Severance is when a connection or relationship ends. As such, severance pay is given to employees when they are let go by their employer.
While severance is common in America, you don't hear about it much in the UK. Instead, we talk about redundancy pay or settlement agreements when employees leave. But are they the same things?
In this article, we'll explore severance pay, how it's different from redundancy pay, and what UK law says about severance payment packages.
Table of Contents
- What is severance pay in the UK?
- What’s the difference between redundancy and severance pay?
- Severance pay and UK law
- Do employers have to pay severance pay?
- Who is entitled to severance pay?
- Do you get severance pay if you get fired?
- Do you get severance pay if you quit?
- How much is severance pay?
- Is severance pay taxable in the UK?
- What are the benefits of severance pay?
- What are the disadvantages of severance pay?
- How can Lawhive help?
What is severance pay in the UK?
In the UK, severance pay is compensation given to employees who lose their jobs due to circumstances beyond their control, like business closures or staff reductions.
Contractual severance pay might include extra pay, lump sum payments, or additional benefits more generous than the legal minimums - like redundancy pay.
Although it's not legally required, many companies offer severance pay to attract and retain talent or to ensure a smooth departure for employees leaving due to redundancy or mutual agreement. It also can protect against potential unfair dismissal claims.
What’s the difference between redundancy and severance pay?
The terms redundancy pay and severance pay are often used interchangeably, but they can have different meanings depending on the situation.
Statutory redundancy pay is a legal entitlement for employees laid off because their employer no longer requires their position. Redundancy pay is calculated based on the employee's length of service and weekly pay up to certain limits.
While some employers may offer enhanced redundancy packages as part of their employment contracts, statutory redundancy pay is the baseline requirement they must adhere to by law.
Severance pay, on the other hand, is a broader term that can include any payment made, or benefit given, to an employee on the termination of their contract, regardless of the reason. While it may include enhanced redundancy pay, severance pay can also be offered when an employee is dismissed for reasons other than redundancy.
Severance packages are often negotiated as part of the employment contract, reassuring employees that if they have to leave unexpectedly, they'll have financial support until they secure a new position.
Severance pay and UK law
The Employment Rights Act 1996 is the main law governing statutory redundancy pay for employees with at least two years of service. Outside of statutory rules, employers and employees can agree on severance pay terms in contracts or collective agreements, however, they must exceed statutory minimums and adhere to fairness and non-discrimination laws.
For example, severance payments shouldn't violate rights based on age, gender, race, disability, or other protected characteristics.
Do employers have to pay severance pay?
Employers aren't legally obligated to provide severance pay, but they pay it if it's outlined in the contract or negotiated in a settlement agreement.
However, statutory redundancy pay is mandatory if an eligible employee is laid off due to redundancy and has at least two years of continuous service with the company.
Who is entitled to severance pay?
Who is entitled to severance pay depends on the terms agreed on in the employment contract or negotiated at termination.
Who is entitled to statutory redundancy pay is subject to certain eligibility criteria.
Employees must have worked continuously for the same employer for at least two years to qualify, but it generally doesn't extend to independent contractors, freelancers, or casual workers. Employees must also be of working age to qualify for statutory redundancy pay.
Do you get severance pay if you get fired?
If you're fired due to misconduct or poor performance, whether or not you get severance pay depends on the terms of your contract.
Some contracts may include clauses for severance pay even in cases of dismissal. Others, however, may outline an employer's right to withhold severance pay if an employee is fired for certain reasons.
Do you get severance pay if you quit?
Some employment contracts may include terms for severance pay upon resignation, although this is rare. These terms would be explicitly stated in the contract and agreed on by both parties at the start of employment.
However, employees who resign under certain circumstances might negotiate an exit package with their employer as part of a settlement agreement, depending on the specifics of their departure.
Employers often do this to mitigate potential legal claims, particularly if an employee has grounds for constructive dismissal.
How much is severance pay?
Unlike statutory redundancy pay, which follows specific calculations based on length of service and weekly pay, there are no set rules for determining severance pay.
Severance packages are typically negotiated before employment begins, and the amount offered depends on the company's policies and what they're willing to provide if an employee is let go through no fault of their own.
Is severance pay taxable in the UK?
Redundancy pay up to £30,000 is typically tax-free, providing some financial relief for employees facing redundancy.
However, severance pay is taxed similarly to regular income, including wages, holiday pay, and overtime.
What are the benefits of severance pay?
Severance pay offers a financial safety net for employees who lose their jobs suddenly. It helps cover living costs while they find new work, reducing immediate financial stress.
For employers, offering severance pay has two main benefits:
It makes the company more attractive to potential hires and helps retain current employees.
It can prevent legal issues by including a release of claims in the severance agreement.
What are the disadvantages of severance pay?
Severance packages can strain employers financially, especially during big layoffs or for high earners. They may also create feelings of unfairness among employees if some negotiate better deals or if long-term employees receive the same as those with less tenure.
Employers should carefully plan when and how they offer severance to manage these challenges.
How can Lawhive help?
At Lawhive, our network of specialist employment lawyers is ready to assist employers and employees with legal matters, including severance pay, redundancy pay, settlement agreements, employment contracts, and more.
Whether you're facing an employment dispute, negotiating terms of departure, or seeking legal guidance in drafting employment contracts, our network of experienced solicitors is ready to provide advice and representation tailored to your needs.
Contact us today for a free case evaluation and discover how our legal experts can support you with employment law matters.