Severance pay is compensation and benefits an employer provides to an employee upon involuntary termination of employment. This payment is typically offered to help bridge the financial gap while the former employee seeks new work, often including a lump sum or continued payroll payments over a set period. An employer is generally not legally required to provide severance pay if an employee is fired in the United States. The practice is instead governed by specific company policies, individual employment contracts, or a voluntary agreement reached during the termination process.
Is Severance Legally Required?
The United States operates under an “at-will” employment doctrine, allowing an employer to terminate an employee at any time, for any reason that is not illegal, and without advance notice. This means no federal or state statute mandates that employers must offer severance compensation upon firing an employee. Severance is considered a voluntary benefit, not a statutory entitlement.
Employers who choose to offer severance packages do so for business purposes, not because of a legal obligation. Offering a financial cushion helps protect the company from potential future lawsuits or disputes related to the termination. The compensation functions as an incentive for the departing employee to sign a legal waiver, agreeing not to sue the former employer.
When Severance Is Typically Offered
Companies frequently offer severance when termination is a business decision, not a result of employee misconduct. This commonly occurs during large-scale personnel actions such as mass layoffs, corporate restructuring, or departmental downsizing, where the termination is classified as being “without cause.” Offering severance in these situations helps maintain the morale of remaining employees and protects the company’s public reputation.
Severance may also be offered when an employee is terminated due to a poor fit or a performance issue that does not rise to the level of gross misconduct. In such cases, the company seeks a clean break, avoiding protracted disputes over unemployment insurance eligibility and reducing the administrative costs of defending against potential claims.
How Employment Agreements Influence Severance
While no law mandates severance, a company can create a binding obligation through its own written documents. An individual employment contract, common for executives or specialized roles, may contain a specific clause detailing the amount and conditions for severance payment upon termination. These contractual terms override the general principle of voluntary payment and create a legal requirement for the employer.
Formal company policies, often detailed within an employee handbook, can also establish an entitlement. If a policy states that severance will be paid based on tenure, the employer must adhere to it to avoid breach of contract claims or claims under the Employee Retirement Income Security Act (ERISA). Collective bargaining agreements negotiated by a union similarly establish specific, mandatory severance terms for covered employees.
Reasons for Firing That Prevent Severance
Most company severance policies and agreements explicitly disqualify an employee who is terminated “for cause.” Being fired for cause means the termination resulted from the employee’s direct actions or severe failure to meet employment standards. This typically includes gross misconduct, encompassing offenses like theft, embezzlement, or workplace violence.
Other actions that prevent severance include serious policy violations, insubordination, or the sharing of confidential business information. The distinction between a termination for performance (which may qualify for severance) and one for cause (which does not) is a significant factor in determining eligibility.
Key Components of a Severance Package
A typical severance package extends beyond simple financial compensation. The core element is the severance pay itself, often calculated based on tenure (e.g., one or two weeks of salary per year of service). This payment can be delivered as a lump sum or as continued payroll payments over a defined period.
The employer’s offer is universally contingent upon the employee signing a “Release of Claims,” a legal waiver surrendering the right to sue the company for various employment-related claims. Other common components include:
- Continuation of health benefits, usually through payments toward COBRA premiums for a specified duration.
- Outplacement services, which are professional career counseling and job search assistance programs.
- Payment for unused vacation or accrued paid time off (PTO), which is sometimes mandated by state wage and hour laws.
Steps to Take Before Signing
Receiving a severance package requires careful consideration, starting with understanding the timeline provided for review. For employees over the age of 40, the Older Workers Benefit Protection Act (OWBPA) requires the employer to provide at least 21 days to review the agreement if it includes a waiver of age discrimination claims. This period allows the employee ample time to evaluate the offer without pressure.
It is advisable to consult with an employment law attorney before signing any severance agreement, especially one that includes a Release of Claims. An attorney can help identify potential claims being waived and determine if the offer is fair. The review period is also an opportunity to negotiate terms, such as extending severance pay, modifying a non-compete clause, or adjusting non-disparagement provisions.