A practical employer guide to severance pay in the US: whether severance is required, common formulas, what a severance agreement and release include, special rules for employees 40 and older, taxes, benefits, unemployment interactions, how to create a severance policy and mistakes to avoid.
Severance pay helps a departing employee bridge the gap to a new job. It may be a lump sum or continued salary for a set period, and it may include other benefits such as paid health coverage for a time, outplacement services or extended access to an employee assistance program. Employers offer severance to treat people fairly, protect their reputation, maintain morale among remaining employees and, often, to obtain a release of potential legal claims.
To record clock-ins, breaks and overtime automatically, see EZTime time and attendance software.
| Source | Explanation |
|---|---|
| Federal law | Generally does not require severance pay |
| State law | A few states have requirements in specific situations, such as certain mass layoffs or closures; check your states |
| Employment contract | If the contract promises severance, it must be paid as written |
| Union agreement | Collective bargaining agreements may require severance |
| Company policy or handbook | A written policy may create an obligation |
| Past practice | Consistently paying severance can create expectations or obligations in some cases |
| WARN Act violations | Employers that fail to give required notice may owe back pay and benefits for the notice period |
| Formula | Example |
|---|---|
| Weeks of pay per year of service | 1 week per year, minimum 2 weeks, maximum 12 weeks |
| Tiered by level | Hourly staff: 1 week per year; managers: 2 weeks per year |
| Flat amount | 2 weeks’ pay for all affected employees |
| Pay continuation | Salary continues for a set number of weeks |
| Benefits contribution | Employer pays a share of continuation coverage for a period |
Define clearly how a week of pay is calculated for hourly employees with varying schedules, for example the average weekly hours over the last 12 weeks. Accurate time records make this easy to calculate and defend.
Many employers offer severance only if the employee signs a separation agreement that releases legal claims against the company. To be enforceable, the release generally must be knowing and voluntary, and the employee must receive something they were not already entitled to, such as severance beyond required final pay.
| Term | Purpose |
|---|---|
| Severance amount and payment schedule | What is paid and when |
| Release of claims | Employee waives the right to sue over the employment, with legal exceptions |
| Return of property | Devices, documents, keys |
| Confidentiality | Of the agreement terms, within legal limits |
| Non-disparagement | Mutual or one-sided, within legal limits |
| Reference policy | What the company will say to future employers |
| Cooperation | Help with transition or legal matters |
| Restrictive covenants | Non-solicitation or confidentiality reminders, subject to state law |
Some rights cannot be waived, such as the right to file a charge with the EEOC or to receive certain vested benefits, and some provisions, such as broad confidentiality or non-disparagement clauses, may be restricted by federal labor law or state law. Have an attorney draft or review your agreement template.
Under the Older Workers Benefit Protection Act, a release of federal age discrimination claims must meet specific requirements, including being written in plain language, referring specifically to age discrimination claims, advising the employee in writing to consult an attorney and giving time to consider and revoke.
| Situation | Consideration period | Revocation period |
|---|---|---|
| Individual termination | At least 21 days | 7 days after signing |
| Group layoff or exit program | At least 45 days | 7 days after signing |
For group programs, employers must also provide information about the decisional unit, eligibility factors and the ages and job titles of those selected and not selected. Missing these requirements can make the age discrimination release unenforceable.
Explain clearly when health coverage ends and whether the company will contribute to continuation coverage as part of severance. Some employers pay a share of premiums for a few months. Severance can affect unemployment benefits differently by state: some states reduce or delay benefits for weeks covered by severance, others do not. Employees should check with their state unemployment agency.
A formal severance plan may be subject to federal benefits law in some cases, which brings additional requirements. Ask your attorney how your plan should be structured.
Give the employee the agreement in writing at the separation meeting or soon after, along with a plain-language summary of the amount, payment timing, benefits, deadlines to sign and who to contact with questions. Do not pressure anyone to sign on the spot. Make clear which payments they receive regardless of signing, such as final wages and any required vacation payout, and which depend on the release. Clear communication reduces disputes and helps the employee leave with dignity.
Employees sometimes ask for more. You may negotiate, but large differences between similarly situated employees can create claims of unfair treatment. Document the reasons for any exception, such as a longer notice period for a key transition role.
A 90-person manufacturer eliminated a product line and laid off 11 employees, four of them over 40. Its handbook promised nothing, but the owner wanted to treat people fairly. Working with an attorney, the company offered one week of pay per year of service (minimum three weeks) plus two months of employer-paid continuation premiums in exchange for a release. Because it was a group program, employees received 45 days to consider and 7 days to revoke, along with the required disclosures. Hourly employees’ weekly pay was calculated from average hours in the prior 12 weeks using time records. All final paychecks were issued on the last day, separate from severance.
EZTime keeps the records needed to calculate severance fairly and pay final wages on time. Time records show actual hours for averaging hourly pay, data history is kept for up to 7 years, final hours export to payroll-ready reports and agreements and acknowledgments can be signed with e-signatures and stored in the digital employee file.
Federal law generally does not require it. Some states, contracts, union agreements and company policies may.
Many employers offer one or two weeks of pay per year of service with a minimum and maximum, but amounts vary by company, role and circumstances.
Yes. Severance is generally treated as wages subject to withholding and payroll taxes and reported on Form W-2.
Employees 40 and older must generally get at least 21 days, or 45 days in a group program, to consider a release of age claims and 7 days to revoke. Other employees should get a reasonable period.
Yes. Many employers make severance conditional on a signed release of claims, as long as the agreement meets legal requirements.
EZTime keeps time records for up to 7 years and exports payroll-ready reports for final pay.