Severance Pay

Is severance pay required by law?

Not in most of the US. The Fair Labor Standards Act does not require it, and neither does any other general federal law. Employees are owed severance when something creates the obligation: an employment contract, an offer letter promise, a collective bargaining agreement, a written severance plan, or a consistent company practice that a court treats as a promise.

There are narrow exceptions. A few states require payments tied to certain plant closings, Maine being the best-known example. And the federal WARN Act requires covered employers (generally 100 or more employees) to give 60 days' notice of a plant closing or mass layoff. WARN does not require severance, but employers who skip the notice can owe up to 60 days of back pay and benefits, which is why many companies pay 60 days of wages in lieu of notice and call it part of the package.

Outside the US the picture flips. Many countries, including Canada, the UK, India and most of the EU, set statutory termination or redundancy pay. Rules vary by state and country, so check local law before you set a policy.

What a severance package usually includes

The cash payment is the headline, but the package is what people compare and what drives the decision to sign.

• Base severance, calculated from tenure and level.
• Pay in lieu of notice, where WARN, a contract or local law requires notice that you are not giving.
• Health coverage support, usually a COBRA premium subsidy for 1 to 6 months.
• Prorated bonus for the current year, if the plan allows it.
• Equity treatment, such as accelerated vesting or a longer post-termination exercise window.
• Outplacement services and a neutral reference agreement.
• Release of claims and related clauses: confidentiality, return of property, cooperation, and sometimes non-disparagement.

Keep severance separate from what the employee is already owed. The final paycheck, earned commissions and, in many states, accrued unused vacation must be paid whether or not the person signs anything. Tying those to a release is a common and expensive mistake.

Typical severance formulas and ranges

Most US employers with a written policy use a weeks-per-year formula with a floor and a ceiling. Common patterns:

• Hourly and frontline staff: 1 week per year of service, minimum 2 weeks.
• Professional individual contributors: 1 to 2 weeks per year, minimum 2 to 4 weeks.
• Managers and directors: 2 to 3 weeks per year, minimum 4 to 8 weeks.
• Executives: set by individual contract, often 6 to 12 months of base pay, sometimes more after a change in control.

Whatever you pick, apply it consistently. If two employees in the same layoff group get different formulas, the difference needs a documented, job-related reason. Inconsistent packages are one of the first things a plaintiff's lawyer looks for in a discrimination claim tied to a reduction in force.

The severance agreement and release

Severance is almost always paid in return for a signed severance agreement in which the employee releases claims against the company. Without that exchange, you are paying money and getting no legal protection. Our separation agreement template shows the standard clauses.

Three federal rules shape the document:

1. Older Workers Benefit Protection Act (1990). To release age discrimination claims from employees 40 or older, the agreement must be written in plain language, refer to the ADEA, advise the employee to consult a lawyer, give at least 21 days to consider (45 days in a group termination program) and 7 days to revoke after signing. Group programs also require a disclosure of the job titles and ages of people selected and not selected in the decisional unit.
2. NLRA limits. In McLaren Macomb (2023), the NLRB held that broad confidentiality and non-disparagement clauses in severance agreements offered to non-supervisory employees can unlawfully restrict their rights under Section 7. Narrow these clauses or drop them for non-supervisory staff.
3. Unwaivable rights. Employees cannot waive the right to file a charge with the EEOC or to receive certain government whistleblower awards, so the agreement should say so.

Tax, unemployment and plan rules

Severance is taxable wages. It is subject to income tax withholding and FICA, and many employers withhold federal income tax at the flat supplemental rate (22% for supplemental wages up to $1 million in a year). It is reported on the W-2, not a 1099.

Unemployment eligibility depends on the state. Some states reduce or delay benefits while severance is being paid, especially as salary continuation; others ignore lump sums. Tell employees to ask their state agency rather than giving them an answer.

A formal, ongoing severance plan can be an ERISA welfare benefit plan, which brings a written plan document, a summary plan description and a claims procedure. Payment timing can also trigger Section 409A rules on deferred compensation. Both are reasons to have benefits counsel review the policy once, before you need it.

Common mistakes HR teams make

• Promising severance verbally. A manager saying "you will be taken care of" during a layoff conversation can create an obligation. Train managers to use the script.
• Making the release too broad. Blanket confidentiality and non-disparagement language now creates legal risk instead of reducing it.
• Skipping the OWBPA timeline. Rushing a 52-year-old to sign the same day can void the age discrimination release.
• Paying before the revocation period ends. Pay after the 7-day revocation window closes, not on signature.
• Treating severance as a retention lever by accident. Generous, predictable packages can make low performers wait for the next layoff. Tie eligibility to involuntary, without-cause separations only, and keep it out of termination for misconduct.