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When an employment relationship ends, how you handle the exit matters just as much as how you manage hiring. A severance package is one of the most common tools employers use to support employees during this transition while protecting the business from legal and reputational risk.
This guide explains what a severance package is, what it usually includes, when it is required, and how employers can design one that is fair, compliant, and aligned with business realities.
A severance package is an agreement between an employer and an employee that outlines the compensation and benefits the employee will receive after termination. In exchange, employees are often required to sign a release or waiver, agreeing not to pursue legal claims against the company.
Severance packages can vary significantly depending on company policy, local labor laws, the employee’s position, and length of service.
In general, a severance package is not automatically required by law in every termination scenario. Whether it is mandatory depends on two key factors: the reason for termination and the employment laws of the country where the employee is based.
In many jurisdictions, severance pay becomes a legal requirement when termination happens due to redundancy, retrenchment, or business restructuring. Laws may prescribe minimum payouts based on length of service, salary, or employee category. These statutory severance rules are designed to protect employees who lose their roles through no fault of their own.
For example, in Singapore, a severance package is not legally mandatory under the Employment Act. However, in cases of retrenchment or redundancy, employers are strongly encouraged by the Ministry of Manpower (MOM) to provide fair retrenchment benefits.
If severance or retrenchment benefits are stated in an employment contract, company policy, or collective agreement, employers are legally required to follow those terms. In practice, severance packages in Singapore commonly range from two weeks to one month of salary per year of service, depending on company policy and employee tenure.
A severance package may include one or more of the following components:
This is the most common element. Severance pay is usually calculated based on:
Employers may continue benefits for a certain period, such as:
Some severance packages include payment for unused:
Depending on the agreement, employees may receive:
Some companies provide career transition assistance, such as:
Severance packages play an important role for both employers and employees. Beyond financial compensation, they help reduce legal risks, protect company reputation, and support a smoother transition after employment ends.
One of the main reasons severance packages matter is legal protection. In many cases, employees who accept a severance package are required to sign a release of claims. This helps employers minimize the risk of future lawsuits related to wrongful termination, discrimination, or contract disputes. For employees, clear severance terms also provide certainty and transparency regarding their post-employment rights.
Severance packages help companies maintain a positive employer reputation, especially during layoffs or restructuring. Treating departing employees fairly can reduce negative publicity, protect employer branding, and preserve trust among remaining staff. Companies known for offering fair severance packages are often seen as more responsible and ethical employers.
A severance package supports a smoother transition for employees by providing financial stability while they search for new opportunities. Continued income, benefits, or outplacement services can reduce stress and allow employees to focus on career planning, skill development, and job applications without immediate financial pressure.
Providing severance packages helps preserve goodwill between employers and departing employees. It also sends a positive message to current employees, showing that the company handles separations professionally and humanely. This can help maintain morale and productivity within the organization after difficult decisions such as layoffs.
For companies managing employees across multiple countries, severance becomes more complex. Different notice periods, statutory formulas, and termination protections mean higher compliance risk if handled internally without local expertise.
This is where working with a workforce partner or employer of record can help ensure severance is handled correctly, consistently, and in line with local laws.
A severance package is not just a financial payout. It is a signal of how an organisation treats people, especially during difficult moments.
When designed thoughtfully and executed correctly, severance packages protect your business, support employees, and preserve trust on both sides. As work becomes more global and regulations more complex, getting this right is no longer optional.
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