Severance pay—also known as “severance” or a severance package—is the compensation and benefits an employer may provide an employee upon termination of employment. In addition to cash paid as compensation (1-3 months of the employee’s pay, for example), upon severance of employment an employee’s health insurance may be extended for a number of months and the employee may be paid for unused, accrued vacation time and other paid time off.
Whether to provide any severance pay—and if so, how much—is usually in the discretion of the employer. There is no requirement in the Fair Labor Standards Act (FLSA) (federal law) for severance pay. Severance pay is a matter of agreement between an employer and an employee (or the employee's representative) and is often based on the employee’s length of employment with the employer. The federal government’s Employee Benefits Security Administration (EBSA) may be able to assist an employee who did not receive severance benefits under their employer-sponsored plan.
Employers often offer severance packages to employees who are laid off or whose jobs are eliminated because of downsizing. Some employees who resign, retire, or who are terminated may also be paid a severance package—usually in exchange for signing a waiver of any claims against the employer. Although federal and (most) state laws do not require employers to pay severance pay, severance pay can be a gesture of goodwill by the employer and may help the employee transition to a new job or career.
But if an employer pays an employee severance pay in a lump sum (without the continuation of ongoing benefits like health insurance and vacation pay) the employee will no longer be on the employer’s payroll and may promptly file for unemployment insurance benefits. For this reason, an employer may require an employee to sign a statement that the employee is voluntarily resigning and will not seek unemployment insurance (unemployment insurance claims may increase an employer’s insurance premiums). An employer may also extend the severance pay over some period of time to keep the employee on the payroll and ineligible for unemployment insurance—at least for the near future.
Some states (Idaho, Maine, Massachusetts, Rhode Island) may require an employer to pay severance pay in the event of a mass layoff or plant-or-facility closing.
Severance pay that is promised in a written policy (such as an employee handbook) or employment agreement is generally enforceable as wages due under a state’s payday laws.
In New Jersey, severance pay is not mandated by state law, and the provision of severance benefits is typically at the discretion of the employer. The Fair Labor Standards Act (FLSA) does not require severance pay either. Severance packages may include compensation, extended health insurance, and payment for unused vacation time, and are often based on the length of employment. While severance pay is not a legal requirement, it can be part of an agreement between an employer and an employee. If severance is promised in an employment contract or employee handbook, it may be enforceable under state wage laws. Employers may offer severance as a goodwill gesture to assist with the employee's transition after termination, and sometimes require a waiver of claims against the employer. Severance paid in a lump sum may allow an employee to file for unemployment benefits, unless there is an agreement to the contrary. In contrast, severance paid over time may keep the employee on the payroll, potentially affecting eligibility for unemployment benefits. Unlike some states, New Jersey does not have specific statutes requiring severance pay in cases of mass layoffs or plant closings, although federal laws like the WARN Act may impose certain notice and severance obligations in such situations.
