) before employees assume full responsibility. HR teams should clearly communicate:

   • When benefits end

   • When COBRA coverage begins

   • How long coverage is available (typically up to 18 months)

   • The cost of continuing coverage after the employer’s contribution ends

3. Post-termination, outplacement services

   Many employers want to support the transition process. In fact, over 70% of U.S. companies engage outplacement firms to assist departing employees with finding new employment. These services can provide:

   • Resume writing and editing

   • Interviewing preparation

   • Target company searching

   • Career counseling

   • Networking services

   • Office services

   Employers may be flexible by offering letters of recommendation, allowing employees to get personal files off the computer, or giving limited access to voicemail or email for a short time.

Severance packages can be tailored based on location, industry standards, or company size. With Salary.com's Market Data, employers can scope jobs, access relevant market insights, and justify severance pay using benchmarks aligned with similar organizations.

FAQs

Here are some common questions about the topic:

Is a severance package mandatory?

No, a severance package is not mandatory under U.S. state or federal law. The Fair Labor Standards Act (FLSA) does not require employers to provide severance packages, and a severance package offered is entirely at the employer’s discretion.

What are the common misconceptions about severance pay?

The common misconceptions about severance pay are that it is required by law, only for long-term employees, covers all wages or benefits, or prevents legal claims. In reality, severance is usually optional, and severance packages vary. The amount of severance pay depends on company policy, job level, employee’s tenure, and the terms in the employment contract.

Is severance pay taxable under employment law?

Yes, severance pay is taxable in the year that an employee receives it. Employers must report the amount on the employee’s Form W-2 and withhold the appropriate federal and state taxes, according to the Internal Revenue Service (IRS). It is important to consider the tax implications of severance pay when planning or processing payments.

How much severance pay does an employee receive?

How much severance pay an employee receives depends on company policy, length of service, job level, and the employment contract. Typically, employers provide one to two weeks of pay for each year of service.