What is severance pay?

Severance pay is compensation provided to employees upon termination of employment, typically based on length of service, offered in exchange for a release of claims or as part of company policy. For professional service firms, severance pay helps manage departures professionally while protecting the business.

Key characteristics

• Paid upon termination

• Often based on tenure

• May require release signing

• Not legally required, usually

• Subject to payroll taxes

• Policy should be documented

Why it matters for professional service firms

Severance pay eases transitions and can protect the company through release agreements. Having a clear policy ensures consistent treatment. Professional service firms should establish severance guidelines and use proper documentation when providing severance.

Real-world example

Brian terminated the senior consultant after 4 years. Severance policy: 2 weeks per year of service. Severance package: 8 weeks' salary ($24,000), COBRA subsidy for 3 months ($2,400), and outplacement assistance. Conditioned on signing the separation agreement with the release of claims. All amounts are treated as supplemental wages with 22% federal withholding. Clean separation protected both parties.