As the economic downturn from the COVID-19 pandemic continues to impact
businesses throughout the United States, many employers face the prospect of
implementing reductions in force or other employee terminations. Common questions include whether employers
are legally obligated to pay severance, whether offering severance is advisable
in the absence of a requirement to do so, and how much to offer. As explained below, severance payments are
generally optional and can be used by employers to achieve a number of
important goals, including risk mitigation and litigation avoidance.
Are Employers Required to Pay Severance?
As of this writing, no federal or state law obligates
employers to pay severance to employees upon termination. Under the federal Worker Adjustment and
Retraining Notification (“WARN”) Act and some state equivalents, employers may
be required to pay terminated employees wages and benefits for a certain period
if they fail to provide adequate notice to those employees as part of a
qualifying mass layoff or plant closing.
However, these payments under the WARN Act are penalties for
non-compliance with the notice requirement rather than true severance and, moreover,
can easily be avoided by providing the required notice.
New Jersey will become the first state in the nation to
require employers to pay severance in certain circumstances when amendments to
its WARN Act equivalent become effective.
As part of a series
of employer-unfriendly laws enacted in January 2020, New Jersey will
require large employers—even those who comply with WARN notice requirements—to pay
one week of severance for each full year of service to employees who are
terminated as part of a qualifying mass layoff or plant closing. Employers who fail to provide adequate notice
must pay an additional four weeks as a penalty. Fortunately, New Jersey has delayed the effective date of this new
severance requirement to 90 days after termination of the COVID-19-related
state of emergency. Although no law currently requires the payment of severance,
an employer may legally obligate itself to provide severance in a number of
- An employment agreement, especially for an executive,
may guarantee some amount of severance in the event of a termination without
- A company policy, whether contained in an employee
handbook or not, may provide for severance for employees who are terminated
through no fault of their own.
- A collective bargaining agreement may contain a
- Federal, state, and local anti-discrimination
laws may compel an employer to offer severance to similarly situated employees
in order to avoid a disparate treatment claim.
- A practice of paying severance may be viewed under
some circumstances to create a plan
under the federal Employee Retirement Income Security Act (“ERISA”),
with attendant requirements.
an Employer Offer Severance?
Absent a requirement or obligation to pay severance, an employer may
nonetheless choose to offer severance in order to avoid claims or litigation, to
obtain other benefits, or as a matter of goodwill. Indeed,
whenever an employer offers severance, the offer should be conditioned upon the
employee’s signing a general release of claims against the employer, affiliated
entities, and associated personnel. This
is true whether there is a specific concern about a claim or lawsuit—for
example, where the terminated employee has previously complained about alleged
discrimination—or not. Note that certain
claims and rights cannot be released by an employee even in exchange for
severance, such as claims for unemployment and worker’s compensation and the
right to file a discrimination charge with a government enforcement agency.
Employers can also use severance to obtain strategic benefits from
terminated employees beyond the release of claims, including confidentiality and
restrictive covenants such as non-competition, non-solicitation, and
non-disparagement provisions. In some
situations, employers may wish to include other provisions as part of the
exchange, such as a requirement that terminated employees cooperate with
post-termination transition work or be available as a witness for pending or
How Much Severance to Offer?
Unless there is a preexisting requirement, policy, or plan to
pay severance in a specified amount, the amount of severance to offer is
entirely up to the employer. The amount
should be sufficient “consideration” to support the employee’s release of
valuable rights/claims; however, there is no minimum threshold or magic
number. Ultimately, the right amount of
severance is a function of how much the employer is willing to pay and how
little the terminated employee is willing to accept in exchange for signing an
agreement containing a general release and any other provisions desired by the
A good starting point—though by no means a requirement or
standard—is one week of base salary for every year of service. Using a formula to determine severance
amounts based on tenure or some other objective criteria helps insulate an
employer from allegations of discrimination or unfairness, especially in the
context of a group termination. Still, an employer is generally free to adjust the
amount of severance to address individual situations.
Severance can be paid in a single lump sum or in
installments over time, within certain limitations under the tax code. Employers should note that severance pay will
likely be deemed to be W-2 wages by the IRS and state tax authorities, thus
requiring employers to withhold employee payroll taxes and to pay employer
payroll taxes. In addition, receipt of
severance may impact a terminated employee’s eligibility for unemployment
are also a variety of other items that can supplement severance pay and may
help achieve the employer’s ultimate goal—getting an employee to give a general
release or agree to other conditions. Perhaps the most common is subsidized health insurance continuation
coverage, in which the employer makes up the difference between the cost for
the terminated employee under COBRA and the rate paid by active employees. Other,
non-monetary supplements include job placement assistance, reference letters and
Takeaways for Employers
Severance is a powerful tool that employers can use to
protect against lawsuits, legal fees, unfair competition, and a host of other
undesirable situations. It is critical
that any offer of severance, whether contained in an agreement/policy or made
in conjunction with a termination, include, at a minimum, a requirement that
the terminated employee provide a general release of claims. Finally, severance agreements and policies
require the input of experienced legal counsel. There are many procedural requirements to ensure that releases and
related agreements are fully enforceable, and these
requirements continue to evolve.
We are available to advise employers on using severance for
their maximum benefit and to draft enforceable severance agreements.
This Client Alert has been prepared by Sills Cummis & Gross P.C. for informational purposes only and does not constitute advertising or solicitation and should not be used or taken as legal advice. Those seeking legal advice should contact a member of the Firm or legal counsel licensed in their state. Transmission of this information is not intended to create, and receipt does not constitute, an attorney-client relationship. Confidential information should not be sent to Sills Cummis & Gross without first communicating directly with a member of the Firm about establishing an attorney-client relationship.