What Is Severance Pay and How Does It Work?

An employer typically offer severance pay to employees who are terminated from their jobs, which may be due to a layoff or by being fired.
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Severance pay is a lump sum that an employer might offer to employees who are terminated from their jobs, which may be due to a layoff or by being fired.

In exchange for severance pay, an employee typically has to agree to waive their right to sue their employer for wrongful termination, discrimination or other employment-related claims.

The amount of severance pay an employee is offered varies by person and employer, and it’s often just one part of a larger severance package. Here’s a deeper look at what severance pay is and how it works.

Are employers required to pay severance?

Employers in the U.S. aren’t required to pay severance. There aren’t any federal laws guaranteeing that employees will be offered additional pay or benefits when they suddenly lose their jobs.

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Exceptions exist where employment contracts, such as a bargaining agreement between an employer and a union, are in place, says Denise Clark, an employment and employee benefits attorney who founded Clark Law Group in Washington D.C. Those contracts can include provisions requiring the employer to pay severance to terminated employees.

Who gets severance pay?

Some companies offer severance only to workers with certain types of jobs or levels of responsibility in the company or who have been employed a certain number of years. Generally, people ranked higher in a company’s hierarchy are more likely to be offered severance, according to the 2023 Guide to Severance and Workforce Transition survey conducted by Randstad RiseSmart, a careers development services company.

The survey found that just 25% of U.S. companies offer severance to all employees.

Do you get severance if you’re fired?

If you’re fired, you could still be offered severance pay. Under those circumstances, the employer still wants assurances the employee that’s leaving won’t come back with a lawsuit, Clark says.

However, if you’re fired for another, more serious reason, “the offer of severance is unlikely,” Clark says. She listed absenteeism and failing a drug test among the discipline issues that could prevent someone who is fired from being offered severance.

What’s included in a severance package

The Randstad RiseSmart survey found benefits in a severance package most commonly include:

  • A cash payout.

  • Bonuses that the employee was previously eligible for.

  • Outplacement services.

Outplacement services are meant to help laid off or terminated employees get a new job by helping them craft resumes and cover letters, look for jobs and prepare for interviews.

A severance package should go above and beyond any benefits you’re entitled to any time you leave your job. For example, some states require employers to payout unused vacation time.

Additionally, employees who were covered by their employer’s group insurance are eligible for COBRA when they resign or are terminated.

How much is severance pay?

U.S. employers are likely to offer severance pay equaling up to four months’ salary, according to the Randstad RiseSmart survey. The amount can vary between individuals at the same company, depending on how severance pay is calculated.

How is severance pay calculated?

Typically, severance pay is calculated based on the employee’s current salary and the number of years they’ve worked at the organization, according to the Randstad RiseSmart survey.

Here’s an example: Let’s say a company offers one week of pay at the employee’s basic salary rate for each year they’ve worked for the company.

An employee who has been with the company for five years would be offered severance pay totaling five weeks of earnings — or a little more than a month’s pay. So, if they earn $2,000 per week (which is an annual salary of about $104,000), they would be offered $10,000 in severance pay.

Though it’s less common, some companies base severance pay on a person’s earnings or tenure alone. Here’s how that severance would be calculated.

Earnings only: Returning to the example above, let’s say the company offers three months (about 13 weeks) of pay to all employees who are let go during a layoff. The employee earning $2,000 per week would be offered $26,000 in severance pay.

Tenure only: Rather than referencing an individual workers’ salary to calculate severance pay, a company could decide to pay a fixed amount to its workers based on years of service, such as $15,000 to anyone who has worked at the company for two to seven years.

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Can you negotiate severance?

Clark says some companies will follow a “take it or leave it” approach to severance and won’t negotiate the terms. But others will be more open.

“Not every employer will necessarily know what employee might walk out the door and file a lawsuit,” Clark says.

That means an employer that’s motivated to ensure a departing employee won’t bring a lawsuit against the company could be open to increasing the payout as the employee exits.