Labor and Employment

Severance Agreement FAQs for Employees

By Lisa Guerin, ​J.D., Boalt Hall at the University of California at Berkeley
Learn the rules on severance, including when you might receive it, what might be included in the package, and whether it will be taxed.

Q: Is severance pay required by law?

A: Generally, no. Federal law, and the law of most states, do not require employers to pay severance to departing employees. However, if your employer has contractually agreed to pay severance, it must honor that promise. Otherwise, you can sue for breach of contract. For example, if you have an employment contract promising severance, you are a member of a union whose collective bargaining agreement authorizes severance, or your employee handbook guarantees severance, you are entitled to enforce that agreement.

A few states also have laws requiring employers to pay a small amount of severance or benefits to employees who lose their jobs in a mass layoff or plant closing. Contact your state labor department to find out if your state has this type of requirement.

Aside from severance, workers who are laid off or fired for reasons other than misconduct can collect unemployment compensation.

Q: Am I entitled to a severance package if my employer has a written severance plan?

A: Maybe. Because employers are generally not required to offer severance by law, they are free to set the terms of their severance plans, including which employees are eligible. Your employer’s severance plan should spell out exactly which employees are entitled to the benefits of the severance package. The plan should also spell out when the severance package kicks in, such as when an employee is laid off or resigns.

Unless you have an employment contract specifying what you will receive in severance, an employer can generally change its severance plan at any time. There's nothing to stop an employer from modifying the plan or getting rid of it altogether, as long as it provides advance notice to employees. In most states, employers are required to give employees a copy of any severance plan the employer already has in place or creates after an employee is hired.

Get a copy of your employer's severance plan and see if you're eligible to receive severance. The plan might be in your employee handbook, or it might be a stand-alone policy. If you have any questions, ask your supervisor or human resources department for more information about the plan.

Q: Can my employer make me sign an agreement not to sue in exchange for a severance package?

A: It depends. An employer cannot require you to sign a release of claims (an agreement not to sue) in exchange for severance pay to which you are already entitled. For example, if your employment contract says you will be entitled to two weeks of severance for every year of service, and the contract doesn't mention giving up the right to sue, your employer may not withhold your severance pay until you sign a release.

However, if your employer simply offers severance without being required to do so (for example, to a group of employees who are laid off), it can require you to sign a release in exchange for severance.

Q: How much severance pay should I expect?

A: Every severance agreement is different. Some employers offer one or two weeks of salary as severance pay, while others use a formula based on your current salary and your years of service for the employer. And, some employers have different packages for different levels or tiers of employees. For example, severance packages for executives and managers might be much larger than those offered to non-managerial staff.

In addition to money, some severance packages offer other benefits, such as continued health coverage or retention of company property (for example, a laptop or company car). Some packages may also include outplacement services to help employees find new jobs, like job placement services and assistance with writing a resume or preparing for an interview.

Q: Will my severance pay be taxed?

A: Severance pay is taxable as income to you. What's more, you'll have to pay Social Security and Medicare taxes on the money, even though it isn't really compensation for work. To minimize the tax burden, you might want to ask your employer to spread the payment out over two separate tax years, rather than paying you all at once in a lump sum. Otherwise, your severance pay might push you into a higher tax bracket for the year, meaning you'll have to pay more in taxes right when you need the money the most.

Q: I'm thinking of taking a severance package, but I'm not sure if it's worth what I’m giving up. What should I do?

A: Talk to an employment lawyer as soon as possible. To decide whether it makes sense to accept a proposed severance package, you’ll need to figure out whether you have any claims against your employer and, if so, what those claims might be worth. For example, if you have a potential claim for discrimination or unpaid wages, those might be worth well more than what you are being offered in severance.

An attorney can help you determine if you have any legal claims against your employer, how much they may be worth if your suit is successful, and how much a suit might cost you in attorneys’ fees and court costs. If your employer is asking you to give up valuable legal claims, a lawyer can help you negotiate for a more generous package.

Q: My employer always used to pay severance, but now there's no severance plan at all. Can I still get severance?

A: Generally, employers can cancel or change their severance policies at any time. Nonetheless, you may be able to establish a right to severance pay if your employer promised it in any of the following ways:

  • You and your employer have a written or oral employment contract stating you will be paid severance.
  • A current employee handbook states that severance will be paid to employees who are laid off or terminated for specified reasons. If the handbook promise is explicit enough to create a contract, a court might enforce it.
  • Your employer has consistently paid severance to employees in the past, in a manner that led you to reasonably believe severance was a part of your employment arrangement. You will need to show which employees got paid, how much, and under what circumstances (for example, when laid off). It is more difficult to prove a contract based on past practices, but if your employer always paid severance to former employees, you may have a plausible claim. An employment lawyer can help you figure out whether you are entitled to severance based on your employer's practices.

Q: What will happen if I ask my employer for a better severance package?

A: That's up to your employer. Some employers might agree to pay more, some might not. And some might take their offer off the table entirely if you try to bargain. By trying to negotiate a better deal, you're actually turning down the current deal. In legal jargon, you're making a "counteroffer." Once you do that, your employer is free to accept or decline your proposed deal. If your employer rejects your request, the earlier offer is no longer on the table, unless your employer says so.

This doesn't happen too often, however. Most employers will leave their original offer open even after you've made a counteroffer. Pay close attention to the time limits in the offer, however. If you don't accept it within the time specified, your employer doesn't have to provide it.

Q: What if I'm rehired by my employer after I take a severance package?

A: It depends on the terms of the severance package. Some employers might let you keep anything you've been paid under the severance plan if you are rehired at a later date. Some employers might make you repay all or part of any money you received if you’re rehired within a certain amount of time. Read the severance plan carefully for the details.

At the very least, if your former employer offers to rehire you, ask whether you'll have to pay back your severance benefits. The answer may have a big impact on your decision to return to work for the employer.

Q: Why does my severance package give me 21 or 45 days to consider the deal? Can I accept it before the time is up?

A: In general, your employer can set the time limits for how long you have to consider the severance package. This might be a few days, or it might be a few weeks. However, special rules apply to older workers when they are asked to sign a release, waiving all claims against the employer, in exchange for the severance.

If you are at least 40 years old, a federal age discrimination law—the Older Workers Benefit Protection Act (OWBPA)—requires your employer to give you at least 21 days to consider the severance package. (You are entitled to 45 days if the deal is part of an early retirement incentive program.) If your employer doesn't give you enough time, your waiver of any age discrimination claim is not valid, and you could still sue your employer.

Your employer can't withdraw its offer of severance during the waiting period. And, you don't have to wait the full 21 (or 45) days; you can sign the agreement earlier, if you wish.

Under the OWBPA, your employer must also give you seven days after signing to change your mind and "revoke" your acceptance of the severance offer. This seven-day period is required by law; neither you nor your employer can waive it. Because of this, you probably won't receive your severance check until at least seven days after you accept the deal.

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