How to manage severance pay for global teams

Terminating employees abroad is a difficult matter for businesses on many levels. There are a myriad of different rules to consider, and the fact that employee termination is handled differently in each country adds an additional layer of complexity for organizations with a global workforce.

International employers have to comply with the legal requirements surrounding notice periods and termination formalities and make sure that they have a valid reason for terminating the employee. Additionally, they have to check for severance pay requirements and provide the correct amount of compensation.

Managing severance pay for global teams is a challenge. Read on as we dive deep into the legal requirements, taxation rules, and calculation methods for severance pay and share some valuable tips on how to create severance packages for global teams.

Severance pay is the compensation a business offers to an employee upon the termination of his or her employment, typically in cases of redundancy, retirement, or layoff. The amount of severance the employee receives is generally determined based on his or her tenure with the company. In many cases, it comes down to a couple of weeks’ pay for each year of service.

There are two different payment models for severance pay. Employers can either choose to make a lump-sum payment, or they can offer a salary continuation plan, which means that they continue to pay the employee’s salary for a certain length of time.

What is a severance package?

Some employers go beyond simple severance pay and offer severance packages. Severance packages don’t just include the sum of severance pay provided by the company, but also additional monetary and non-monetary compensation elements, such as:

• Extended benefits (e. g. extended health insurance coverage),

• Pay for unused vacation or sick days,

• Assistance for finding a new job,

• Support for applying for unemployment benefits,

• Reduced working hours during the last weeks at work to give the employee time to find a new position, or

• Transfer of company property (e. g. work phone, laptop, etc.).

Companies normally provide detailed information on what is included in the severance package in the employment contract. Depending on the circumstances, it might be worth adding a non-compete agreement or including a garden-leave clause in the employee’s contract.

One common question about severance pay is whether it is taxable or not. There is no generic answer that is valid for every single country. There are countries that don’t impose taxes on severance pay, for instance the United Kingdom. Generally speaking, however, severance pay and other compensation such as pay offered for unused vacation days are subject to income tax and other payroll taxes.

This means that, as an employer, you need to withhold the same amount of taxes as you do for the employee’s normal salary and wages. However, in countries like the United States, paying the employee’s severance out in one lump sum might push them into a higher tax bracket, which would lead to them having to pay more tax than before.

Since taxes on severance pay must generally be paid in the year in which the payment is received, the risk of increasing the employee’s tax burden can be mitigated by paying severance in several installments spread over two consecutive years.

Severance pay is a legal requirement in many countries around the world. Especially in countries where employees enjoy a high level of legal protection, you should expect to have to pay severance when terminating local hires. Here are some examples of jurisdictions where severance pay is a legal requirement:

• United Kingdom: Employees who are made redundant after having completed at least two years of service are entitled to a severance pay settlement equal to 50% to 150% of their weekly earnings per year of service (depending on the employee’s age).

• France: When terminating employees in France for reasons other than gross or intentional misconduct, employers must pay a dismissal indemnity equal to at least one-quarter of the monthly salary per year of service for the first ten years of service, plus one-third of the monthly salary for each year of service exceeding ten years.

• Netherlands: Employers in the Netherlands are legally required to provide a dismissal payment equal to one-third of the employee’s gross monthly wages for each year of service. After ten years of service, the transition payment rate per year of service increases to 50% of the employee’s gross monthly wage.

• Austria: In Austria, employers are required to pay a sum of 1.53% of every monthly salary into an employee severance fund—only applies to employees whose employment contract was issued after 2003.

• Croatia: Under Croatia’s employment laws, employees whose tenure with the company exceeds two years are entitled to severance pay equal to one-third of their average monthly salary for each year of service.

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Severance pay is not a legal requirement in all countries. But employers may offer severance packages even in cases where they are not legally obligated to do so. In most cases, they do so because:

• They want to avoid a lawsuit with a disgruntled employee;

• They want to appear more attractive to potential new employees;

• They want to help employees during the transition period between jobs; 

• They want to improve employee morale after team members were laid off or made redundant; or

• They want to cut costs by making an employee an early-retirement offer.

The main challenge of managing severance pay for global teams is to remain compliant with in-country rules and regulations. Even if you intend to create a universal severance package that will be offered to all employees regardless of their location, your first priority should be to make sure that you adhere to the legal requirements of each jurisdiction.

This involves answering the following key questions:

• Is severance pay mandatory or not?

• Under which circumstances are employees entitled to severance pay (e. g. years of service, dismissal grounds, etc.)?

• What are the rules for taxing it?

• How is severance pay calculated?

• What else to include in the severance package?

• Are there any restrictions regarding how severance pay is paid?

• When does the payment have to be issued?

An employee’s severance pay always needs to be calculated based on the rules that apply under the laws that govern the employment relationship. There are different ways for calculating the amount of severance:

• Based on length of service: Under this model, the employee’s severance pay entitlement is calculated by multiplying his or her years of service with a certain percentage of the average salary (e. g. one-quarter or one-third of monthly earnings).

• Applying a flat rate: If they are not bound by legal requirements, companies can offer a fixed amount of severance pay to all employees, regardless of their position or years of service.

• Based on employee job level: Another method of calculating severance pay is adjusting the payment as the employee moves up the career ladder.

• Based on employee salary: Basing severance pay on employee salary means that the payment is calculated by multiplying the employee’s regular salary by a specific factor chosen by the company. For instance, it could be that all employees are entitled to severance pay equal to three times their average monthly earnings.

Creating effective severance packages for different members of a globally distributed team can be challenging. Here are a few tips to help you succeed:

• Be fair: As is the case for managing international benefits and compensation, managing severance for global teams is, first and foremost, a question of fairness. Employees who don’t receive severance because in-country laws don’t provide for it might feel bitter and less valued than their international colleagues. So try to find the middle ground between legal requirements and equality. For instance, this could be a minimum severance package for all countries.

• Follow a strategic approach: No matter how you want to manage severance pay for your global team, make sure to be consistent. This is best achieved by creating a detailed severance pay strategy that describes the guiding principles that apply across locations and explains how the strategy is executed in each country.

• Get legal advice if needed: As with anything else concerning international employment, compliance is key. When creating severance packages for international employees, your first priority should be to ensure compliance with in-country laws. Do your due diligence when researching local regulations and reach out to legal experts if you are unsure about legal requirements.

In order to remain compliant, businesses need to fully understand the rules surrounding severance pay. The problem is, however, that despite your best efforts, you might misinterpret legal texts, which could lead to miscalculation of employee severance pay or failure to provide severance pay in cases where it would have been required. An Employer of Record (EOR) can mitigate these risks.

An Employer of Record is an employment outsourcing solution for businesses that want to hire employees abroad without opening a legal entity. As the employee’s official employer, the EOR handles all things employment on your behalf. This includes the legal offboarding of employees and the administration of severance payments.

With Lano’s global employment solution, you get access to a global network of experienced EOR partners who can help you manage severance pay and employee termination in more than 170 countries worldwide. Interested in knowing more? Book a demo with one of our global employment experts to learn more.