Severance pay

How is severance pay calculated?

There is no single global formula. Calculation typically depends on years of service, final salary, and local law. Some countries set a statutory minimum; others leave the amount to negotiation or follow a customary practice shaped by case law.

In the UK, statutory redundancy pay uses a week's pay (capped at £751 from April 2026), multiplied by years of service and an age-based factor. In Germany, the common starting point is half a month's gross salary per year of service, though this is a guideline rather than a legal requirement.

Is severance pay always legally required?

No. Statutory entitlements differ by country and often by the reason for termination. Redundancy, restructuring, and performance dismissals can attract different rules. Some countries require nothing unless it is written into a contract or collective agreement.

Germany is a clear example: there is no general statutory right to severance, but employers commonly offer a payment when making an employee redundant to avoid an unfair-dismissal claim. Always confirm local rules before planning a termination.

What happens in countries with a severance fund?

Some countries, notably Brazil, require employers to pay into a government-held severance fund every month of employment. When termination without cause occurs, the employee receives the accumulated balance plus a penalty top-up, rather than a one-off payment at the point of dismissal.

Brazil's FGTS (Fundo de Garantia do Tempo de Serviço) requires employers to deposit 8% of the employee's salary monthly. On dismissal without cause, the employer also pays a 40% penalty on the total fund balance accrued during employment.

How does using an EOR affect severance obligations?

When you hire through an employer of record (EOR) model, the EOR employs the worker locally and is legally responsible for meeting statutory severance requirements. The commercial agreement between you and the EOR will set out how termination costs are handled.

This matters most in high-cost termination jurisdictions: the EOR calculates the correct statutory and contractual amount, makes the payment, and invoices you accordingly. Understanding the local rules in advance helps you plan costs before hiring.

Frequently asked questions

• Is severance pay the same as a redundancy payment?+

  Often yes, but not always. Redundancy pay is one type of severance triggered by a role being eliminated. Severance can also cover other termination scenarios such as mutual agreement exits or restructuring. The umbrella term 'severance' covers any payment made on termination beyond final salary.
• Is severance pay taxable?+

  It depends on the country and the type of payment. In the UK, the first £30,000 of a genuine termination payment is income-tax-free; amounts above that are taxable. In Germany, severance is generally exempt from social security contributions but may be subject to income tax with a possible one-fifth reduction if claimed on the tax return.
• Does the reason for termination affect how much severance is owed?+

  Yes, in many countries. Dismissal without cause typically triggers the highest entitlement. Dismissal for serious misconduct (gross cause) often results in little or no severance. Mutual-agreement exits may carry a reduced amount: in Brazil, for example, the FGTS penalty drops from 40% to 20% when both parties agree to end the employment.
• Can a contract override the statutory minimum?+

  Contracts can improve on the statutory minimum but cannot go below it. An employer can offer enhanced severance through a contract clause or collective agreement. Any provision that pays less than the legal floor is unenforceable, and the employee retains their statutory entitlement regardless.

Related terms

• Notice period
• Employer of Record (EOR)
• Worker misclassification
• Statutory benefits