Severance packages: what you need to know
September 19, 2024 by Jen David
Severance packages are an important part of a company’s offboarding process. During downsizing projects, they provide support to employees as they transition between roles. They also minimise the chance of an organisation being named in an unlawful termination lawsuit.
While Singapore doesn’t have specific legislation establishing a right to severance pay, the Ministry of Manpower does provide guidance on retrenchment benefits. When combined with provision of an outplacement service, this can be interpreted as a sign of good faith from the business. How a company treats its departing employees can have a huge effect on their reputation, so it’s important to develop a fair severance package. In this article, we’re looking into how that can be done to best effect.
What is a severance package?
There is a difference between a severance package and retrenchment benefit. While retrenchment benefit generally refers to the financial compensation a worker receives from their employer, a severance package includes the financial compensation plus a severance agreement and any other benefits the employer chooses to provide.
It is important to ensure that severance agreements are drafted collaboratively between the HR team and the legal team, to ensure they are robust and safeguard the business.
Why offer a severance package?
As we said, a severance package is not a legal requirement but it does incur some costs for the business. So why would an employer offer it? While it may seem counter-intuitive, there are several good reasons to consider offering such a package to departing employees:
- Legal protection: Including a severance agreement as part of the package can reduce the risk of lawsuits.
- Reputation management: A severance package that supports employees is beneficial for the company’s reputation, in terms of attracting and retaining talent.
- Morale and productivity: Retained staff can also be impacted by retrenchment exercises, but offering a robust severance package shows that the company cares and will support them should they be affected in the future, which in turn impacts their morale and productivity.
- Successful transitions: Severance packages offer departing employees a smoother route into a new role by providing financial support and outplacement services, which reduces disruption to the business.
- Cost control: Planning effective severance packages enables companies to mitigate the financial impact of layoffs, including unexpected legal expenses.
The benefits of a severance package for employers are clear, but what are the benefits for impacted employees?
- Financial support: Severance pay, or retrenchment benefit, guarantees financial help during the transition, enabling employees to focus on their job search rather than worrying about expenses.
- Job search resources: Adding outplacement support to a severance package means that the employee can access career coaching, CV and LinkedIn profile writing services, and job search support, enabling them to move back into employment much more quickly.
- Emotional support: Outplacement can support a job seeker emotionally as well as practically. At a stressful and overwhelming time, this is a much-needed service.
- Time: When an unexpected job loss occurs, severance packages provide individuals with a buffer of time and financial security to come to terms with the news and plan their next steps.
- Continuity of benefits: Some severance packages enable departing employees to continue accessing their former employment benefits – such as health insurance – for added peace of mind
It’s clear that a comprehensive severance package can facilitate a compassionate, professional, and reassuring approach to retrenchment, for employers and employees alike.
By clicking the link below, you’ll be able to access our free guide to layoffs, which will help you to prepare effective severance packages and processes to ensure a smooth workforce reduction.
Who is entitled to retrenchment benefit?
When you’ve decided to offer a severance package, the next step is to decide who will receive it.
No-one is legally entitled to retrenchment benefit, although the Ministry of Manpower recommends that “employees who have served the company for at least two years are eligible for retrenchment benefit” and “those with less than two years’ service could be granted an ex-gratia payment out of goodwill.” This only refers to financial payments – the Ministry doesn’t make any recommendations about outplacement services or other benefits.
It is advisable to create a company-wide severance policy clearly outlining the terms and eligibility criteria. A proactive approach to this right at the start of the downsizing exercise will give clarity on the financial impact and ensure that employees receive consistent, fair treatment and a predetermined amount of pay.
What is included in a severance package?
The benefits included in a severance package can vary greatly depending on the company, the number of employees affected, and the circumstances. The two main elements are severance pay and outplacement services, so let’s explore those first in depth.
Severance pay
Severance pay is also referred to as retrenchment benefit. The exact amount paid will vary depending on the contract of employment, if there is a clause covering such circumstances, otherwise it will need to be negotiated between the employer and its employees.
The Ministry of Manpower recommends a standard payout of between two week’s to one month’s salary per year of service. There may be variations to negotiate for commission-based employees.
Outplacement services
The provision of outplacement services eases the employees path into a new role. A quality outplacement service, combining online resources with a personal, person-centred approach, enables departing staff to navigate their retrenchment more easily and secure new roles sooner than they would on their own. The service may include:
- Career coaching
- CV and LinkedIn profile writing
- Interview preparation
- Job search support
- Online tools and resources
A severance package that includes both retrenchment benefit and outplacement services shows goodwill towards both departing and retained employees. It proves to staff and the rest of the world that the company cares about its staff, whilst enabling it to reap the benefits.
In addition to these two main offerings, the severance package may also include other options, such as:
Continuation of benefits
Sometimes, employment benefits can be continued past the employee’s departure date. The severance package should clarify which benefits can be taken forward, and for how long. For example, the employee may be compensated for unused leave days or retain their health insurance for a set period. It’s also worth confirming any effect on pensions or stock options.
Extra benefits
The company can also offer additional benefits that may smooth the way to a clean exit. These could include offers such as full or pro-rated performance bonuses, training costs, or even keeping equipment such as phones and laptops.
Counselling
Unplanned job loss can be a difficult situation for any employee. Some businesses choose to offer support in the form of legal services, financial planning services, or wellbeing support, on top of severance pay and outplacement.
Each company may choose a different combination of some, or all, of these benefits to include in a severance package, depending on their policies, budgets, and employee needs.
Final thoughts on severance packages
A robust severance package is crucial to a smooth off-boarding process. It provides much-needed support to employees and protects your organisation’s reputation and legal exposure. It can also help employees to transition between roles whilst demonstrating that your organisation genuinely cares about its staff – even at challenging times.
To summarise what we’ve discussed:
- Employees in Singapore have no automatic right to retrenchment pay and benefits
- Severance packages offer employers legal protection, protect their reputation, boost morale and productivity, and enable better cost control
- Severance packages offer employees financial support, emotional support, career support, and time
- Developing a comprehensive, company-wide retrenchment policy helps to manage downsizing exercises fairly and effectively
- Common components of a severance package include retrenchment pay, continuation of benefits, counselling, and outplacement services
- Outplacement demonstrates the company’s goodwill and enables employees to transition into new roles more quickly
Are you planning a layoff or workforce reduction? It’s time to find the right outplacement provider for your business. Click below to chat with an expert and find out more about the Careerminds difference.
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