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 South Dakota, severance pay is not mandated by state law, nor is it required under the Fair Labor Standards Act (FLSA). Severance pay is typically a matter of agreement between the employer and the employee. It may be offered based on the employee's tenure, as part of a company policy, or through an employment contract. The terms of severance packages can vary, including components such as continued salary, benefits, and compensation for unused vacation time. While severance pay is not a legal requirement in South Dakota, if an employer has a policy or contractual obligation to provide it, such agreements are generally enforceable under state wage laws. In the event of mass layoffs or business closures, federal law, specifically the Worker Adjustment and Retraining Notification (WARN) Act, may require advance notice but does not mandate severance pay unless stipulated by contract or employer policy. Employees receiving a lump-sum severance payment may become immediately eligible for unemployment benefits, but this can be affected by any additional agreements, such as a resignation statement. The Employee Benefits Security Administration (EBSA) can assist with issues regarding severance benefits, although their role is primarily related to retirement and health plans.
