Severance Packages for Employees & Legal Implications

In most cases, a company is not required by law to pay severance. When an employee leaves a company, the Fair Labor Standards Act (FLSA) requires that the employer pay his or her regular wages through the completion date and for accrued vacation time. It does not, however, require severance to be paid. Generally, severance pay is paid by agreement between an employer and an employee or employee representative, such as a union. However, the Worker Adjustment and Retraining Notification Act does require employers to either give a 60-day notice of a mass layoff or pay 60 days of salary and benefits.

Additionally, certain employment contracts, employee handbooks, and union contracts require severance. Sometimes severance is given as an incentive to quit or retire. In most cases, an employer paying severance will require that the employee sign a release that frees the employer from all potential liability, including discrimination claims, in the future.

If an employee is over 40, they can be asked to sign a separate release for age discrimination lawsuits that could be brought under the Age Discrimination in Employment Act (ADEA). Under federal law, employees have 21 days to decide whether to sign the release and accept severance pay. If more than one employee is terminated around the same time, the layoff is considered a “group layoff.” This means that if just one employee is over 40, each of the laid-off employees must be given 45 days to consider the agreement.

How Is Severance Paid?

At larger companies, giving severance as a lump sum payment or a brief continuation of salary is common and negotiable. Receiving it as a lump sum is preferable if an employee wants to be able to collect the full amount of unemployment compensation going forward after the severance is paid. If severance is paid over time, the amount of unemployment compensation will be reduced until the employee stops receiving severance payments. However, if the payments are spread out, it is more likely that an employer will continue paying for the employee's health insurance.

Under the Consolidated Omnibus Budget Reconciliation Act of 1995 (COBRA), employees are likely to be entitled to continue the medical coverage they had under their employer’s plan for up to 18 months, but they probably will have to pay the premiums themselves. They may be able to negotiate for their employer to continue paying their health insurance premiums for a certain period of time.

In general, severance at these companies averages two and a half to three weeks of pay per year of service for top and senior executives who are involuntarily separated. However, it is 1.4-1.8 weeks per year for others. The number of years may be capped. Additionally, severance is considered taxable pay that can result in an individual qualifying for a higher tax bracket.

As part of severance negotiations, an employee may want to recoup unreimbursed travel expenses and payment for unused vacation or sick time. They also can ask to keep their unvested interests, such as stock, stock options, deferred compensation, or company matches to a 401(k) plan. They may ask for a prorated share of their bonus for the year, if they are typically given bonuses.

Last reviewed October 2024