Severance pay

Severance pay is the cash a worker is entitled to receive when employment ends, calculated from tenure, last salary, and the reason for termination.

For global payroll and EOR teams, severance is the line where the gap between provider contracts and real liability becomes visible. The statutory floor is one number; the settlement to secure a clean exit is another; the wrongful-termination tail is a third; the running accrual on the balance sheet is a fourth.

The label hides three different things across countries. Some treat severance as deferred compensation accrued from day one (Italy TFR, Brazil FGTS). Others treat it as a penalty owed only when the employer ends the relationship without cause (UK, Mexico, France). A third group treats it as a negotiated settlement to avoid wrongful-termination litigation (Germany, US).

The cost spread between the lowest and highest of the major countries runs 7x for the same employee profile. Modelling severance as one line across your country footprint is how the year-end accrual restatement starts.

What does severance pay mean in payroll?

Severance pay is the cash owed to a worker when employment ends, calculated from tenure, last salary, and the reason for termination. The exact mechanic varies by country, but every regime can be sorted into one of three models.

Model	Anchor	When it pays	Example countries
Deferred compensation	Accrues from day one as worker's property	Every exit, including voluntary resignation	Italy (TFR), Brazil (FGTS), UAE (gratuity)
Cause-conditional penalty	Statutory minimum on dismissal without cause	Employer-initiated termination without cause	UK, France, Mexico, Spain
Negotiated settlement	No statutory floor; settlement to secure release	When the employer wants a clean exit	Germany (Abfindung), US (release-of-claims)

Italy is the clearest example of the deferred-compensation model. The Trattamento di Fine Rapporto (TFR) accrues at 7.41% of annual gross salary, every year, every employee. It is paid in full at every exit regardless of cause, including voluntary resignation.

The US sits at the other end. Federal law mandates no severance at all, outside the WARN Act for mass layoffs. Whatever the employer pays is contractual or negotiated to secure a release of claims.

Between those poles sit most of the countries on a typical global headcount. The UK has statutory redundancy, France has a conventional minimum, Brazil has FGTS, the UAE has end-of-service gratuity. Each runs on different arithmetic.

The trap is treating "severance pay" as one budgeting line when it is at least four different liabilities depending on which country runs the payroll.

How much does severance pay actually cost in each country?

The answer changes by an order of magnitude depending on country. The dataset at severance, notice, and statutory leave by country tracks the current floors across 40 countries. The table below is the operational view for a typical 5-year tenured employee earning the local equivalent of $80,000.

Country	Mechanism	5-year cost (USD eq.)	Pays on resignation?
Italy	TFR at 7.41% annual accrual	~$29,600 + revaluation	Yes
Brazil	FGTS 8% monthly + 40% penalty	~$32,000 + ~$12,800 penalty	Yes (FGTS only)
Mexico	3 months base + 20 days/year	~$33,000	No
Germany	Abfindung 0.5 month/year (settlement, not statutory)	~$16,700	No
France	1/4 month/year (1/3 after year 10)	~$8,300 + préavis	No
UAE	21 days/year first 5y, 30 days after	~$7,700	Yes (gratuity)
UK	Statutory redundancy capped at £21,000	~£4,800	No
Singapore	No statutory; practice 2 weeks to 1 month/year	Negotiated	No

The 7x cost spread between the UK statutory minimum and Brazilian FGTS-plus-penalty for the same employee profile is the headline finding. The UK redundancy regime is the local equivalent of severance pay; see the redundancy pay entry for the calculation differences.

Two further numbers tend to surprise Finance teams. France adds a préavis notice payment on top of severance whenever the notice period is not worked, often equal to one to three months of salary; see the payment in lieu of notice entry for the parallel calculation. Brazil's penalty rate doubled for repeat dismissals under 2023 legislation.

If severance is budgeted at one number across the country footprint, the variance will appear in the year-end accrual restatement. Build the model per country, not per company.

Which country's rule applies, and what changes the math?

Severance is governed by the country where the employee performs the work, not the country where the contract is signed and not the country where the company is headquartered. That distinction trips up cross-border accruals more than any other rule.

The applicable law shifts the day a remote engineer relocates from London to Lisbon mid-engagement. The accrual modelled against UK rules is wrong from the move date forward.

Three factors move the math more than tenure does.

Termination cause. Almost every country distinguishes dismissal with cause (gross misconduct, fraud, refusal to work) from dismissal without cause (redundancy, performance, restructure). With cause, statutory severance is typically zero or reduced; without cause, the full statutory amount applies. The burden of proving cause sits with the employer in most civil-law countries, and tribunals are sceptical.

Tenure thresholds. Many regimes have step-function tenure points where the per-year accrual changes. France steps from 1/4 month to 1/3 month at year 10; the UAE steps from 21 days to 30 days at year 5; Spain has a 20-day-per-year rate for unfair dismissal that becomes 33 days for older contracts and 12 days for valid economic dismissal.

The notice period attached to the dismissal often costs as much as the severance itself; see the notice period entry for country-by-country lengths.

Contractual uplift. Statutory is the floor. Many countries have collective bargaining agreements or industry conventions that set a higher floor.

France's Syntec convention covering IT and consulting raises severance above the Code du Travail minimum for engineers and managers. Italian metalworkers' contracts add a supplementary indemnity on top of TFR. An EOR will administer the higher floor only if its local entity is signatory to the relevant convention.

The GCC region runs on a different model entirely. The UAE, Saudi Arabia, Qatar, and Bahrain use end-of-service gratuity rather than severance, paid as a lump sum at any departure including resignation; the end-of-service gratuity entry covers the GCC calculation in detail.

The rule of thumb is the rule of nothing. Look up the specific country, the specific cause, and the specific tenure bracket every time.

What does the four-layer severance liability actually look like on the balance sheet?

The statutory minimum is the floor, not the ceiling. Real-world severance liability runs across four layers, and most P&L models capture only one of them.

Layer	What it is	Where it sits	Common modelling miss
1. Accrued statutory liability	Tenure that has already happened	Balance sheet (Italy TFR) or funded account (Brazil FGTS)	Modelled as future event rather than running liability
2. Settlement uplift	Gap between statutory floor and clean-exit number	P&L when the exit happens	German Abfindung at 0.5 month/year not in any column
3. Wrongful-termination tail	Tribunal multiplier when dismissal found unjustified	P&L months after the exit	France/Brazil/Mexico can 2x-3x the original number
4. Funded reserve	Cash held in regulated account against future severance	Locked cash (Brazil FGTS) or retained TFR with revaluation	Treated as accrual when actually cash

Italy TFR is the most extreme version of the accrued-liability layer. At any moment, the employer owes every Italian employee the cash balance of their accrued TFR, payable on demand at exit. That is a running liability, not a future event.

Germany has no statutory severance but Abfindung settlements at 0.5 month of salary per year of service are routine to close out an unfair-dismissal claim. None of that appears in the statutory column of an accrual model.

In France, Brazil, and Mexico, a dismissal a tribunal later finds unjustified can multiply the original severance by two or three, plus reinstatement obligations or back-pay. The wrongful-termination tail is the layer most often missed, and it catches Finance off guard when the tribunal multiplier lands.

Italy TFR can be retained by the employer or transferred monthly to INPS or a complementary pension fund. If retained, it sits on the balance sheet as a liability with annual revaluation. Brazil FGTS is funded monthly to a federal deposit account, so the balance is real cash, not a balance-sheet accrual.

The exposure that lands on the audited accounts is whichever of the four layers is highest. Modelling only the lowest is how the year-end restatement starts.

What goes on the termination checklist before, during, and after exit?

Severance cost is partly determined by the legal arithmetic and partly determined by what People Ops does in the two weeks before the conversation happens.

The pre-termination work is where the lever sits. Document the performance issue or the redundancy economic case in writing. In civil-law countries, the absence of a contemporaneous paper trail converts a with-cause dismissal into a without-cause dismissal by default, which is often a tripling of the bill.

Confirm the applicable collective bargaining agreement and the convention-uplifted severance floor before the offer is fixed. The Syntec scenario in France and the metalworkers' scenario in Italy are the two most often missed in EOR-administered exits.

Confirm the statutory benefits accrued but not yet paid, including untaken vacation days and the pro-rata thirteenth-month bonus where applicable; see the statutory benefits entry for the country-by-country list.

During the termination, follow the local procedure precisely. France requires a convocation letter and a separation meeting with specific notice. Germany requires the works council to be consulted in advance of any operational dismissal. Italy requires the conciliation procedure for individual dismissals above the small-employer threshold.

Skipping any step converts the dismissal into procedurally invalid, which makes the wrongful-termination tail almost automatic.

Process the statutory severance through the local payroll, not as an off-cycle bonus. Tax treatment differs sharply between the two; the first €31,000 of French indemnité is exempt from social charges, and only severance processed correctly through payroll captures the exemption.

After the exit, secure the release-of-claims signature where local law permits one. In Germany, an Aufhebungsvertrag with a clean release closes off the unfair-dismissal route entirely. In France, the rupture conventionnelle achieves a similar but narrower outcome. In the UK, a settlement agreement with independent legal advice gives the same result.

Run the population-level accrual check at quarter end, not year end. Restating one country's severance carryforward two weeks before the audit closes is expensive in both time and signal.

Severance pay FAQs

Is severance pay legally required?

It depends on the country and the cause of termination. Italy, Brazil, the UAE, Mexico, France, and Spain all require statutory severance under defined conditions.

The US, Germany, and Singapore have no general statutory severance, though Germany's Abfindung settlements at around 0.5 month per year of service are routine to close out an unfair-dismissal claim. The country where the employee performs the work governs the rule, not the country where the contract is signed.

What is the difference between severance pay and redundancy pay?

Severance pay is the generic term for the cash owed at termination. Redundancy pay is the UK and Commonwealth subset that applies specifically when the role is eliminated for operational reasons rather than performance.

UK statutory redundancy uses a tenure-and-age-banded formula capped at a maximum weekly pay. Other countries fold redundancy into a broader statutory severance regime without the same UK-specific structure.

Does severance pay get taxed?

Almost always, but the treatment varies. The first £30,000 of UK statutory severance is income-tax-free under ITEPA 2003. The first €31,000 of French indemnité is exempt from social charges.

The US treats severance as wages subject to FICA, FUTA, and federal income-tax withholding. Italy TFR is taxed under a separate scheme based on average earnings over the tenure period. Process severance through local payroll to capture the available exemptions.

Does an Employer of Record handle severance pay?

Yes for the statutory floor. The EOR calculates the statutory amount, runs the termination payroll, and processes the local tax and social-charge withholdings.

The settlement uplift above statutory, the wrongful-termination defence cost, and the legal sign-off on the rationale almost always sit with the buyer, billed at cost plus a coordination fee. The EOR contract should define exactly where the provider's liability ends; see the best EOR providers shortlist for the providers that handle enhanced severance transparently.

What is the difference between Italy TFR and a typical severance regime?

TFR (Trattamento di Fine Rapporto) is the Italian deferred-compensation model. It accrues at 7.41% of annual gross salary, every year, for every employee, and is paid in full at every exit including voluntary resignation.

A typical Western-European severance regime pays only on employer-initiated dismissal without cause. The TFR balance is a running liability on the balance sheet from the day the employee starts work, not a future event triggered by termination.