Severance Package: What It Is and How to Implement It

If you’re preparing for a layoff or other workforce reduction event, you probably know that offering a severance package to dismissed employees is common practice in the business world. But do you know why? Did you know it’s a way to help your departing staff bridge the gap between roles and help your organization to minimize some very important risks?

Here, we’ll discuss in detail what a severance package is, what it comprises, and how it benefits both employers and employees. By the end of this article, you’ll be better equipped to give departing employees all the support they need while helping your organization to meet its goals.

What is a severance package?

A severance package contains the benefits an employer offers to employees when they’re laid off – meaning they’re dismissed through no fault of their own. The package includes, but might not be restricted to, the severance pay that federal and provincial law requires Canadian employers to pay to dismissed employees. The package can also include other benefits, like a higher payment than the required minimum, outplacement services, and extended health insurance.

After the layoff individuals must sign their severance agreements, which state in detail the benefits included in their severance packages. As an HR professional, you should ensure the departing employee takes the time to review the severance agreement carefully before signing it. Also, in order to avoid future legal issues, collaborate with your legal team to draft your severance agreements and other legal documents to ensure they’re solid, accurate, and clear.

Who’s entitled to receive a severance package?

In Canada, no individual is legally entitled to a severance package – only the severance pay determined by federal or provincial law. So, even if an employee has been with a company for, say, more than ten years, it’s at the company’s discretion to determine the conditions that apply for a dismissed employee to receive a severance package.

However, despite the lack of legal obligations, offering a severance package is seen as a best practice in the event of a workforce reduction. Laid-off employees expect to receive those benefits and, if that doesn’t happen, they might feel frustrated and even motivated to take legal action. To avoid this, your organization should establish a severance package policy with terms and eligibility criteria that are clear and understandable to every employee.

Why do companies give severance packages?

Severance packages are an empathetic, professional approach to workforce reductions that offer various benefits for employers, such as increasing legal protection and helping in reputation management. Let’s see the main advantages they bring to organizations:

• Legal protection: In many cases, severance agreements include waivers of liability, which significantly reduce the risk of wrongful termination lawsuits and similar claims.
• Reputation management: Severance packages are a sign of goodwill and preserve a company’s positive reputation, a crucial element for attracting and retaining future talent.
• Retention increase: Remaining employees can see severance packages as an incentive to stay, as they show the company cares about its staff even in times of hardship.
• Cost management: Severance packages help organizations to better manage the financial impact of layoffs and avoid unexpected expenses from potential lawsuits.

How does a severance package benefit employees?

Employees benefit from severance packages in many ways, such as receiving much-needed financial and emotional support in their transition to a new chapter in their careers. Let’s see how individuals benefit from severance packages:

• Financial assistance: A severance package gives individuals substantial support while searching for a new job, helping them to manage expenses and provide for their families.
• Maintained benefits: Severance packages often include continued health insurance and similar benefits for a given period, allowing for extra security and peace of mind.
• Smoother transition: Many packages include outplacement services, like career coaching and resume building, making individuals more confident about finding an opportunity.
• Emotional support: Outplacement services also give employees psychological and emotional support, helping to ease the stress and uncertainty after a job loss.

What is typically included in a severance package?

As we’ve seen before, severance packages can include many elements, such as severance pay, extended benefits, and outplacement services. Each company may provide a different combination of these offerings, tailored to their policies and the needs of the departing employees. Let’s see in detail what the most common elements of a severance package are:

Severance pay

We’ve already seen what severance pay is and how it’s regulated by Canadian law. Now, let’s review some crucial details about their impact on the employee. First, here are the three different ways your company can provide employees with severance pay:

• Lump-sum payment: The employee receives the total amount in one single payment.
• Salary continuance: The employee will receive regular pay and benefits for a limited time after dismissal.
• Deferred payments. The employee will receive their severance pay over several years.

Besides that, there is some other crucial information employees should be aware of when informed of their severance packages:

• Employment insurance: Ensure that the employee is informed how each one of the options above may impact their unemployment benefits from the government.
• Income tax: How much the employee pays will depend on how your company pays the severance pay. So, educate the employee about how much they’ll owe.
• Pension: The agreement must indicate how much the employee gets in severance pay and how much they’ll have in their pension plan. Make sure to inform them about this.

Outplacement services

In addition to the severance pay, severance packages often include outplacement services to help dismissed employees to land their next job. These services support outgoing staff members by building winning resumes, giving them access to career coaches, preparing them for interviews, and empowering them to use job search platforms.

With access to modern, high-quality outplacement services, individuals can navigate their transition more effectively and find new opportunities much sooner than they would on their own. Also, as we’ve seen, offering outplacement services proves to surviving staff that your organization cares about them, which can boost morale and retention and improve reputation.

Other benefits and perks

Severance pay and outplacement services are the core of most severance packages. However, some additional benefits could be made available to departing employees. Let’s see what those are:

• Health, life, and disability insurance: It’s common to see those types of insurance made available for the departing employee for a given period.

• Pension plan: Some employers can offer a continuation of pension benefits, such as contributions to a Registered Retirement Savings Plan (RRSP).
• Bonuses: If available, employees can receive an accrued performance-based bonus for the current year and a bonus for the severance period.
• Commissions: Dismissed employees with fluctuating pay, like sales, would expect to be paid their severance based on overall estimated earnings, not just their base salary.
• Office equipment: In some severance packages, employees are allowed to keep equipment such as laptops, tablets, computer peripherals, and mobile phones.

Severance package: main takeaways

Severance packages are central to any organization’s offboarding strategy. On the one hand, they demonstrate empathy and respect toward departing employees, giving them financial and emotional support in challenging times. On the other, they’re an effective resource for the company to improve retention, attract talent, and avoid potential legal risks.

When you add outplacement services to your severance package, you’ll support laid-off employees in their career transition and send your remaining staff the message that your organization values them and will be on their side even in tough times. Also, if you partner with a modern outplacement firm, you’ll see results. Look at these statistics from Careerminds:

• 95% placement rate for participants
• Participants land new jobs in under 12 weeks on average
• 99% participant satisfaction rate
• 80% participant engagement rate

If you’re looking for an outplacement partner, click below to speak with one of our experts. Learn more about the benefits of a people-first, result-driven outplacement provider like Careerminds!

Rafael Spuldar

Rafael is a content writer, editor, and strategist with over 20 years of experience working with digital media, marketing agencies, and Tech companies. He started his career as a journalist: his past jobs included some of the world's most renowned media organizations, such as the BBC and Thomson Reuters. After shifting into content marketing, he specialized in B2B content, mainly in the Tech and SaaS industries. In this field, Rafael could leverage his previously acquired skills (as an interviewer, fact-checker, and copy editor) to create compelling, valuable, and performing content pieces for various companies. Rafael is into cinema, music, literature, food, wine, and sports (mainly soccer, tennis, and NBA).