How Does Severance Pay Differ by Country?
Severance Pay Differ by Country
The answer varies by country, but many employers offer it to ensure employees who leave the company aren’t left without financial support. The specific amount depends on factors like the employee’s salary, age and how long they’ve worked for the company.
Some companies include severance pay in their hiring contracts, while others make it available as an added benefit. Severance packages can include everything from continued health insurance coverage to outplacement services to unused vacation and sick time. They also may include perks such as company-issued cell phones or laptops.
Companies generally provide severance packages for employees who are being laid off because of a restructuring or downsizing. In some countries, laws require them to do so. For example, in England and France, severance pay is mandatory for those who are dismissed without “good cause.”
Other factors that influence the amount of severance pay an employee receives vary by country. For instance, in the United States, severance pay is not regulated by law, and instead it’s usually negotiated through union contracts or among a group of companies in a given industry.
In other countries, such as the United Kingdom and Mainland China, severance pay is determined by labor laws and employment tribunal decisions. In the UK, employees are entitled to one month’s salary for every year they’ve worked with a company, and the amount can be adjusted depending on an employee’s age. In Mainland China, the amount is calculated by adding together years of service and then multiplying by the average monthly salary.
How Does Severance Pay Differ by Country?
The type of retirement or pension plan an employer offers also influences how much severance pay is included in a package. Employees enrolled in a defined contribution plan or 401(k) typically receive a lump sum payout. They can choose to keep the money in their former employer’s retirement fund, roll it over into an individual retirement account or transfer it into a new employer’s retirement plan. Northwestern Mutual financial advisors can help employees understand what options are available to them.
The tax treatment of severance packages varies by country as well. Some countries don’t impose taxes on severance payments, while in others, such as the United States, it can be taxed as ordinary income. It’s important for employees to carefully review any severance agreement they sign and consult with a tax professional to determine how their severance package is likely to be taxed. This is especially important if they’re receiving a large lump-sum payment that could push them into a higher tax bracket. In some cases, it may be possible to negotiate a reduced tax rate with the employer.
This is perhaps the most straightforward type of how to get severance pay, where the terminated employee receives a one-time payment equal to a specified number of weeks or months of salary. It provides immediate financial support and closure, allowing individuals to navigate their next steps with some financial security.
In some cases, rather than receiving a lump sum upfront, terminated employees may continue to receive their regular salary for a predetermined period post-termination. This type of severance pay eases the financial transition by providing a steady income stream while job searching or adjusting to unemployment.