Severance Package or Termination: What You Should Know

A severance package – also called a termination agreement or severance pay arrangement – is a voluntary agreement between an employer and an employee entered into when an employment relationship ends. Severance packages are commonly used to resolve workplace conflicts or facilitate downsizing in a smooth and mutually acceptable way.

For the employer, it can be an effective tool to avoid legal disputes and negative publicity. For the employee, it often represents a dignified and financially secure way to end the employment relationship.

But what should you know before accepting a severance package? What should such an agreement include, and which pitfalls should you avoid? This article provides an overview of employee rights, negotiation room, and the practical and financial considerations involved.

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What Is a Severance Package?

A severance package, also referred to as a termination agreement or exit agreement, is a financial and practical settlement between an employer and an employee when employment is terminated. It may be entered into before a termination is issued, after a termination, or as an alternative to potential legal proceedings.

Severance packages are often used to resolve conflicts or implement workforce reductions in an orderly, consensual manner. For the employer, it can prevent time-consuming disputes and protect the company’s reputation. For the employee, it provides security and predictability during a difficult transition.

The term “severance package” is sometimes used interchangeably with “golden parachute”. The latter, however, refers to a pre-agreed arrangement that can only be made with a company’s general manager, where the employee waives termination protection in exchange for pre-defined severance pay. Such agreements are regulated by Section 15-16 of the Working Environment Act and are not further addressed in this article.

The Contents of a Severance Package

It is important to note that there is no legal right to receive a severance package in Norway – it must be negotiatedbetween the parties. Because these agreements are based on non-statutory law and practice, there is no single standard format.

However, certain elements are commonly included. Below are key points that are typically addressed in a severance agreement. The list is not exhaustive, and the exact terms depend on the specific situation.

1. Parties and Date

To ensure the agreement is binding, it must clearly state who the parties are. It is also standard to specify the date and place of signing, to establish context and validity.

2. Grounds for Termination

The reason for ending the employment may affect both financial entitlements (such as severance pay or unemployment benefits) and potential claims for damages.
It is therefore advisable to include a short description of the background for the termination.

If the agreement is entered into as an alternative to dismissal due to redundancy, it may be relevant to issue a redundancy certificate (overtallighetsattest) to present to NAV (the Norwegian Labour and Welfare Administration) to avoid unnecessary waiting time for unemployment benefits.

3. Termination and Final Working Day

Every severance agreement must state when the employment relationship formally ends. There are typically two approaches:

• The employment ends immediately upon signing, or

• The employee continues working until a specified future date.

If continued employment is agreed upon for a limited period, the agreement should clearly state the final date of departure.

4. Financial Compensation

Severance packages are the result of negotiation, not entitlement. Whether one is offered – and what it includes – depends on the circumstances and each party’s bargaining position.

A severance package may include one or more of the following benefits:

• Severance pay / post-employment compensation: A financial settlement for a given period without work obligations. Sometimes referred to as compensation for loss of income, it is often paid in addition to salary during the notice period.

• Release from work duties: The employee may be released from their duties during the notice period while still receiving full salary until the date of departure.

• Career support: The employer may offer job search assistance, counselling, or help with recruitment and networking.

• Expense coverage: Reimbursement for expenses such as legal assistance or other costs related to the process.

• Bonus clarification: If the employee is part of a bonus scheme, the agreement should specify whether full or partial bonus is payable and when payment will be made.

The agreement should state how and when payments will be made – either as a lump sum or as instalments. This distinction may affect how NAV calculates unemployment benefit entitlements.

As long as the employment relationship formally continues, the employer remains bound by statutory obligations such as salary and holiday pay – these must, however, be explicitly regulated in the agreement.

Most severance agreements include a “final settlement clause”, ensuring that neither party can make additional claims after signing. The amount of severance pay is usually negotiated based on a certain number of monthly salaries. Both parties should fully understand the legal and financial implications before signing.

Additional Clauses Often Included

Confidentiality

Employers often require the content of the agreement to remain confidential, primarily to prevent it from being used as a precedent in future negotiations with other employees. If confidentiality is intended, it must be clearly stated, and sanctions may be included (e.g., liability for repayment or damages in case of breach).

Return of Company Property

Employees normally have access to company equipment such as laptops, keys, and documents. The employer should require these to be returned within a set deadline. To ensure compliance, it can be agreed that part of the severance payment will be withheld until all property is returned.

Settlement and Waiver Clause

A key purpose of a severance agreement is to reduce legal risk for the employer. Therefore, the agreement should include a waiver clause, stating that both parties waive the right to pursue legal action related to the employment relationship. This provides finality and predictability for both sides.

When Are Severance Packages Offered?

Severance packages are used in various situations, including:

1. Downsizing and Restructuring
   Offered as a voluntary alternative to redundancy or dismissal. If enough employees accept, the employer may avoid forced terminations.

2. Conflict or Cooperation Problems
   In cases of long-term tension or unresolvable disputes, a severance agreement can help both sides move on without further strain or cost.

3. As an Alternative to or After Termination
   When an employee has been terminated and considers legal action, a severance package can serve as a mutually acceptable settlement, avoiding a public and uncertain process.

4. When the Basis for Termination Is Uncertain
   If the employer is unsure whether the termination meets legal requirements, offering a severance package may be strategically wiser than risking court proceedings and potential liability.

The Purpose and Benefits of Severance Packages

For the Employer:

• Quick and orderly conclusion to the employment relationship

• Reduced risk of lawsuits and negative publicity

• Predictable financial outcome

• Lower internal conflict levels

• Less strain on management and HR

For the Employee:

• Financial security during the transition period

• Avoids the stress of litigation

• Maintains reputation and dignity

• Provides time and resources to find new employment

• Opportunity to negotiate favourable terms and references

How Large Should Severance Pay Be?

There are no fixed rules for the amount of severance pay. It must be negotiated individually, and the range typically spans one to twelve months’ salary, sometimes more.

Factors influencing the size include:

• The strength of a potential legal claim

• Age and re-employment prospects

• Loyalty and seniority

• Company precedents

• Whether the agreement precedes or follows termination

• The employee’s role and responsibility level

• The company’s financial position

For executives and high-income earners, severance packages may be substantial, often including bonuses, shares, accrued vacation pay, and pension benefits.

Taxation and NAV Implications

A severance package affects both tax liability and benefits from NAV (Norwegian Labour and Welfare Administration).

Taxation:

• Severance pay and salary are taxed as regular income

• Certain types of compensation for non-economic loss may be tax-free

• Education or retraining support is tax-free up to 1.5 G (the National Insurance base amount)

• Employers must pay employer’s tax on the severance payment

NAV:

• You cannot receive unemployment benefits while also receiving severance pay or salary

• NAV will evaluate the wording of the agreement – phrasing matters for eligibility

• If you request a severance package and resign voluntarily, NAV may impose a waiting period (quarantine), currently up to 16 weeks

It is therefore crucial that the agreement is clearly worded and that both parties understand how it may impact future benefits.

Common Pitfalls – and Why You Should Use a Lawyer

A severance agreement becomes binding once signed. Many employees sign under pressure without fully understanding what they are giving up. The agreement may contain vague language, hidden conditions, or clauses favouring the employer.

Common pitfalls include:

• Accepting confidentiality clauses that prevent you from discussing the case

• Severance pay being reduced if you find new work quickly

• Waiving your right to appeal or sue

• Accepting insufficient compensation

• Unclear notice periods or rights to remain in position

To avoid these mistakes, always have a lawyer review the agreement before signing. An experienced employment lawyer can determine whether the offer is fair, ensure your rights are protected, and help you negotiate better terms.

Our Services

At Advokatfirmaet Verito AS, we have extensive experience negotiating and reviewing severance agreements. We assist both employers and employees in achieving fair solutions and well-structured processes.

We offer:

• Free initial case assessment

• Negotiation on your behalf

• Legal review of agreements before signing

• Advice on implications for NAV, tax, and pension

• Representation in case of dispute

Read the norwegian article Sluttpakke eller oppsigelse: Dette bør du vite

Have You Been Offered a Severance Package?

Are you uncertain whether you should sign?
Contact Advokatfirmaet Verito AS today for a free, no-obligation assessment of your situation.
We will help you safeguard your rights and secure the best possible terms.

24 02 21 20 | post@verito.no

Visit our website Verito.no

Sources

• Nils H. Storeng, Tom H. Beck, Arve Due Lund, Kari B. Andersen, Terje G. Andersen, Thomas B. Svendsen: Arbeidslivets spilleregler (Universitetsforlaget AS, 5th ed., 2020)

• Arbeidsrett.no

• Lovdata.no