Quick answer
- Severance pay is not required by the Fair Labor Standards Act or any other federal law. The US Department of Labor calls it a matter of agreement between employer and employee.
- It becomes owed when a contract, written policy, handbook, benefit plan or union agreement promises it. The federal WARN Act requires 60 days' written notice of covered plant closings and mass layoffs, not severance.
- Common formulas pay one or two weeks of base pay per year of service. Severance is taxed as wages: Social Security, Medicare and income tax withholding all apply.
Severance pay is money an employer gives an employee who is let go, on top of the wages the employee already earned. It is not a legal entitlement in the United States. The Department of Labor's answer to "is severance pay required" is short: there is no requirement in the Fair Labor Standards Act (FLSA), and severance is a matter of agreement between an employer and an employee. That agreement is where everything else follows from. If a policy, contract or plan promises severance, the employer has to pay it on the terms written. If nothing promises it, the employer chooses whether to offer it, usually in exchange for a signed release of claims. This guide covers both sides: what the rules are, how severance is calculated, what a severance package normally includes, how it is taxed, what it does to unemployment benefits, and what to put in the letter.
What is severance pay
Severance pay is a payment made because employment is ending, not for hours worked. It is different from the final paycheck, which covers wages the employee already earned through the last day and is owed in every case on the deadline your state sets. It is also different from paying out accrued PTO, which some states require and many written policies promise regardless of severance.
Severance shows up in three situations:
- Layoffs and position eliminations. The job goes away for business reasons. This is where most severance is paid, and where it is most often tied to years of service.
- Negotiated separations. An employee and employer agree to part ways, and severance is part of the deal, usually with a release of claims.
- Contractual promises. An employment contract, offer letter or executive agreement spells out what the person gets if they are terminated without cause.
Severance is rarely offered for terminations for misconduct, and nothing requires it there either. Because most US employment is at will, an employer that does not have a written severance obligation can end employment without severance, as long as the reason is not an illegal one.
Is severance pay required?
Not by federal law. The FLSA sets minimum wage, overtime and recordkeeping rules and says nothing about severance. The Department of Labor's wage pages say severance "is a matter of agreement between an employer and an employee (or the employee's representative)." No state requires severance across the board either, although a few states have narrow rules for specific situations such as large plant closings. Check your state labor department if you are laying off a large group.
Severance becomes a legal obligation when something creates it:
- A written policy or handbook. If your handbook says "employees laid off for lack of work receive one week of pay per year of service," that is a promise, and in many states it is enforceable as wages. Texas, for example, treats severance pay owed under a written agreement or written policy as wages under the Texas Payday Law, which means the Texas Workforce Commission can order it paid.
- An employment contract or offer letter. Any signed document that promises severance on termination without cause.
- A severance plan. A formal plan with eligibility rules and a formula may be an employee benefit plan under ERISA. The Department of Labor's Employee Benefits Security Administration says it may be able to help an employee who did not receive severance under an employer-sponsored plan.
- A collective bargaining agreement. Union contracts often set severance terms, and the employer has to follow them.
- Past practice, in some cases. An employer that has paid the same formula to everyone for years can create an expectation that a court or agency treats as an implied promise. If you want to keep discretion, say so in writing.
The practical rule for employers: decide what you want to promise, write it down once, and follow it the same way for everyone. Inconsistent severance is a discrimination claim waiting to happen. Our employee handbook templates show where a separation policy fits.
The WARN Act and 60 days' notice
The federal Worker Adjustment and Retraining Notification (WARN) Act is often confused with a severance law. It is a notice law. According to the Department of Labor, WARN requires employers with 100 or more employees (not counting part-time employees, or counting 100 or more employees who together work at least 4,000 hours a week) to give at least 60 calendar days' written notice before a covered plant closing or mass layoff. Under 29 U.S.C. 2101:
- A plant closing is the permanent or temporary shutdown of a single site that causes employment loss for 50 or more employees (excluding part-time employees) during any 30-day period.
- A mass layoff is a reduction in force at a single site that, within 30 days, causes employment loss for at least 50 employees who make up at least 33% of the workforce at that site, or for at least 500 employees regardless of percentage.
Notice goes to the affected employees or their union, the state dislocated worker unit and the chief elected local official. There are exceptions for unforeseeable business circumstances, faltering companies and natural disasters.
What WARN does not say is "pay 60 days' severance instead." The statute requires notice. An employer that gives less than 60 days' notice is liable to each affected employee for back pay and benefits for each day of the shortfall, up to 60 days, and 29 U.S.C. 2104 reduces that liability by any voluntary and unconditional payment the employer makes that it was not already required to make. That is why many employers pay out the notice period in practice: it is a way of covering the liability, not a right the law gives them. Several states have their own "mini-WARN" laws with lower employee thresholds, longer notice periods or, in a few cases, required severance when the law is triggered. If you are planning a layoff of more than a handful of people, check your state's law before you set the date.
How is severance calculated
There is no legal formula. "How is severance calculated" has one honest answer: however the policy, contract or offer says. That said, most US severance follows a few patterns, and the numbers below are illustrative of common practice, not a standard anyone is required to meet.
| Formula | How it works | Typical use |
|---|---|---|
| Weeks per year of service | 1 or 2 weeks of base pay for each completed year, often with a floor (2 to 4 weeks) and a cap (12 to 26 weeks) | Layoffs and position eliminations at most small and mid-sized employers |
| Flat amount | A set number of weeks regardless of tenure, such as 4 weeks for everyone affected | Small group layoffs where simplicity matters |
| Tiered by level | Hourly staff get one scale, managers another, executives a contract amount | Mid-sized employers with a written plan |
| Pay in place of notice | Pay for the notice period the employer chose not to work (for example, 2 weeks) | Immediate separations, WARN notice shortfalls |
| Contract amount | Whatever the employment agreement states, often months of salary plus benefits | Executives and specialized hires |
Three details decide the dollar amount for hourly employees:
- What a "week of pay" means. For a salaried employee it is salary divided by 52. For an hourly employee, define it as regularly scheduled hours times the hourly rate, or the average weekly hours over a lookback period such as the last 12 weeks. Pick one and write it in the policy. Overtime is normally excluded.
- How service is counted. Completed years is the usual rule. Some policies round partial years up at six months; some prorate. A hire date of November 2, 2023 and a separation on November 20, 2026 is three completed years either way.
- Floors and caps. A floor gives a one-year employee something meaningful; a cap keeps long-service payouts predictable.
Decide also whether the amount is paid as a lump sum or as salary continuation over the same number of weeks. Lump sums are simpler and clean up the payroll account faster. Salary continuation keeps the person on the payroll, which can keep health coverage running under some plans, and spreads the cash out for the business. Either way, the gross amount is the same.
What a severance package includes
"Severance package" is the whole bundle offered on the way out. Severance pay is one line in it. A typical package for an hourly or mid-level employee includes:
- Severance pay under the formula above, paid separately from the final paycheck so the withholding and the pay stub are clear.
- Final wages for every hour worked through the last day. These are owed regardless of the package and are due on the deadline your state sets; several states require them on the last day for an involuntary termination. Never make final wages conditional on signing anything.
- PTO payout. Some states require accrued, unused vacation to be paid out at separation; others leave it to the written policy. Texas, for example, requires payout only if a written agreement or policy promises it. Either way, PTO payout that is owed is not severance and cannot be the "consideration" for a release. See our guide to paid time off for how accrual and payout policies are written.
- Health coverage. Under federal COBRA, group health plans of employers with 20 or more employees must offer continuation coverage. The employer notifies the plan administrator within 30 days of the termination, the administrator has 14 days to send the election notice, the employee has at least 60 days to elect, coverage after a termination generally lasts up to 18 months, and the plan can charge up to 102% of the plan's cost. Many states have their own continuation laws that reach smaller employers, usually through the insurer. A richer package pays some or all of the COBRA premium for a set number of months.
- Other items. A neutral reference or agreed reference letter, outplacement help, keeping a company phone or laptop, payment of a pro-rated bonus, accelerated vesting, and the return of company property on both sides.
The separation paperwork itself (termination letter, benefits notices, final pay statement) is a separate job. Our termination letter templates cover the letter that goes with the package, and Workzenly HR documents keeps the signed copies with the employee's file.
Severance agreements and releases
When severance is not already owed, employers almost always offer it in exchange for a severance agreement that includes a release: the employee gives up the right to sue over the employment and its ending. For the release to hold up, a few rules apply.
It has to be a real exchange. The employee must receive something they were not already entitled to. Final wages, earned commissions and PTO payout required by law or policy do not count. Severance on top of them does.
It has to be knowing and voluntary. Plain language, enough time to read it, and no pressure to sign on the spot.
Employees 40 and older have extra protection. The Older Workers Benefit Protection Act (OWBPA), part of the Age Discrimination in Employment Act, sets minimum conditions for a valid waiver of age discrimination claims. According to the Equal Employment Opportunity Commission (EEOC), the waiver must:
- be written in a way the employee can clearly understand;
- specifically refer to rights or claims under the ADEA;
- not cover claims that arise after the date it is signed;
- be in exchange for something of value beyond what the employee is already owed;
- advise the employee in writing to consult an attorney before signing;
- give the employee at least 21 days to consider the agreement, or at least 45 days when the severance is offered to a group under an exit incentive or layoff program, in which case the employer must also disclose the job titles and ages of the employees selected and not selected;
- give the employee at least 7 days after signing to revoke, a period neither side can shorten or waive.
The EEOC also says that no severance agreement can stop an employee from filing a charge with the EEOC or taking part in an EEOC investigation, and any clause that tries to is invalid. The same is true of rights that cannot be waived at all, such as unemployment benefits, workers' compensation and vested retirement benefits. Many employers simply give every employee 21 days and a 7-day revocation window regardless of age, because it is easier to administer and harder to challenge.
If the employee revokes, the severance is not paid and the release is void. That is why most agreements say the payment is made within a set number of days after the revocation period ends, not on the last day of work.
Taxes on severance pay
Severance is taxable wages. IRS Publication 15 (Circular E), the 2026 edition, states that severance payments are wages subject to Social Security and Medicare taxes, federal income tax withholding and FUTA tax. There is no special exemption and no way to pay it "tax free."
For withholding, the IRS lists severance pay among supplemental wages, alongside bonuses, commissions and payouts of accumulated sick leave. When supplemental wages are paid separately from regular wages, or identified separately on the same check, Publication 15 gives the employer two choices, provided income tax was withheld from the employee's regular wages in the current or previous calendar year:
- Flat 22%. Withhold a flat 22% federal income tax, no other percentage allowed. This is the most common choice for a lump-sum severance check.
- Combine with regular wages. Add the severance to the regular wages paid in the same period, figure withholding on the total using the employee's Form W-4, and withhold the difference.
Once an employee's supplemental wages in a calendar year pass $1 million, the excess must be withheld at 37% regardless of the W-4. Whichever method you use, Social Security tax at 6.2% (up to the 2026 wage base of $184,500, rising to $192,300 on January 1, 2027) and Medicare tax at 1.45% come out of the severance, and the employer matches both. FUTA applies only to wages up to $7,000 per employee per year, so it rarely adds anything for a long-tenured employee leaving late in the year. State and local income tax follow your state's rules; Texas, Florida and several other states have no state income tax on wages.
Two points worth telling employees. The 22% flat rate is withholding, not the final tax: the severance is added to the rest of the year's income on the tax return and the real rate is whatever the return produces. And a large lump sum can push withholding higher or lower than the eventual tax, so the employee may want to adjust estimated payments. Point them to the pay stub so they can see what came out; our pay stub guide explains each line.
Severance and unemployment benefits
Unemployment insurance is a joint state-federal program, and the Department of Labor notes that each state administers its own program and sets its own eligibility rules. The effect of severance on benefits therefore depends entirely on the state, and the details change, so what follows is the shape of the rules rather than a promise about any one claim.
- Some states delay benefits for the weeks severance covers. Texas is one: the Texas Workforce Commission's guidance says a claimant is disqualified for any benefit period covered by wages in lieu of notice or severance pay the employer had obligated itself to pay, and benefits can start once those weeks run out. Texas also treats payments made in exchange for a release or under a negotiated agreement differently, so how the payment is labeled matters. Confirm the current rule with the TWC.
- Some states reduce the weekly benefit dollar for dollar during the severance weeks instead of denying it outright.
- Some states ignore severance entirely and pay full benefits from the first eligible week.
- Lump sum versus continuation can matter. A few states treat a lump sum as covering one week and salary continuation as covering each week paid.
The advice for employees is the same everywhere: file for unemployment right away, report the severance exactly as the form asks, and let the agency decide. Filing late does not help, and failing to report severance can turn into an overpayment you have to return. For employers, answer the state's notice of claim accurately, including the amount of severance and the period it covers, because the state uses that answer to set the start date.
Negotiating severance (for employees)
If you are offered severance, you are being asked to sign something. That gives you room to negotiate, within limits.
- Do not sign on the spot. Take the document home. If you are 40 or older the employer must give you 21 days; if you are younger, ask for at least a week in writing.
- Separate what you are owed from what is offered. Final wages, earned commissions and any PTO payout required by your state or the written policy are yours regardless. Do not let them be presented as the benefit of signing.
- Check the policy. If the handbook or your offer letter promises a formula, the offer should meet it. Ask for the policy if you do not have a copy.
- Ask for the things that cost the employer little. A neutral reference, an agreed resignation date, a later separation date that keeps health coverage running one more month, payment of a few months of COBRA premium, keeping your phone number, and a clause that the employer will not contest unemployment.
- Ask for more weeks, with a reason. Tenure, the time of year, a non-compete you are being asked to honor, or the fact that you were recruited away from a stable job are all reasons. Keep the tone practical.
- Read the non-disparagement, confidentiality and non-compete terms. These outlast the money. Make sure any non-disparagement clause runs both ways.
- Get advice if the amount is large or the situation is messy. An hour with an employment attorney is cheap next to a release that gives up a real claim.
If you suspect the termination was for an illegal reason (discrimination, retaliation for a complaint, taking protected leave), talk to an attorney before signing anything, and remember that a release cannot stop you from filing an EEOC charge.
Worked example: one week per year of service
Northfield Coffee in Austin, Texas, has nine hourly employees. Its handbook says employees whose positions are eliminated receive one week of base pay for each completed year of service, with a week defined as regularly scheduled hours times the hourly rate. Chris Walker, a barista hired on November 2, 2023 at a regular schedule of 40 hours a week and now earning $17.75 an hour, is laid off effective Friday, November 20, 2026, when the shop closes its afternoon shift. The figures below are illustrative and use 2026 federal rates; Texas has no state income tax.
| Step | Calculation | Amount |
|---|---|---|
| One week of base pay | 40 hours × $17.75 | $710.00 |
| Completed years of service | November 2, 2023 to November 20, 2026 | 3 |
| Gross severance | 3 weeks × $710.00 | $2,130.00 |
| Federal income tax withholding (flat 22%) | $2,130.00 × 22% | $468.60 |
| Social Security (6.2%) | $2,130.00 × 6.2% | $132.06 |
| Medicare (1.45%) | $2,130.00 × 1.45% | $30.89 |
| Total withheld | $468.60 + $132.06 + $30.89 | $631.55 |
| Net severance to Chris | $2,130.00 − $631.55 | $1,498.45 |
Northfield also pays the employer share of Social Security and Medicare on the severance, another $162.95, so the severance costs the business $2,292.95. FUTA adds nothing here because Chris's wages passed the $7,000 FUTA base earlier in the year. If the policy paid two weeks per year instead, gross severance would be 6 × $710.00 = $4,260.00.
The severance check is separate from two other payments that are owed no matter what:
- Final wages. Chris worked 32 hours in the November 15–28 pay period before the layoff: 32 × $17.75 = $568.00 gross, taxed with normal W-4 withholding. Under the Texas Payday Law an employee who is laid off must be paid within six calendar days, so Northfield pays on Tuesday, November 24 rather than waiting for the regular December 4 payday.
- PTO payout. Northfield's written policy pays out unused PTO at separation. Chris has 16 hours: 16 × $17.75 = $284.00 gross, paid with the final wages.
Northfield has nine employees, so neither the federal WARN Act (100 or more employees) nor federal COBRA (20 or more) applies to it. Chris's health coverage ends under the plan's terms, and any continuation right comes from state continuation law rather than COBRA, so Northfield's letter tells him to expect information from the insurer. Because Northfield's handbook already promised the severance, it is owed as wages under Texas law, and Northfield does not condition it on a release. If the shop wanted a release, it would have to offer something beyond the three weeks.
Sample severance offer letter and agreement outline
The letter below is for an employer offering severance that is not already owed, in exchange for a release. Replace every bracketed item, delete anything that does not apply, and have an employment attorney review the release language for your state before you use it. It is a starting point, not legal advice.
What employers should do
Most severance disputes come from inconsistency and bad timing rather than from the amount. A short checklist:
- Write the policy once. State who is eligible, the formula, how a week and a year are defined, whether a release is required, and that the company may change the policy prospectively. If you want discretion, say the policy creates no entitlement and keep the practice consistent anyway.
- Pay what is owed first, unconditionally. Final wages on the state deadline, PTO payout where required, and benefit notices on time. Never hold the final paycheck for a signature or for returned property.
- Pay severance as its own pay item. Code it as supplemental wages, apply the 22% flat withholding or the combined method consistently, and show it on its own pay stub line so the employee and the unemployment agency can see what it is.
- Give the OWBPA time periods to everyone 40 and older, and consider giving them to everyone. Run the group disclosure if more than one person is offered severance in the same program.
- Check WARN and your state's mini-WARN before any layoff of a group, and your state's rule on how severance affects unemployment so your letter does not promise something the agency will not do.
- Keep the file. The signed agreement, the dated letter, proof of when the employee received it, the pay records and the benefits notices. FLSA payroll records have to be kept at least three years in any case.
If payroll, time and PTO already live in one place, the separation itself is a short job: the last punches become the final paycheck, the PTO balance becomes the payout, and severance is one more line. That is what Workzenly payroll is built for, and our guide to processing payroll walks through an off-cycle run step by step.
Frequently asked questions
Is severance pay required by law in the US?
No federal law requires severance pay. The US Department of Labor says it is a matter of agreement between the employer and the employee. It becomes owed when an employment contract, written policy, handbook, benefit plan or union agreement promises it. The WARN Act requires 60 days' notice of covered mass layoffs, not severance.
How is severance pay usually calculated?
The most common formula is a set number of weeks of base pay for each year of service, often one or two weeks per year, sometimes with a minimum and a cap. For an hourly employee, a week is normally the regular scheduled hours times the hourly rate. The formula is whatever the policy or agreement says, so read that document first.
How is severance pay taxed?
The IRS treats severance as wages subject to Social Security, Medicare and FUTA taxes and to federal income tax withholding. Severance paid separately from regular wages is a supplemental wage, and IRS Publication 15 allows a flat 22% federal withholding (37% on amounts over $1 million in a year). State income tax rules follow your state.
Does severance pay affect unemployment benefits?
It depends on the state. Each state runs its own unemployment program and sets its own rules. Some states, including Texas, do not pay benefits for the weeks that severance or pay in lieu of notice covers, so benefits start later. Other states do not reduce benefits at all. File as soon as you are laid off, report the payment, and let the agency decide.
How long do I have to sign a severance agreement?
Whatever the agreement says, with one federal floor. If you are 40 or older and the agreement waives age discrimination claims, the Older Workers Benefit Protection Act requires at least 21 days to consider it (45 days in a group layoff) and 7 days to revoke after signing. Younger employees have no federal minimum, so negotiate a reasonable deadline.
Can an employer require a release to get severance?
Yes, if the severance is extra, not something already owed. Severance offered in exchange for a release must be more than what the employee is already entitled to, such as final wages or PTO payout required by state law. The release cannot stop the employee from filing a charge with the EEOC, and it cannot waive claims that arise after signing.