Severance Package: An Employer Guide
Severance is not required by federal law. What a package contains, how much to offer, the tax, the OWBPA rules, and the release you are actually buying.
Severance Package
You are not required to offer one. What it contains, how much to pay, what it costs after tax, and the legal rules that decide whether the release you paid for is worth anything
You are letting somebody go, and you are wondering whether you have to pay them severance. The short answer is no. Federal law does not require it, and most small businesses that pay it are paying it for reasons they have never articulated.
Which is a problem, because severance is not a gesture. It is a transaction. You are buying something specific, and if you do not know what it is, you will overpay for it, or underpay for it, or pay for it and fail to actually receive it because the paperwork was wrong.
This is the employer version: what severance is, what you are actually buying, when it is worth offering, how much, what it costs after tax, and the legal rules that determine whether the release you paid for is worth the paper it is written on. Particularly the over-40 rules, which are not optional and which employers get wrong routinely. I build FirstHR, which is where the agreement and the offboarding record live. A caveat that matters here more than almost anywhere: this is employment law with real legal consequences, I am not a lawyer, and a severance agreement should be reviewed by one.
What Is Severance Pay?
Severance pay is compensation an employer provides to an employee whose employment is ending, typically in a layoff or a termination without cause, and almost always in exchange for the employee signing a release of legal claims.
The word to hold onto is consideration. In contract terms, consideration is what you give in exchange for what you get. The severance is what you give. The release is what you get. That is the entire structure, and everything else in this article follows from it.
A severance package is the full set of what you offer: the cash, plus health coverage, plus whatever else. Severance pay is the cash component specifically. The terms get used interchangeably and it rarely matters, but the distinction is worth knowing when you are reading an agreement.
You Are Not Required to Pay It
This surprises people, and it is the most important fact on the page for a business owner deciding what to do.
So when does it become required? When you promised it. And the ways you can promise it are broader than most owners realize.
| Source of obligation | Does it bind you? | Note |
|---|---|---|
| Federal law | No | The FLSA does not require severance. There is no federal mandate |
| An employment contract | Yes | If the contract promises severance, it is an enforceable contractual obligation |
| Your employee handbook | Often yes | A handbook that states a severance policy can create an enforceable expectation, depending on how it is drafted |
| An established past practice | Sometimes | If you have always paid severance in similar circumstances, that consistency can itself create an expectation |
| A collective bargaining agreement | Yes | Union agreements frequently mandate severance terms |
| State law | Rarely, but check | New Jersey mandates severance in certain mass layoffs. Most states do not, but this is worth verifying |
The handbook row is the one that catches small businesses. A well-meaning sentence in a handbook saying that the company will provide severance in the event of a layoff can convert a discretionary payment into a contractual one, and you will discover this at the least convenient moment. If you want to retain discretion, your employee handbook needs to say so explicitly.
What You Are Actually Buying
If severance is not required, why does anybody pay it? Because of what they get back.
You are buying a release of claims. The employee signs an agreement giving up their right to sue you for anything arising from their employment: discrimination, wrongful termination, wage claims, harassment, retaliation, the lot. That release is the asset. The severance is the price you paid for it.
The claims being released are real and they are broader than most owners picture: discrimination under Title VII, age claims under the ADEA, wage and hour claims, and retaliation, which is a separate cause of action that can succeed even where the underlying claim fails.
Once you see it as a purchase, the decision framework becomes obvious. Is there something worth buying? A long-tenured employee over 40 being terminated for performance after a rocky year: yes, there is real exposure, and a release is worth paying for. A junior employee resigning voluntarily to take another job: there is no plausible claim, there is nothing to release, and severance buys you nothing.
It also explains the amounts. Severance tends to scale with tenure not out of sentiment but because tenure correlates with exposure. Ten years of employment is ten years of potential claims, ten years of documented and undocumented incidents, and ten years of accumulated relationship. The release you are buying is bigger, so the price is higher.
What Is in a Package
The cash is what people mean when they say severance, but the package is broader and several of the other components cost you very little.
Three of those are worth more than they cost. A COBRA subsidy, meaning you pay their health premium for two or three months, is a large, concrete benefit to somebody who has just lost their income and is worrying about insurance, and it costs you a few hundred dollars a month.
Outplacement support costs relatively little and changes the emotional register of the conversation entirely: you are not just paying them to go away, you are helping them land. And a reference commitment costs literally nothing and removes an anxiety that would otherwise sit with them for months.
The PTO row has its own state-by-state complexity worth checking before you calculate anything, and it is covered in do companies have to pay out PTO.
The point of this list is that severance does not have to be all cash. A package of six weeks of pay plus three months of COBRA plus a written reference is meaningfully better, to the person receiving it, than eight weeks of pay alone, and it may cost you less.
When to Offer One
Apply the purchase framing and the answer becomes clear in most cases.
The red rows are the ones to look at carefully, because they describe payments made for emotional rather than commercial reasons, and they are the ones small business owners actually make.
Paying because you feel guilty is understandable and it is not a good basis for a decision. Guilt is a real feeling and it deserves acknowledgment, but it does not generate a legal claim, and a payment made to relieve your own discomfort buys you nothing except the discomfort of having spent the money.
Note also that most US employment is at-will, which means you generally do not need a reason to terminate. That does not mean you are safe: at-will does not protect you from a discrimination claim, and it is precisely that residual exposure that a release is buying off.
And ad-hoc severance is itself a risk, which is counterintuitive. If you decide case by case, with no written criteria, you are making discretionary payment decisions about individual people, and if the pattern of who gets what happens to track age or sex or race, you have created a discrimination problem out of an act of kindness. Consistency is the protection.
How Much to Offer
The default convention in the US is one to two weeks of pay per year of service. It is a convention, not a rule, and there is no legal minimum.
Two structural decisions matter more than the specific number.
Set a cap. One to two weeks per year is fine at three years and becomes very expensive at twenty. Decide, in your policy, whether the formula caps out, and at what. Decide it before you have a twenty-year employee in front of you, because deciding it while looking at a specific person is how policies get abandoned.
Decide the formula in advance. This is the single most useful thing in this section. A number arrived at in the room, under emotional pressure, in a difficult conversation, is a number you will second-guess and possibly regret. A number produced by a policy you wrote calmly six months ago is a number you can defend, to the employee and to yourself.
How It Actually Works
The sequence, in order, because the order has legal consequences and getting it wrong invalidates the thing you paid for.
The payment itself runs through payroll like any other wage, on your normal cycle, and the mechanics of an off-cycle run are in the payroll run guide.
Step seven is the one employers actually get wrong. The instinct is to pay immediately, because it feels kind and because you want the whole thing over. You cannot. The agreement is not in force until the revocation window closes, and paying before it does means you handed over the consideration before you owned the release.
Note also that severance is separate from the final paycheck, and this distinction is not cosmetic. The final paycheck is wages you already owe, it has a state-mandated deadline that in some states is immediate, and it is not conditional on anything. Making the final paycheck contingent on signing a release is unlawful: you are withholding wages the employee is already entitled to.
The Over-40 Rules
Here is the section that decides whether the money you spent bought anything. If the employee is 40 or over, a whole set of federal requirements attaches to the release, and failing any of them makes the waiver unenforceable.
Read that last sentence again, because it is genuinely counterintuitive. The employee cannot waive the revocation period even if they want to. Somebody who says I have read it, I am happy, let me sign now and get paid cannot do so. The seven days run regardless, and the money cannot move until they have.
Three further points that catch employers out.
Material changes restart the clock. If the employee negotiates and you improve the offer, the 21 or 45 days start again from the date of the revised offer. A concession you made to be helpful can add three weeks to the process.
Group terminations require disclosure. If you are terminating two or more people aged 40 or over as part of the same decision, you must give each of them written information about the decisional unit: the job titles and ages of everyone selected, and of everyone eligible but not selected. This is a real document with real content and it is frequently overlooked entirely.
You cannot bar them from the EEOC. A release may not prohibit an employee from filing a charge with the EEOC or from participating in an EEOC investigation. A clause purporting to do so is void and its presence can undermine the whole agreement. This is covered in the ADEA and the EEOC is explicit about it.
How It Is Taxed
Severance is wages. Not a settlement, not a gift, not tax-free. It runs through payroll and it is taxed accordingly.
Two practical consequences. First, tell them what it will actually be worth. An employee who has just lost their job and is told they will receive $12,000, then receives $7,842, has one more reason to feel badly treated, and you did not need to give them one. Say the gross figure and say plainly that it is taxed like wages.
Second, it costs you more than the headline. A $12,000 severance payment costs $12,918 once your matching FICA is added. That is a small difference and it is worth having in your model, and the mechanics are in the FICA tax guide. The wider category, covering bonuses, commissions, and severance together, is supplemental pay.
Health Coverage
Losing a job means losing health insurance, and for most Americans that is the scariest part of the whole experience. Which makes it the cheapest place to be genuinely generous.
COBRA gives a departing employee the right to continue their group health coverage for a period after employment ends, at their own expense. If you have 20 or more employees, you are generally required to offer it. The employee pays the full premium plus an administrative fee, which is often startlingly expensive to somebody who has just lost their income.
| Option | What it costs you | What it is worth to them |
|---|---|---|
| Offer COBRA, they pay | Nothing. Just the administration | The right to keep coverage, at a price they may not be able to afford |
| Subsidize COBRA for 2-3 months | A few hundred dollars a month | Enormous. It removes the most frightening part of losing a job |
| Subsidize for the severance period | More, but predictable | Aligns coverage with the runway you gave them, which is coherent and generous |
| Nothing beyond the legal minimum | Nothing | Nothing. Which is a legitimate choice, but be aware of what it signals |
The second row is the one I would push. Paying somebody's health premium for two or three months costs you very little and it is the single most valuable thing in the package to the person receiving it. Cash gets spent and forgotten. Health coverage during a job search is remembered.
The employee benefits picture more broadly, including what you are and are not required to provide while somebody is employed, is in statutory benefits.
Note that COBRA is a legal obligation of its own, separate from severance: if you have 20 or more employees you must offer continuation coverage regardless of whether you offer severance, and the notice requirements have deadlines. Details are with the Department of Labor.
What It Really Costs
The severance figure is not the cost of the severance. Here is the whole thing, for a five-year employee earning $78,000.
Two things to take from that. The cash line is about 70 percent of the total. Employer FICA, a COBRA subsidy, the PTO payout, and legal review all sit on top, and a business that budgets only the headline number is out by several thousand dollars.
And the last row is the entire argument. An employment lawsuit routinely costs six figures in legal fees alone, before any settlement or judgment, and it consumes a year of your attention. The release you are buying for $17,000 is insurance against that. Framed as a risk transaction rather than as a gesture, the decision is usually straightforward.
Note that the legal review line is the one people cut, and it is the one that determines whether everything above it was wasted. A defective release means you paid the $17,000 and bought nothing at all.
The State Layer
Federal law is the floor and it is a low one: no severance requirement at all. The state layer is where the actual obligations live, and they vary considerably.
| What varies by state | Why it matters to you |
|---|---|
| Whether severance is ever mandated | New Jersey requires severance in certain mass layoffs. Most states do not. This is the exception worth knowing about |
| Final paycheck deadlines | Some states require final wages immediately on termination. That is a separate, unconditional obligation from any severance |
| Accrued PTO payout | Several states treat accrued vacation as earned wages that must be paid out. Others leave it to your policy |
| Mini-WARN laws | Lower headcount thresholds and longer notice periods than the federal WARN Act. These reach small employers |
| Unemployment treatment of severance | Some states treat it as disqualifying wages, some do not, and some distinguish lump sum from continuation |
| Enforceability of non-disparagement | Increasingly restricted. A clause that is standard in one state may be void in another |
| Wage deduction rules | Which govern what you may and may not withhold from a final paycheck. Generally: very little |
The row that matters most operationally is the second one. Final paycheck deadlines are state law and they can be immediate. That obligation exists regardless of whether you offer severance, it is not conditional on anything, and it is the one you are most likely to breach by accident because you were focused on the package.
And the last row is worth understanding before you draft anything: in most states you may withhold essentially nothing from a final paycheck without written authorization. If somebody owes you money, a laptop, or a training reimbursement, you generally cannot simply deduct it. That is a separate conversation and often a separate legal problem.
Unemployment Benefits
They will ask you this, so it is worth knowing the shape of the answer even though the answer is unsatisfying.
Whether severance affects unemployment benefits depends entirely on the state. Some states treat severance as wages that delay or reduce benefits for the period the severance notionally covers. Others treat it as a separate payment with no effect on eligibility at all. Some distinguish between a lump sum and salary continuation, treating them differently.
Your own unemployment insurance rate is separately affected by claims, since SUTA is experience-rated, which means a layoff has a cost to you beyond the severance. That mechanism is explained in the payroll guide.
The honest thing to tell an employee is: it depends on the state, and you should check with the state unemployment agency rather than relying on me. Do not guess, and do not reassure them that it will be fine, because if you are wrong they will have relied on you and been harmed by it.
What you can control is the structure. If your state treats a lump sum differently from salary continuation, that is a choice you get to make, and it may be worth making deliberately rather than by default. Worth a five-minute conversation with your accountant before you decide the payment mechanics.
The WARN Act
If you are laying off a group rather than one person, there is a separate law you need to know about, and employers conflate it with severance constantly.
WARN is a notice law, not a severance law. It requires you to give affected employees advance written notice of a mass layoff or plant closing. It does not require you to pay them severance, and satisfying WARN does not satisfy any severance obligation, because there usually is not one.
The federal WARN Act generally applies to employers with 100 or more employees, which means most businesses in the 5 to 50 range are outside it entirely. That is the good news.
The less good news is that several states have their own mini-WARN laws with lower thresholds. Some reach employers with far fewer than 100 employees, some require longer notice periods, and at least one state mandates severance in certain mass layoffs. If you are planning any kind of group reduction, this is a thing to check rather than assume, because the penalty for failing to give required notice is typically back pay for the notice period, which lands like an unplanned severance you did not budget for.
The Conversation Itself
No article about severance mentions this, and it is the part you will actually think about at three in the morning. The package is a document. The conversation is what the person remembers for the rest of their life.
The rest of the exit, meaning the equipment, the accounts, the handover, and the final pay calculation, belongs on an offboarding checklist rather than being remembered under pressure on the day.
Step two is the one I would insist on hardest, and it is counterintuitive. Say it in the first thirty seconds. Every instinct tells you to soften the landing: ask how they are, mention the weather, work up to it gently. Do not. The moment they walk into a meeting they did not schedule, with you and possibly another person, they know. Everything you say before the sentence is torture, and it is torture you are inflicting to make yourself more comfortable.
Step six is legal as well as humane. If the person is 40 or over, you cannot ask them to sign in the room: they are entitled to 21 days. And even if they are 25 and you legally could, asking somebody to execute a legal release of all claims while they are in shock is the kind of thing that gets an agreement challenged and deserves to.
And step seven costs nothing at all. Somebody who has just been terminated is, within about ninety seconds, thinking about what you will say to their next employer. Telling them, unprompted, exactly what you will say, is worth more than several thousand dollars of severance and it is free.
If They Push Back
Some will. Some will have consulted a lawyer, and a few will come back with a counteroffer. Here is how to think about it.
| What they say | What it means | How to respond |
|---|---|---|
| I want more money | A normal opening. Often just an ask | You can hold, or move. If you move, know that for anyone 40+ a material change restarts the consideration clock |
| I have spoken to a lawyer | They are taking it seriously. So should you | Do not panic and do not improvise. Talk to your own attorney before responding to anything |
| I want the non-disparagement clause removed | Increasingly common, and increasingly reasonable | Broad non-disparagement and confidentiality clauses have come under real legal scrutiny. This is worth taking advice on |
| I want longer COBRA coverage | Usually a cheap ask to grant | Frequently the best trade available. Cheaper than cash and worth more to them |
| I want a better reference | Costs you nothing and means a lot | Grant it if it is honest. Refusing a reasonable reference over a severance negotiation is a bad look and a bad trade |
| I am not signing anything | Their right. You keep the money | Then you owe them their final wages and nothing else. The severance was conditional on the release, and there is no release |
The last row is the one people forget. If they refuse to sign, you do not pay the severance. That is not punishment; it is the deal. The severance was consideration for the release. No release, no consideration. You still owe every cent of their earned wages, which is unconditional, but the package was an offer and offers can be declined.
The clock-restart point in the first row is worth internalizing before you negotiate rather than during. A material change to the offer restarts the 21 or 45 day consideration period for anybody 40 or over. That means an improvement you offer to be generous can add three weeks to the process, and you should decide whether that is acceptable before you make the concession rather than discovering it afterwards.
Write the Policy First
Before anybody needs it. This is the single highest-leverage item in this article and it takes an afternoon.
A policy converts an emotionally loaded, high-stakes, individual decision into an administrative one. Without it, you are deciding what somebody's exit is worth while sitting across from them, which is the worst possible circumstance in which to make a financial decision.
Where the policy lives matters: it belongs in the handbook if you want people to know about it, and in your document management so that the version you actually applied is retrievable years later.
The first item in the right column is the one to be careful about. A policy that says the company will pay severance can create an enforceable obligation. If you want to retain discretion, the policy must say so explicitly: that severance is offered at the company's sole discretion, that the policy does not create a contractual right, and that the company may amend or withdraw it.
Have an attorney review the policy language for exactly this reason. It is the difference between a helpful internal guideline and an accidental promise.
The Agreement
Here is a starting structure. I want to be unusually blunt about this one: do not use this as-is. A severance agreement is the one document in a small business where the cost of getting it wrong is total, and where a few hundred dollars of legal review is unambiguously worth it.
This is a checklist of what needs to be in there, so that you arrive at the lawyer's office knowing what you want rather than starting from nothing.
Item 2 deserves emphasis because it is the error with the clearest legal consequence. Final wages are not conditional on a release. The employee is entitled to their earned wages and, in many states, their accrued PTO, whether or not they sign anything. If your agreement implies otherwise, or if you hold the final paycheck hostage to a signature, you have committed a wage violation on top of whatever else was happening.
The whole sequence belongs inside your employee exit process, and the signed agreement itself belongs in the personnel file, retrievable, dated, and unchanged.
Lump Sum or Continuation
Same total money, two ways to deliver it, and the choice has consequences that are not obvious.
The lump sum is cleaner and it is what most small businesses should do. One payment, after the revocation period, and the relationship is over. Salary continuation keeps somebody attached to your payroll for months, which means somebody has to remember to run it, and it means the relationship does not actually end when everybody thought it did.
But continuation is materially easier on cash flow, and for a small business writing a five-figure check in a difficult month, that is not a trivial consideration. If you go that route, the agreement must answer the questions the structure raises: are they still an employee, are they still on the health plan, does PTO accrue, and what happens if they get another job before the payments finish.
And the unemployment interaction is genuinely worth a phone call. Some states treat salary continuation as disqualifying wages while treating a lump sum differently, or the reverse. That materially affects the employee, they will find out, and if you chose the structure without thinking about it, they will reasonably ask why.
What You Can Say
You offered a reference commitment. Now somebody has called. What are you actually allowed to say?
| What you can say | Risk level | Note |
|---|---|---|
| Dates of employment | None | Factual, verifiable, and universally safe. The neutral reference baseline |
| Job title and duties | None | Also factual. This plus dates is what most large companies limit themselves to |
| Whether they are eligible for rehire | Low | A common and useful signal. Answer it consistently or not at all, because inconsistency is where risk enters |
| Salary | Low, but consider | Some states now restrict discussing prior compensation. Increasingly, do not volunteer it |
| A positive assessment | Low, if honest | Praising somebody genuinely is safe. It is the negative that carries risk |
| A negative assessment | Real risk | Truth is generally a defense, but defamation claims arising from references are a real category. Be careful, and be factual |
| Why they left | Depends entirely | If you agreed to say it was a layoff, say that. Contradicting what you promised in the agreement is a breach of the agreement |
The salary row is worth a note: a growing number of states now restrict asking about or discussing prior compensation, for the reasons set out in pay equity. Volunteering somebody's old salary to a reference caller is increasingly a bad idea and occasionally an unlawful one.
The pragmatic answer, and what most employers land on: a neutral reference, meaning dates and title, plus whatever positive statements you honestly hold and agreed to make. It is defensible, it is consistent, and it does not require you to make a judgment call under pressure from a stranger on the phone.
The critical point is the last row. If your severance agreement says you will describe the departure as a layoff, then it is a layoff, forever. Contradicting that later is a breach of the agreement you signed, and it hands the former employee a claim you had specifically paid to eliminate.
Whatever you decide, decide it once and tell everyone. A reference policy that lives in one person's head produces inconsistency, and inconsistency is where every reference-related legal problem starts.
Situations That Come Up
Five scenarios that are not covered anywhere else and that you will eventually meet.
| The situation | What to do |
|---|---|
| They die before the severance is paid | The obligation generally survives and passes to their estate. Talk to your accountant about the tax treatment, which changes depending on the timing |
| The business is closing and money is short | Employees are creditors, and wages have priority over ordinary debts in most insolvency contexts. Severance may not. Get advice before promising anything you cannot pay |
| They find a new job during salary continuation | Unless your agreement says the payments stop, they do not. Decide this in advance and say so, because it is a question you will be asked |
| You want to rehire them later | The release covers claims up to the date of signing. It does not prevent you rehiring them, and it does not release future claims. Rehiring is allowed and it is not unusual |
| They ask for a non-compete to be removed | Increasingly reasonable, and increasingly enforceable-in-doubt. Non-competes have come under significant legal pressure. Take advice rather than defaulting to keeping it |
| They sign, then try to revoke on day 8 | Too late. The revocation period is 7 days and it is not extendable. But do not gloat, and do check that your dates are right, because a mistake in the timeline is your problem not theirs |
The rehire row surprises people, so it is worth stating plainly: a release covers claims up to the date of signing. It does not bar you from hiring them back, and it does not release anything that happens afterwards. Rehiring somebody you gave severance to is allowed, it is not unusual, and it does not undo the release.
The business-closing row is the one worth taking most seriously if it applies to you, and it is the one nobody plans for. Do not promise severance you may not be able to pay. A severance obligation you cannot meet is not just a broken promise; it is a debt owed to a person who now has a claim against a business with no money, and their claim may sit behind other creditors.
And the non-compete row is moving fast. Broad non-compete clauses have come under sustained legal pressure, and a clause that was standard practice a few years ago may now be unenforceable or restricted where you operate. If somebody asks for it out, that is worth a genuine conversation with counsel rather than a reflexive no.
Alternatives to Severance
Sometimes the right answer is not a severance package at all, and it is worth knowing the alternatives before you default to writing a check.
| Alternative | When it fits | The catch |
|---|---|---|
| Pay in lieu of notice | You want them gone today but owe notice | Not the same as severance. It buys no release and it is simply wages for a notice period you are not making them work |
| A longer notice period | You can afford the runway and they can keep working | They stay on payroll, keep their benefits, and job-hunt. Cheaper than it looks, and it buys goodwill without a legal document |
| Salary continuation instead of a lump sum | Cash flow matters, or your state treats it better for unemployment | Same total money, spread out. Check how your state treats each for unemployment purposes before you choose |
| Extending health coverage only | The cash is not the problem, the insurance is | Often the single most valuable thing you can offer, and far cheaper than the equivalent in cash |
| A performance improvement plan | You genuinely want to keep them | Not an alternative to severance so much as an alternative to termination. Only honest if you actually mean it |
| Nothing at all | Clean departure, no exposure, no promise made | Entirely legitimate. You are not required to pay severance, and paying it where there is nothing to buy is simply a gift |
The last row deserves to be stated without embarrassment. Offering nothing is a legitimate choice. If somebody resigned voluntarily, on good terms, with no plausible claim against you, then there is no release worth purchasing and severance would be a gift rather than a transaction. That is allowed, it is normal, and it is what most small businesses do most of the time.
Note that a departure also has a cost you will not see on any invoice: the institutional knowledge that walks out with them, and the time it takes to replace it. That is the thing HR metrics are trying to make visible.
The second row is underrated. A longer notice period is frequently better for everybody than a shorter one plus severance. They stay employed, they keep their health coverage, they job-hunt from a position of employment rather than unemployment, and it often costs you less than the equivalent severance would. It does not buy you a release, so it is not a substitute where there is real legal exposure. But where the risk is low and the goodwill matters, it is a genuinely good option that almost nobody considers.
Common Mistakes
Seven recurring failures, and several of them mean you paid the money and bought nothing.
If you have never examined how your business handles exits at all, an HR audit is the structured way to find out what your current practice actually is before somebody else does.
The two that cost the most are the OWBPA failures and the missing release, and they share a shape: you spent the money and did not get the thing. Every other mistake on that list is recoverable. Those two are a total loss, and you find out about them at the worst possible moment, which is when somebody is already suing you.
If You Were Offered One
Most of this page is written for the employer. But a great many people arrive at a page like this because they have just been handed a severance agreement, and it would be strange to send them away with nothing. So here is the honest version, from the other side of the desk.
The single most useful thing to understand, if you are the one holding the agreement, is the same thing the employer needs to understand: this is a purchase. They are buying your right to sue them. Whether the price is fair depends entirely on what those rights were worth, and that is a question for a lawyer rather than for a blog post.
And the pressure to decide quickly, if you are feeling any, is worth noticing. You have time. The law usually gives you time. An employer who is rushing you is telling you something.
Frequently Asked Questions
What is severance pay?
Severance pay is compensation an employer provides to an employee whose employment is ending, typically in a layoff or termination without cause. It is almost always offered in exchange for the employee signing a release of legal claims against the company. Severance is not required by federal law: the Fair Labor Standards Act does not mandate it, and it is a matter of agreement between employer and employee. The exception is where a contract, an employee handbook, or a company policy promises it, in which case it becomes an enforceable obligation.
What is the severance pay meaning in simple terms?
It is money your employer pays you when your job ends, usually because they eliminated the role rather than because you did anything wrong. It is not something they owe you by law. It is a payment offered in exchange for you signing an agreement that you will not sue them. That is the actual transaction: money for a release. Understanding that reframes the whole thing, because it explains why severance is offered, why an agreement always comes with it, and why an employer who is not worried about a claim often does not offer any.
Is severance pay required by law?
Not under federal law. The Fair Labor Standards Act does not require severance pay, and the Department of Labor states plainly that it is a matter of agreement between an employer and an employee. However, it becomes legally required if you promised it: a written contract, an employee handbook, an established policy, or even a consistent past practice can create an enforceable obligation. New Jersey stands out as having a state law mandating severance in certain mass layoffs, and other states may impose obligations in specific circumstances.
What is a severance package?
A severance package is the full set of things an employer offers a departing employee, of which severance pay is only one component. It typically includes the cash payment, continued health coverage or a subsidy toward COBRA premiums, payout of accrued but unused paid time off where required, sometimes outplacement or career support, and a commitment about what the employer will say in a reference. In exchange, the employee signs a release of claims. The release is what the employer is actually buying, and everything else is the consideration paid for it.
How much is severance pay?
The common convention in the US is one to two weeks of pay for each year of service, though there is no rule and no legal minimum. An employee with four years of service might be offered four to eight weeks. Executives frequently receive three to twelve months, but that is usually contractual rather than discretionary and is negotiated at hire. What matters more than the benchmark is having decided your formula in a written policy before you are sitting across from a specific person, because a number invented in the room is a number you will regret.
How do severance packages work?
The employer decides to end the employment, prepares a package and a written agreement, and presents it to the employee. The agreement sets out what the employee receives and, critically, what they give up: typically a release of all legal claims arising from the employment. The employee is given time to consider it, and if they are 40 or over that time is legally mandated at 21 days, or 45 for a group termination, with a further 7 days to revoke after signing. Once the revocation period expires, the agreement takes effect and the employer pays.
Is severance pay taxed?
Yes, in full, as wages. Severance is not a settlement and it is not tax-free. The IRS treats it as a supplemental wage, which means when it is paid separately from regular wages the employer may withhold federal income tax at a flat 22 percent, rising to 37 percent above $1 million in cumulative supplemental wages. Social Security and Medicare apply exactly as to regular pay, and the employer matches them. A $12,000 severance payment typically lands as roughly $7,842 and costs the employer about $12,918.
Do I have to give an employee 21 days to sign a severance agreement?
If they are 40 or over and you have 20 or more employees, yes. The Older Workers Benefit Protection Act requires that a waiver of age discrimination claims give the employee at least 21 days to consider the agreement, or 45 days if it is part of a group termination program, plus a 7-day period after signing during which they may revoke. The 7-day revocation period cannot be changed or waived by either party for any reason. If you do not comply, the waiver is unenforceable and you will have paid severance and bought nothing.
Can I pay severance before the revocation period ends?
No, and this is a mistake employers genuinely make. Under the OWBPA, the agreement does not become effective or enforceable until the 7-day revocation period has expired. Paying the severance before that point undermines the entire structure: the agreement is not yet in force, and you have handed over the consideration before securing the release. The correct sequence is that the employee signs, the 7 days run, the agreement becomes effective, and then you pay on the next payroll run.
Does severance affect unemployment benefits?
It can, and it depends entirely on your state. Some states treat severance as wages that disqualify or delay unemployment benefits for the period it notionally covers. Others treat it as a separate payment that does not affect eligibility at all. Some distinguish based on whether the severance was paid as a lump sum or as salary continuation. This matters to the employee more than to you, but they will ask, and the honest answer is that it depends on the state and they should check with the state agency rather than rely on you.
Should a small business offer severance?
Only when you are buying something. Severance is a transaction: money in exchange for a release of claims. If the departure is clean, the employee resigned, and there is no plausible claim, there is nothing to buy and a payment is a gift. If there is any real risk of a claim, particularly with a long-tenured employee or anyone 40 or over, a few weeks of pay in exchange for a properly executed release is cheap insurance against a year of litigation and legal fees that would dwarf the package.
What is the difference between severance pay and a final paycheck?
The final paycheck is wages you already owe: hours worked, accrued PTO where your state requires it, and any expenses. It is legally required, it has a state-specific deadline that can be as short as the day of termination, and it is not optional. Severance is additional money you are not required to pay, offered in exchange for a release. Conflating them is a serious error: if you make the final paycheck conditional on signing a release, you are withholding wages the employee is already entitled to, which is unlawful.
Do I have to offer severance to everyone equally?
Not identically, but consistently. Severance packages are frequently structured by tenure and seniority, which is legitimate. What is not legitimate is a pattern where the decision to offer severance at all, or the generosity of it, correlates with age, sex, race, or another protected characteristic. Ad-hoc severance decided case by case is itself a discrimination risk, because you are making a discretionary payment decision about individuals with no stated criteria. A written policy applied consistently is both fairer and far safer.
What is the WARN Act and is it the same as severance?
No, they are completely different, and employers conflate them constantly. The WARN Act is a notice law: it requires covered employers to give affected employees 60 days of advance written notice before a mass layoff or plant closing. It does not require you to pay severance. Federal WARN generally applies to employers with 100 or more employees, so most small businesses are outside it. However, several states have their own mini-WARN laws with lower thresholds and longer notice periods, and those can reach much smaller employers, so check before any group reduction.
Do I have to pay out accrued PTO in a severance?
That depends on your state and your policy, and it is a separate question from severance entirely. In several states, accrued but unused vacation is treated as earned wages that must be paid out at separation regardless of what your policy says. In most states, payout is required only if your own policy promises it. Either way, accrued PTO owed under state law is part of the final paycheck, not part of the severance package, and it is not conditional on signing a release.
How much does a severance package really cost?
More than the headline. A $12,000 severance for a five-year employee also carries about $918 in employer FICA, because severance is wages. Add a COBRA subsidy for three months at roughly $700 a month, any accrued PTO payout required by your state, and a few hundred to a couple of thousand for legal review of the agreement, and the real cost of the exit lands closer to $17,000. Set against an employment lawsuit, which routinely runs into six figures in legal fees alone, that is usually a straightforward trade.
What if the employee refuses to sign the severance agreement?
Then you do not pay the severance. That is not a punishment; it is the structure of the deal. Severance is consideration offered in exchange for a release of claims, and if there is no release, there is no consideration owed. What you still owe, unconditionally, is their final paycheck: earned wages and, in many states, accrued PTO. Those are not contingent on anything, and withholding them pending a signature would be a wage violation regardless of what the severance agreement says.
Should I sign a severance agreement?
That depends on what you are giving up and what you are getting, and it is genuinely a question for an employment lawyer rather than for an article. The core trade is that you receive money and benefits in exchange for surrendering your right to sue your employer for anything arising from the employment. If you have no plausible claim, that is an easy trade. If you believe you were discriminated against, wrongfully terminated, or underpaid, you are being asked to sell something that may be worth considerably more than the severance. Do not sign under time pressure: if you are 40 or over, the law guarantees you at least 21 days.
How long do I have to decide on a severance offer?
If you are 40 or over and the employer has 20 or more employees, federal law requires at least 21 days to consider the agreement, or 45 days if it is part of a group termination. You then have a further 7 days after signing during which you may revoke, and that revocation period cannot be waived by anybody, including you. If you are under 40, there is no federally mandated period, but an employer pressuring you to sign immediately is worth being wary of. You are allowed to take the agreement home and read it.
Can I negotiate a severance package?
Yes, and many people do. The worst realistic outcome is that the employer declines. Common asks that employers frequently grant include a longer COBRA subsidy, which costs them little and is worth a great deal to you, a more favorable reference, and removal of an unusually broad non-disparagement clause. Asking for more cash is also normal. Be aware that if you are 40 or over and the employer materially changes the offer, the consideration period restarts, which lengthens the process but also gives you more time.
Is my severance offer a good one?
The common US convention is one to two weeks of pay per year of service, so an employee with five years might typically see five to ten weeks. That is a benchmark rather than a rule, and there is no legal minimum. But the more important question is not whether the amount matches a benchmark. It is whether the amount is worth the legal claims you are being asked to release. If you believe you have a genuine claim, the benchmark is irrelevant and you should be talking to an employment lawyer, not comparing your offer to an average.
Can my employer withhold my final paycheck if I do not sign?
No. Your final paycheck is wages you have already earned, and in many states it includes accrued unused PTO. It is owed to you regardless of whether you sign a severance agreement, it is not conditional on anything, and state law typically sets a deadline for paying it that can be as short as the day of termination. An employer who conditions your earned wages on signing a release is committing a wage violation. The severance is separate: that is the optional part, and that is what the release is being exchanged for.
Can an employee negotiate a severance package?
They can ask, and many do, particularly if they have consulted a lawyer. Whether you move is your decision. The important mechanical point is that if you materially change the offer to an employee aged 40 or over, the OWBPA consideration period starts over from the date of the revised offer. That means a negotiation can reset a 21-day clock and extend the process considerably. Knowing that in advance lets you decide whether a small concession is worth the delay, rather than discovering it midway.