Severance Pay vs Redundancy Pay: Key Differences

Defining the Terms

What Is Severance Pay?

Severance pay is a broad term that refers to compensation provided to an employee upon termination of employment. It can apply to various types of termination, including layoffs, downsizing, termination without cause, and sometimes even mutual separations. In countries like the United States, "severance pay" is the primary term used for any termination-related compensation, whether or not the termination is due to redundancy.

What Is Redundancy Pay?

Redundancy pay is a more specific term that refers to compensation provided when an employee's position is eliminated — that is, when the employer no longer needs the job to be performed by anyone. Redundancy is a specific type of termination, and redundancy pay is the compensation associated with it. The term is most commonly used in the UK, Australia, and other Commonwealth countries.

Core Differences at a Glance

Country-by-Country Breakdown

United States

In the US, "severance pay" is the standard term. There is no legal distinction between severance and redundancy because US labor law does not have a specific "redundancy" concept. Whether an employee is laid off due to position elimination or terminated for other non-cause reasons, the compensation is typically referred to as severance. The WARN Act provides notice requirements for mass layoffs and plant closings but does not mandate severance pay.

United Kingdom

In the UK, "redundancy" is a specific legal concept under the Employment Rights Act 1996. Redundancy occurs when the employer closes the business, closes a particular workplace, or no longer needs the work done by the employee. Statutory Redundancy Pay (SRP) is available to employees with 2+ years of service. The term "severance" is less commonly used in UK employment law but may refer to broader termination settlements, including compromise agreements that go beyond SRP.

Canada

Canada uses both terms, but "severance pay" is more common. In Ontario, the Employment Standards Act distinguishes between "termination pay" (pay in lieu of notice) and "severance pay" (an additional payment for long-serving employees at larger employers). "Redundancy" is understood in the Canadian context but is not the primary legal term. Common law reasonable notice applies regardless of whether the termination is characterized as redundancy or termination without cause.

Australia

In Australia, "redundancy pay" is the specific term used in the National Employment Standards (NES) under the Fair Work Act. It applies only to genuine redundancies where the job is no longer needed. "Severance pay" is sometimes used colloquially but does not have a specific legal meaning. An employee who is terminated without cause but not due to redundancy would not be entitled to NES redundancy pay, though they would still be entitled to notice and potentially unfair dismissal remedies.

When Redundancy Pay Applies But Severance Doesn't (And Vice Versa)

Redundancy Without Severance

In the US, an employee can be made redundant (position eliminated) without receiving any severance pay, because there is no federal mandate. The employee may receive WARN Act notice or pay in lieu of notice, but this is not "severance" in the traditional sense.

Severance Without Redundancy

An employee can receive severance pay without being made redundant. For example, if an employee is terminated for poor performance (without cause) and the employer offers a severance package in exchange for a release of claims, this is severance without redundancy. In the UK and Australia, such an employee would not be entitled to statutory redundancy pay but might negotiate a severance settlement.

Key Distinction: Genuine Redundancy Requirements

In jurisdictions that recognize redundancy as a legal concept (UK, Australia), the termination must meet specific criteria to qualify as a genuine redundancy. This matters because genuine redundancy often triggers statutory redundancy pay and may affect the employee's ability to bring an unfair dismissal claim.

UK Genuine Redundancy Test

In the UK, a redundancy is genuine if it falls within the statutory definition: the employer has ceased or intends to cease the business, has ceased or intends to cease the business in the place where the employee works, or the requirements of the business for employees to carry out work of a particular kind have ceased or diminished. The employer must also follow a fair consultation and selection process.

Australia Genuine Redundancy Test

Under the Fair Work Act, a redundancy is genuine if the employer no longer requires the job to be done by anyone, the employer has complied with consultation obligations in the applicable award or agreement, and redeployment within the employer's enterprise or associated entities was not reasonable. If the redundancy is not genuine, the employee may have an unfair dismissal claim.

Tax Treatment Differences

The tax treatment of severance versus redundancy pay can differ significantly:

The favorable tax treatment of genuine redundancy pay in the UK and Australia is a significant benefit. This is one reason why correctly characterizing the termination as a genuine redundancy can be financially important for the employee.

Impact on Unfair Dismissal Claims

The distinction between redundancy and other forms of termination affects an employee's legal rights:

• UK: A genuine redundancy can still be an unfair dismissal if the employer fails to follow a fair process (e.g., no consultation, unfair selection criteria). Employees with 2+ years of service can claim unfair dismissal.
• Australia: A genuine redundancy that meets all statutory requirements is not an unfair dismissal. However, if the redundancy is not genuine (e.g., the employer hired someone else to do the same job), the employee can claim unfair dismissal.
• Canada: There is no specific redundancy defense. An employee terminated without cause — whether due to redundancy or otherwise — is entitled to reasonable notice under common law.
• US: Employment is generally at-will, so the distinction is less relevant. However, if the termination involves discrimination or retaliation, the employee may have claims regardless of the characterization.

Practical Implications for Employees

Understanding whether you are receiving "severance pay" or "redundancy pay" matters because it affects:

1. Calculation method: Redundancy pay in the UK and Australia has specific statutory formulas. Generic severance may be calculated differently.
2. Tax liability: Genuine redundancy pay may receive favorable tax treatment that other severance does not.
3. Legal rights: The characterization of your termination affects your ability to bring claims.
4. Eligibility criteria: Redundancy pay may have different eligibility thresholds (e.g., 2 years in the UK, 12 months in Australia).
5. Negotiation leverage: Knowing which type of payment you are entitled to gives you a stronger negotiating position.

How to Determine Which Applies to You

To determine whether you are entitled to redundancy pay, severance pay, or both, ask yourself:

1. Was your position eliminated because the employer no longer needs the work done? (If yes, redundancy likely applies)
2. Were you terminated for another reason without cause? (Severance may apply)
3. What country are you employed in? (Determines which laws apply)
4. Do you meet the service requirements for statutory redundancy pay?
5. Does your employment contract or company policy provide additional severance?

Use our severance pay calculator to estimate your entitlements under different scenarios.