Severance pay: is money an employer gives an employee at the end of employment, usually after a layoff or termination without cause, often in exchange for signing a release of legal claims. Federal law doesn't require severance pay, but employers may owe it under a contract, a written policy, or a plan.
Key takeaways
- There's no federal or general state requirement to pay severance.
- Once promised in a policy, plan, or contract, it becomes an obligation.
- A common formula is one or two weeks of pay per year of service.
- Releases from employees 40 and older must meet extra federal rules on review and revocation periods.
How severance pay works
The Department of Labor is direct about it: severance pay is a matter of agreement between employer and employee, not a legal requirement under the FLSA (US Department of Labor, Severance pay). Employers offer it to ease job loss, protect their reputation, and get a release of claims. A formal severance plan may be governed by ERISA, with plan documents and claims procedures.
Severance agreements for employees 40 and older must comply with the Older Workers Benefit Protection Act to waive age discrimination claims. The employee gets at least 21 days to consider the agreement, or 45 days in a group layoff along with information about who was selected, and 7 days to revoke after signing. The agreement must advise them in writing to consult a lawyer.
Severance is taxable wages. Payroll treats it as supplemental wages, so the flat 22% federal rate is common, plus FICA and state tax.
Severance pay example
A company eliminates a role held by a 52-year-old analyst with 8 years of service at $95,000. Its policy offers two weeks of pay per year of service, with a four-week minimum, plus three months of COBRA premiums.
| Weekly pay | $1,826.92 |
|---|---|
| Severance, 16 weeks | $29,230.77 |
| COBRA subsidy, 3 months | about $6,900 |
Because he's over 40, the release gives him 21 days to consider and 7 days to revoke. Severance is paid after the revocation period ends.
Why severance pay matters for employers
Severance decisions shape how remaining employees see the company. Layoffs and discharges ran at about 1.6 million a month in August 2026 (BLS Job Openings and Labor Turnover Survey, August 2026), and every one of those exits is visible to the people who stay. Consistent, documented formulas protect against discrimination claims that start when one person gets more than another.
Severance also intersects with the WARN Act, final pay deadlines, unused PTO payout rules, and COBRA. Missing any of those can undo the goodwill the payment was meant to buy. Our layoff notification email and offboarding guide cover the sequence.
Common severance pay mistakes to avoid
Inconsistent amounts for similar employees
Use a written formula and document any exceptions.
Skipping OWBPA requirements
Releases for employees 40 and older must give the required review and revocation periods.
Paying severance through accounts payable
Severance is wages and must run through payroll with withholding.
Overly broad confidentiality or non-disparagement clauses
The NLRB and state laws limit restrictions on employees discussing working conditions.
Severance pay: questions people also ask
Is severance pay required by law?
How much severance pay is typical?
Is severance pay taxed?
Can an employee negotiate severance?
Does severance affect unemployment benefits?
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HRTally glossary entries are written by people who have run US payroll, benefits, and HR operations, then checked line by line against primary sources such as the IRS, Department of Labor, EEOC, and Bureau of Labor Statistics. Dollar limits and rates are for 2026 unless stated. We review every entry at least twice a year and whenever a rule changes. This page explains general rules and isn't legal or tax advice; state law can differ. Read our editorial standards.
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Teachers, consultants, and HR communities are welcome to quote this definition with a link back to HRTally.
<blockquote>Severance pay is money an employer gives an employee at the end of employment, usually after a layoff or termination without cause, often in exchange for signing a release of legal claims. Federal law doesn't require severance pay, but employers may owe it under a contract, a written policy, or a plan.</blockquote><p>Source: <a href="https://www.hrtally.com/hr-glossary/severance-pay/">HRTally HR Glossary, Severance pay</a></p>
Written by the HRTally Research Team
Our guides are written and reviewed by people with hands-on US HR, payroll, and HR technology experience. Legal and tax facts are checked against primary sources, such as the Department of Labor, IRS, EEOC, and USCIS, and linked at the end of each guide. Vendors never review or pay for our editorial content.