What Is Redundancy Pay? Definition, Examples & Guide

What Is Redundancy Pay?

Redundancy pay, also called severance pay or separation pay, is compensation provided to employees whose positions are eliminated due to business restructuring, downsizing, economic conditions, or other organizational needs—not due to individual performance issues. This payment helps bridge the financial gap while employees search for new employment after involuntary job loss through no fault of their own.

Unlike termination for cause or voluntary resignation, redundancy occurs when the employer no longer needs the position, making the role itself redundant regardless of the employee’s performance. Typical severance formulas provide 1–2 weeks of pay per year of service, though amounts vary based on company policy, industry norms, position level, and individual negotiations.

Quick Answer

Redundancy pay (severance) compensates employees whose positions are eliminated due to business needs, typically providing 1–2 weeks pay per year of service. WARN Act requires 60 days notice for mass layoffs at employers with 100+ workers, or 60 days pay as penalty.

According to U.S. Bureau of Labor Statistics data, only 23% of private sector workers have access to severance pay through employer benefits. Among those receiving severance, median amounts equal 2 months salary for workers with 5+ years tenure. Organizations providing severance report 35% lower post-layoff litigation rates and improved employer brand perception.

What Is the Difference Between Redundancy Pay and Termination?

Organizations conducting layoffs should reference reduction in force guidelines for legal compliance.

How Much Is Typical Redundancy Pay?

Standard Severance Formulas

Common calculations:

Calculation example: Employee with 8 years service earning $60,000/year ($1,154/week) using 2 weeks per year formula:

• Severance: 8 years × 2 weeks = 16 weeks
• Total severance: $1,154 × 16 = $18,464

Factors Affecting Severance Amounts

Influences on payment:

• Tenure: Longer service typically earns higher multiples
• Position level: Executives and senior management negotiate larger packages
• Industry norms: Finance and technology often provide more generous severance
• Company financial condition: Struggling companies may offer minimal or no severance
• Group vs individual layoffs: Mass layoffs may use standardized formulas while individual redundancies allow negotiation
• Legal risk: Employees with potential discrimination claims may negotiate higher amounts

Organizations managing exempt employees should consider annualized salary calculations for severance.

Additional Severance Components

Beyond base pay:

• Continued benefits: Health insurance coverage for 3–6 months
• Outplacement services: Career coaching, resume writing, job search support
• Prorated bonuses: Earned but unpaid performance or annual bonuses
• Accelerated vesting: Stock options or retirement contributions that vest early
• Unused PTO: Payout of vacation and personal days (may be legally required in some states)
• Professional development: Reimbursement for training or certification programs

What Is the WARN Act?

Worker Adjustment and Retraining Notification Act

Federal requirements for mass layoffs:

Who must comply:

• Employers with 100+ full-time employees (or 100+ full-time and part-time totaling 4,000+ hours/week)
• Excluding part-time workers from threshold calculation

Triggering events:

Notice recipients:

• Affected employees (or union representatives)
• State dislocated worker unit
• Local government chief elected official

Penalty for non-compliance:

• Back pay and benefits for each day of violation up to 60 days
• Civil penalty up to $500 per day for failing to notify local government

Example: Employer with 250 employees lays off 100 workers without 60 days WARN notice. Penalty: 100 employees × 60 days × daily rate (salary/365) + benefits = potentially $600,000–$1,000,000 liability plus civil fines.

WARN Act Exceptions

When 60-day notice not required:

• Faltering company: Actively seeking capital that would avoid closure, and notice would prevent obtaining financing
• Unforeseeable business circumstances: Sudden dramatic unexpected economic downturn
• Natural disaster: Flood, earthquake, fire, etc. causing closure

Note: Exceptions are narrow and difficult to prove. Most employers cannot rely on exceptions.

Organizations tracking FTE should monitor workforce levels approaching WARN thresholds.

Is Redundancy Pay Required by Law?

Federal Requirements

Limited mandates:

• No general severance requirement: Federal law doesn’t require severance except WARN Act penalties
• WARN Act penalties as severance: 60 days pay and benefits for failing to provide proper notice
• Employee Retirement Income Security Act (ERISA): Governs administration of severance plans but doesn’t require them

State-Specific Requirements

Examples of state laws:

Most states: No general severance requirements beyond WARN Act compliance.

Contractual Obligations

When severance is required:

• Employment contracts: Individual contracts may guarantee severance upon termination without cause
• Collective bargaining agreements: Union contracts often specify severance terms
• Company policies: Employee handbooks or established practices may create implied contracts requiring severance
• Offer letters: Severance promises in offer letters create binding obligations

Legal doctrine: Consistent company practice of providing severance can create implied contractual obligation even without written policy.

Organizations offering floating holidays should clarify treatment of unused days in severance calculations.

What Benefits Continue During Redundancy?

Health Insurance

COBRA continuation:

• Mandatory COBRA: Employers with 20+ employees must offer health insurance continuation for up to 18 months
• Employee cost: Typically 102% of full premium (employee + employer portions + 2% admin fee)
• Severance enhancement: Many employers subsidize COBRA for 3–6 months as part of severance package

Example: Health insurance costs $600/month employer portion + $200/month employee portion = $800 total. Under COBRA, employee pays $816/month (102%). Employer offering 3-month subsidized COBRA saves employee $2,448.

Retirement Benefits

401(k) and pension plans:

• Vested amounts: Employee retains all vested retirement contributions and earnings
• Unvested amounts: May forfeit employer matching contributions not yet vested
• Rollover options: Can roll 401(k) to IRA or new employer’s plan
• Severance negotiation: Request accelerated vesting as part of severance package

Organizations managing annualized salary should calculate severance using annual compensation divided by 52 weeks.

Accrued Paid Time Off

State-by-state variation:

• California, Montana, Nebraska: Must pay out all accrued unused vacation
• Most other states: Payout depends on company policy
• Use-it-or-lose-it states: Employers can implement forfeiture policies in some states

Best practice: Clarify PTO payout in severance agreement to avoid disputes.

How Do You Negotiate Better Redundancy Pay?

Leverage Points

Factors strengthening negotiation:

• Long tenure: 10+ years service warrants higher multiples
• Specialized expertise: Difficult-to-replace skills increase value
• Potential legal claims: Age discrimination, FMLA interference, or other claims increase settlement value
• Company financial health: Profitable companies more likely to increase severance
• Group vs individual: Individual layoffs allow more negotiation than mass reductions

What to Negotiate

Beyond base severance amount:

1. Extended severance duration: Request higher weeks-per-year multiplier
2. Benefits continuation: Negotiate 6-12 months subsidized health insurance instead of standard 3 months
3. Outplacement services: Request professional career transition assistance
4. Non-compete waiver: Ask to waive restrictive covenants limiting future employment
5. Neutral reference: Secure agreement on positive or neutral job references
6. Accelerated vesting: Request immediate vesting of unvested stock or retirement contributions
7. Prorated bonuses: Include earned but unpaid quarterly or annual bonuses
8. Professional development: Request payment for certifications or training programs

Negotiation Strategy

Effective approach:

• Review proposed agreement carefully: Understand all terms before accepting
• Respond in writing: Provide written counteroffer with specific requests
• Justify requests: Explain tenure, contributions, and fair market comparisons
• Be professional: Maintain positive relationship throughout negotiation
• Consult attorney: Employment lawyer can review agreement and advise on reasonableness
• Consider tax implications: Lump sum vs installment payments affect tax treatment

Timeline: Employers typically provide 21 days to review severance agreements (45 days for group layoffs affecting 40+ employees over 40 years old).

Organizations should reference payment in lieu of notice for immediate separations.

What Are Release Agreements?

Standard Severance Release Terms

Typical provisions:

• General release: Employee waives all claims against employer (discrimination, wage/hour, wrongful termination)
• ADEA waiver: Specific waiver of Age Discrimination in Employment Act claims (for employees 40+)
• Confidentiality: Agreement not to disclose severance terms or company confidential information
• Non-disparagement: Promise not to make negative statements about employer
• Cooperation: Agreement to assist with transition, knowledge transfer, or litigation
• Return of property: Commitment to return all company equipment, documents, and materials

Legal Requirements for Valid Releases

Older Workers Benefit Protection Act (OWBPA) requirements for employees 40+:

• Written in clear, understandable language
• Specifically reference Age Discrimination in Employment Act
• Advise consulting attorney
• Provide at least 21 days to consider (45 days for group layoffs)
• Allow 7 days to revoke after signing

Unenforceable waivers: Cannot waive future claims, workers’ compensation, unemployment benefits, or claims not yet known.

The Bottom Line

Redundancy pay (severance) compensates employees whose positions are eliminated due to business needs rather than individual performance, typically providing 1–2 weeks pay per year of service though amounts vary based on tenure, position level, and negotiation. Federal law doesn’t require severance except WARN Act penalties for employers with 100+ workers failing to provide 60 days notice for mass layoffs affecting 50+ employees, resulting in 60 days back pay and benefits liability.

Standard severance packages include base pay calculation (1-2 weeks per year), continued health insurance (often 3–6 months subsidized COBRA), outplacement services, prorated bonuses, and unused PTO payout where legally required. Employees can negotiate higher severance amounts by leveraging long tenure, specialized skills, potential legal claims, and company financial health—requesting extended benefits continuation, accelerated vesting, non-compete waivers, and positive references.

Severance agreements typically require releasing all legal claims against the employer, with specific ADEA waiver requirements for employees 40+ including 21-45 days consideration period and 7-day revocation right. Only 23% of private sector workers have access to severance benefits, with median amounts equaling 2 months salary for workers with 5+ years tenure.

Try ShiftFlow’s workforce planning tools to model FTE impacts of potential layoffs, calculate WARN Act triggering thresholds, and plan workforce reductions that minimize disruption while ensuring legal compliance.

Sources

• U.S. Department of Labor – Worker Adjustment and Retraining Notification Act
• U.S. Bureau of Labor Statistics – Employee Benefits Survey
• U.S. Department of Labor – COBRA Continuation Coverage

Further Reading

• Reduction in Force Guide – Planning and executing layoffs legally
• Payment in Lieu of Notice – Immediate separation pay
• FTE Calculation – Workforce planning and WARN Act thresholds

Frequently Asked Questions

What is redundancy pay?

Redundancy pay (severance) is compensation provided to employees whose positions are eliminated due to business needs rather than performance. Typical formulas provide 1–2 weeks pay per year of service, though amounts vary by company policy and negotiation.

How much severance pay do you get for layoffs?

Typical severance formulas provide 1–2 weeks pay per year of service. For example, 5 years service earning $1,000/week = $5,000–$10,000 severance. Executives often negotiate 6–12 months salary. Amounts depend on tenure, position, and company policy.

What is the WARN Act?

The Worker Adjustment and Retraining Notification Act requires employers with 100+ employees to provide 60 days advance notice for mass layoffs affecting 50+ workers or plant closings. Failure to provide notice requires 60 days pay and benefits as penalty.

Is redundancy pay required by law?

Federal law doesn’t require severance except WARN Act penalties for failing to provide 60 days notice. Some states require severance in specific circumstances. Most redundancy pay is discretionary or required by employment contracts or collective bargaining agreements.

Can you negotiate redundancy pay?

Yes, employees can negotiate higher severance amounts, extended benefits continuation, outplacement services, accelerated vesting, non-compete waivers, and positive references—particularly for individual layoffs vs mass reductions where standardized formulas apply.

Do you get severance if you’re fired?

Severance is rare for termination due to performance or misconduct. It’s typically provided for involuntary separation due to position elimination, layoffs, or mutual separation agreements—not for fireable offenses.

How is severance pay taxed?

Severance is taxable income subject to federal income tax, Social Security, and Medicare taxes. Employers typically withhold 22% federal tax for supplemental wages. Lump sum payments may push taxpayers into higher brackets; consider installment options.

What happens to benefits after redundancy?

COBRA allows continuing health insurance for up to 18 months (employee pays 102% of full premium). Many employers subsidize COBRA for 3–6 months as part of severance. Vested retirement contributions remain yours; unvested amounts may be forfeited depending on plan terms.