What Is Severance Pay and How Does It Work?
The term “severance pay” refers to the monetary compensation given to a departing employee by their employer upon an enforced termination of their employment contract.
This type of payment is offered for many reasons. For example, an employer might offer it out of goodwill, as a way to acknowledge the employee’s hard work and efforts, to defend itself against any legal lawsuit brought by a former worker for unfair hiring, unjust termination, or unpaid compensation, and to gain a competitive benefit against other employers.
Severance compensation must be given to workers as quickly as feasible after a dismissal. If the employer withholds the payment, the employee may file a claim with an employment tribunal or file a lawsuit.
Is Severance Pay The Same as Redundancy Pay?
Severance pay and redundancy pay are similar in many ways but differ slightly based on a few factors. The main similarity between the two is that both forms of financial settlements are offered to employees who are leaving an organisation.
Redundancy pay is offered to employees for three reasons; if the role no longer exists, functions performed by the employee are no longer needed, or the job no longer exists. In the UK, this is a legally required payment if the employee meets the qualifying criteria.
However, severance pay often refers to optional compensation that is offered to employees when their job suddenly ends. Employers frequently provide severance compensation as part of a severance package that may include additional perks like the continuance of the employer-sponsored health insurance plan.
Understanding the Legality of Severance Pay in the UK
The best way to describe severance pay is redundancy pay plus additional employee compensation, such as perks and incentives, in a more extensive package.
The UK law regulates redundancy compensation, but to receive a good severance package, people must negotiate with their employers to make it a part of their employment contracts.
This is important because severance pay, unlike redundancy pay, is not a legal requirement as per UK law unless it is covered under employment contracts. If it is a part of the employee’s contract, then the employer must abide by all legal obligations and pay them the amount as soon as possible.
If an employer offers severance payment to its employees, the entire process should be transparent and per UK employment law. This means that the complete process of paying the severance pay to the employees must be followed through in a non-discriminatory manner.
Additionally, the employees must be given all their legal rights. This means that the employers must refrain from using the severance pay to make up or avoid other legal entitlements of their employees, such as notice pay or similar payments if they do not pay in lieu of notice. Failure to abide by the rules described under the UK employment law can result in a hefty fine for employers.
Since severance pay combines statutory redundancy pay and additional bonuses, knowing how both are calculated is crucial. It should also be noted that employees are eligible for a severance package only if their employment contract covers it. Therefore, the detailed checklist below will help employers calculate employees’ redundancy pay and severance pay.
- Determine Eligibility of Severance Pay
- Calculate the Amount of Severance Pay
- Ensure Employees are Aware of Severance Pay Criteria
- Deduct Tax and National Insurance
- Follow the Correct Procedure
- Seek Legal Advice
Determine Eligibility of Severance Pay
Before providing severance and redundancy pay, you need to determine whether your employees are eligible for them or not. Employees who have worked for you for at least two years are entitled to redundancy pay.
On the other hand, the main eligibility criteria for severance pay is to have an employment contract that states whether or not the employee will be paid their severance pay upon unwilling termination of their work contract.
It must also include any additional eligibility criteria, requirements and notice duration necessary for getting the severance pay. It must highlight the benefits and how they will be calculated.
Severance is calculated on an individual contract basis as no law regulates this type of pay. One individual’s severance pay might differ from the severance pay of another individual who has the same work history based on their contract with the employer.
Calculate the Amount of Severance Pay
The amount of severance pay you need to provide to your employee will be based on their redundancy pay and additional benefits agreed upon by both parties when signing the employment contract.
The redundancy pay calculation depends on multiple factors, such as the total length of service, weekly pay, and whether payment in lieu of notice was paid. The statutory redundancy payments are cappedat £643 per week and the maximum statutory redundancy pay you can get is £19,290.
Ensure Employees are Aware of Severance Pay Criteria
It is important to communicate with your employees about the terms and conditions of their severance pay. Make sure that you provide them with a written statement of the amount and the calculation used to determine it.
Deduct Tax and National Insurance
Severance pay is subject to tax and national insurance deductions, so make sure that you deduct them from the payment before you give it to your employees.
Follow the Correct Procedure
It is important to follow the correct procedure when providing severance pay to your employees. You need to provide written notice of termination, give employees the opportunity to appeal, and provide them with a notice period.
Seek Legal Advice
If you need clarification on providing severance pay to your employees, seek legal advice. An experienced employment lawyer can guide you through the process and ensure you comply with the law.
Our legal experts at IAS offer help and handle severance pay cases for employers to ensure the entire process goes smoothly. For further information, please leave a message on the online chat or call us directly at 0333 305 9375.
When Do Employers Have to Pay Severance Pay?
As highlighted above, UK regulations do not force employers to pay a severance payment to dismissed employees unless stated in their employment contract.
However, employers must pre-inform or notify the employees being laid off as per their severance agreement. In case no such contracts have been signed before, the statutory minimum notice period in the UK is:
- One week’s notice is required for workers who have been on the job for between one month and two years.
- Individuals working for two years or more are entitled to one week’s notice for each year of employment, up to 12 weeks’ notice.
Some employees might also agree to leave their job upon mutual understanding under a settlement agreement with the employer in return for receiving a voluntary severance package.
If the employer holds the payment, the employee can claim to an employment tribunal or take legal action against the employer.
Employees may not be entitled to a severance pay if they are fired due to misconduct or any similar reason. The details of the qualifying circumstances will be detailed in the employment contract.
At IAS we recognize the importance of severance pay in recruiting and retaining staff and can provide comprehensive support for employers and workers concerning severance compensation matters.
Understanding the legal implications around severance pay can be very challenging and this is why our help is always available. You may contact our experienced legal staff by sending a message on our live chat. Alternatively, you can call us at 0333 305 9375 to speak with one of our knowledgeable experts.
Last modified on June 16th, 2023 at 1:22 pm
Need help with an immigration issue? Book a one-to-one advice session with one of our legal caseworkers.
We can complete your visa application on your behalf, taking the stress and hassle out of the process.
Fast Track Package
Need to submit an application quickly? We can help you complete and send it off in as little as 24 hours.
Ensure you have the greatest chance of a successful appeal with our legal support and guidance.
The Advice Package
With our Advice Package, you can book a one-to-one session with one of our legal team and receive bespoke advice tailored for your situation. We will review your case and give you expert advice on how best to proceed with your immigration matter. Reach out to a member of our team and book your session today.
The Application Package
Our Application Package is designed to help relieve the stress of immigration applications. One of our legal caseworkers will help you throughout the entire process, including establishing your eligibility for your chosen route, completing your application form to the highest standards and organising your documents. We will then submit it and monitor its status on your behalf.
The Fast Track Package
Our premium Fast Track Package is ideal if you need to submit an application quickly, such as if you need to meet a tight deadline. Our lawyers will work closely with you to see that your application is completed to the highest standards and ensure you get your application in on time, helping to take the stress and pressure off you.
The Appeal Package
Visa appeals can be a stressful process, especially if you’re relying on a specific visa to be approved. Our legal team can help you navigate the whole process and maximise your chances of a successful appeal, working alongside you to reach a favourable result. We can also represent you in immigration-related hearings and tribunals.
Redundancy pay is tax free up to £30k but the severance element is subject to tax and national insurance.
This depends significantly on your employment agreement and how long you have worked for an employer. Generally, employees who voluntarily resign are not entitled to severance pay.
Upon redundancy, all qualifying employees get a redundancy pay but only those whose employment contract covers severance pay get it.