Severance & Settlement (Compromise) Agreements

A Severance Package is a compensation bundle awarded to an employee upon being laid off from a company. The value of the severance package is usually based on the length of employment prior to termination. The receipt of a severance package is contingent upon signing a severance agreement.

Severance Payment Requirements

As a minimum, employees must, provided they have completed at least two years’ service, be paid a statutory severance payment, which is calculated as two week’s pay for every year of service, and one further week’s pay.  This is paid tax-free but is capped at €600 per week.

An employer may, however, agree to pay more than the statutory amount, perhaps in the form of a lump sum, or ex-gratis payment which may in part be free of taxation.

Calculating a Severance Payment

When calculating an employees total length of service, there may be an adjustment made for absences from work, but this only applies to time off work in the last three years and should only reflect non-reckonable service, including:

• Any period over 52 consecutive weeks where an employee was off work due to an injury at work

• Any period over 26 consecutive weeks where an employee was off work due to illness

• Any period on strike

• Any period of lay off from work

No other absences can be included to reduce an employees length of tenure, and hence an employees redundancy payment.

Voluntary Severance pay differs from redundancy pay, in that it reflects compensation for voluntarily leaving your position – i.e. it is mutually agreed between you and your employer. 

Some employers, rather than impose redundancy on some members of staff, will ask for volunteers to leave the organisation given a financial incentive.

Unlike redundancy payments, voluntary severance pay is taxable and you may not be entitled to Jobseeker’s allowance – as in essence, you chose to leave your paid position.

For staff members with two or more years of continuous service, as a minimum, employers must pay a statutory severance payment; calculated as two week’s pay for every year of service, and one further week’s pay.  This is paid tax-free but is capped at €600 per week.

At an employer's own discretion, an employer may agree to pay more than the statutory amount, perhaps in the form of a lump sum; this is referred to as an ex-gratia payment.

When calculating each employee’s total length of continuous service, an employer may make adjustments for absences from work.  It is important to understand and apply the rules precisely for reckonable and non-reckonable service.  Failure to do so may lead to an incorrect calculation of severance pay, and a claim of procedural error.  Non-reckonable service (which does not contribute to the period of service) includes:

•  Any period over 52 consecutive weeks where the employee was off work due to an injury at work

• Any period over 26 consecutive weeks where the employee was off work due to illness

• Any period on strike

• Any period of ‘lay off’ from work

Voluntary severance pay differs from redundancy pay as outlined above, in that it reflects compensation if an employee voluntarily leaves their position – i.e. it is mutually agreed between you and the employee. 

If you do offer the option of voluntary redundancy, it is important that any employee who accepts the financial incentive understands that it will be taxable and they may not be entitled to Jobseeker’s allowance.