Severance Pay

Severance pay comes in five forms:

  1. None at all
  2. Unemployment compensation
  3. Severance Pay Plans
  4. Voluntary Severance Pay (rare today) and
  5. Bargained for Severance by Agreement.

At-will employees rarely receive severance pay upon their termination. They usually have no right to receive it. Unless fired for cause, though, eligible, terminated at-will employees should receive unemployment compensation benefits.

Employers can offer a Severance Pay Plan as an employee benefit, but most do not. Employers can voluntarily pay severance to employees, and some used to do it. If the employer demands a general release of rights (i.e., a promise not to sue) in exchange for severance, that converts an offer of severance into a negotiated severance payment by agreement. Severance pay agreements also include severance pay clauses in employment agreements negotiated at the beginning of employment.

Employers have No Obligation to pay Severance to At-will Employees

Unless the parties agree otherwise, the law presumes that their employment relationship is “at-will.” This means it lasts only as long as both parties want it to last. Either of them can end it at any time, for any lawful reason, or even for no reason at all. This tends to work out well mostly for employers.

Once either party ends the employment relationship and the employer pays the employee amounts earned, the employer’s obligation to pay an at-will employee ends . After that, employers have no further obligation to pay anything to at-will employees, including severance pay.

Unemployment Compensation Benefits

Unemployment compensation benefits pay workers who lost their job without fault a modest weekly payment until the worker finds a new job, up to a specified number of weeks. Each state administers its own unemployment compensation program.

Unemployment compensation benefits, which are also known as unemployment insurance, are not, technically, a form of severance pay. Rather, the federal government created unemployment compensation programs as a statutory benefit in 1935. Taxes on employers fund unemployment compensation benefits and each state administers. its own program. 

For at-will employees, unemployment compensation benefits fill a function similar to severance pay, providing cash when needed most. MEL has more information on unemployment compensation benefits here.

Severance Pay Plans

Employers can offer employees severance pay benefits in the event of certain job losses, like from a reduction in force. Severance plans typically compute benefits using a formula based on length of service, like a week or month of pay per year of service.

Once an employer offers a severance pay benefit, federal law treats it as a “welfare benefit plan” under the Employee Retirement Income Security Act of 1974 (ERISA). ERISA is the same law that covers employer group health insurance plans. ERISA requires employer who offer ERISA plans to put them in writing and to provide written summaries to covered employees. Importantly, if employers do not deliver a promised ERISA benefit, or interfere with employees' right to it, ERISA gives employees the right to go to court. Employees who win ERISA cases can also receive an award to pay for their attorneys’ fees.

For employees covered by a severance pay plan, ERISA means that they will know what severance they should receive and under what circumstances. Union employees covered by a collective bargaining agreement (CBA) could receive severance pay if it is a negotiated benefit in the CBA. A severance benefit in a union contract looks like an ERISA severance pay plan, but is regulated by federal labor laws.

While employers can create severance pay plans, most do not. Employers who create severance pay plans can and do specify the terms, choose who participates and decide what to pay and when. Employers can modify or terminate severance pay plans whenever they want, and owe only the severance resulting from a triggering that already occurred.

Voluntary Severance Pay

At one time some employers paid departing executives severance pay without any obligation to do so, and sometimes without requiring a release of rights in return. From the point of view of an owner or stockholder, voluntary severance pay to a departing executive is problematic. The company can hardly expect to get much of a return from an employee it just terminated. From a rational economic perspective, though, these companies arguably earn a reputation for fair play among the small universe of potential employees for top positions. This helps them secure leadership for jobs that are by nature risky and insecure.

Like coaches of major league teams, though, most executives now negotiate severance terms as part of their initial employment agreements. If they did not do so, their employer may still agree to pay them severance at the time of their termination, but in exchange for an agreement not to sue and a general release of rights. Both types of agreements are examples of bargained for severance agreements.

Bargained for Severance by Agreement

Employees can bargain with employers for severance pay at the beginning of their employment. Like any other bargain, a sought after employee with adequate leverage can negotiate severance pay following a change in control or other involuntary termination without “cause.” Cause usually means the employee is at fault or did something to contribute to the termination decision . Severance pay provisions in employment agreements may also cover employee resignations for “good reason.”  "Good reason” looks at changes made by the employer to the employee’s working conditions, like a reduction in pay, loss of responsibilities or a downgrade in title. If an employer fails to pay severance promised in an employment agreement, the employee can pursue a breach of contract claim.

Employees can also bargain with employers over severance pay at the end of their employment relationship. The employer may want a clean break and a promise by the employee not to suet. In that event, severance pay negotiations resemble any other bargain for the purchase and sale of property, where the property is the employee’s right to sue the employer.

The trick in such bargains is to figure out the value of the employee’s right to sue the employer. In general, an employee’s right to sue is what the employee would receive if he or she won in court, discounted by the probability that the employee will not win, and less the cost required to take a case through court. As discussed in greater detail here, if the employer and employee agree on the value of the employee’s claims, they can agree at the time of separation to pay the employee for those claims and both parties the risks, costs and distractions of a lawsuit.

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Does Wal-Mart Use of Check Cards for Pay Purposes Violate Wage Payment Laws?

General Assembly Severely Limits Employees' Rights to Accrued Vacation Pay Upon Termination

Auto Parts Distributorship to Pay $175,000 to Settle Sex Harassment Lawsuit

Does a "good faith belief" about an illegal pay practice support an FLSA retaliation claim?

One Percent Pay Increase Differential Is An Adverse Employment Action, Sixth Circuit Rules

Wisconsin Hospital to Pay $3.5 Million to Settle Nurses' Meal Period Class Action

New York Area Car Washes Agree to Pay Employees $3.4 Million for Wage Violations

Australia: Employers of Foreign Workers on Subclass 457 Visas Must Pay Market Wages

San Francisco Giants Agree To Pay Back Wages Following Allegations Of FLSA Violations

Illinois Statute Clarifies Circumstances When Employers May Pay Wages Via Payroll Debit Cards

Staten Island Man Sues Parents’ Ice Cream Shop for Overtime Pay

Funeral Home Buries Itself and Must Pay $62,500 To Settle Americans With Disabilities Act Lawsuit

St. Louis Rams Get Tackled By EEOC And Pay $134,000 To Settle Discrimination Lawsuit

Louisville Kentucky Landmark Restaurant Closes Down Amid Unfair Pay Practices Claims

Report Attributes Pay Disparities Between Women and Men Partners at Law Firms to Sexual Discrimination

Requiring Employees to Pay Back Training Costs May be Illegal Under California Law -- In Re Acknowledgement Cases

Coronavirus Update 6–4–2020: Can you force employees who participate in George Floyd protests to quarantine without pay?

White House Meets With Business Reps on "Fair Pay and Safe Workplaces" Executive Order

Maryland Employers Can Be Liable for up to Treble Damages for Misclassification "Overtime Pay" Claims Under State Law

Black Women’s Equal Pay Day highlights generations of inequality—and lack of progress today

Nassau County Ordered to Pay $604,589 after Losing Sexual Harassment and Retaliation Lawsuit

General Electric Hitachi Agrees to Pay $2.7 Million to Settle False Claims Act Charges

General Electric Hitachi Agrees to Pay $2.7 Million to Settle False Claims Act Charges

Charles W. Pautsch interviewed for article in Financier Worldwide regarding say on pay provisions of the Dodd-Frank Act

General Electric Hitachi Agrees to Pay $2.7 Million to Settle False Claims Act Charges

Open Letter to Texas Governor Rick Perry In Favor of HB 950 Fair Pay Bill

Paul Big M's Grocery Store Must Pay $1.2 Million After Losing Sexual Harassment Lawsuit

New Overtime Pay And Minimum Wage Violation Lawsuits Filed Against Wal-Mart And Temp Agencies

Third Circuit Holds Ledbetter Fair Pay Act Does Not Save Untimely Failure-to-Promote Claims

Workers Denied Overtime Pay For Hurricane Sandy Cleanup File Wage And Hour Lawsuit

$50M Overtime Pay Suit filed in New York alleges Sweatshop Conditions at Famous Fashion House

JURY AWARDS SEAMAN 1.3 MILLION IN PUNITIVE DAMAGES AGAINST ICICLE SEAFOODS FOR FAILURE TO PAY MAINTENANCE AND CURE

Corporation Pushes Six-Year Pay Freeze On Workers While Making Record Profits, Paying CEO $17 Million

Florida's Miami-Dade Wage Theft Ordinance Amended, Employers Allowed Certain Pay Day Practices.

White House Urges Passage of Paycheck Fairness Act, Lists Other Efforts to Address Pay Disparity

Progressive Insurance refuses to pay a dead girl's claim and sets off a social media firestorm

Fourth Circuit Finds Employers Do Not Have to Pay for Donning & Doffing Time That Was Subject to Collective Bargaining

California Announces 2013 Minimum Pay Requirements for Exempt Computer Software, Physician and Surgeon Employees

Appeals Court Determines Police Sergeants And First-Responders Entitled To Overtime Pay in Edward Mullins et al v. City of New York

California Federal Court Finds Employers May Deduct Outstanding Credit Card Balances From an Employee's Final Pay

Appeals Court Determines Police Sergeants And First-Responders Entitled To Overtime Pay in Edward Mullins et al v. City of New York

Fifth Circuit Rules Employers Do Not Have to Pay for Donning and Doffing Time Despite Failure to Address Issue in Collective Bargaining Negotiations

Failure to Pay Commissions Is Not a Valid Defense Under the Theory of Unclean Hands (Central Texas Orthopedic Products v. Espinoza)

Challenge to 12-Hour Shift Pay Practice Defeated in Significant Class Action Lawsuit Before the Ninth Circuit U.S. Court of Appeal

Employer's Uniform Classification of Its Own Employees Does Not Justify Class Treatment -- Wells Fargo Home Mortgage Overtime Pay Litigation

Dukes v. Wal-Mart: Supreme Court Justices Debate Merits of Class Certification Discriminatory Pay & Promotion Claims

Sheppard Mullin Defeats Challenge to 12-Hour Shift Pay Practice in Significant Class Action Lawsuit Before the Ninth Circuit U.S. Court of Appeal

Washington State Court Rules On Punitive Damages In Maintenance and Cure Claim - Orders Icicle To Pay Injured Fisherman Over 2 Million Dollars

US Labor Department sues Texas state agency for failing to pay 800 workers for overtime hours amounting to more than $1 million in back wages

US Labor Department sues Texas state agency for failing to pay 800 workers for overtime hours amounting to more than $1 million in back wages

Overtime Pay and Mortgage Underwriters, Brokers, Loan Processors and Loan Officers

I live in Georgia and got in a car wreck. How do I get the other guy's insurance to pay for my car?

Overtime Pay and Mortgage Underwriters, Brokers, Loan Processors and Loan Officers

Study Finds That Second Year Law Students Pay Less Attention Than Their First and Third Year Counterparts

Airport Starbucks workers face big racial pay disparity, this week in the war on workers

Your Employer Must Pay You What You Deserve: Consenting to "not" be paid overtime wages violates FLSA

Law Prof Alleges Unequal Pay at Denver Law

Pharma Sales Reps: Exempt or Not Exempt from overtime pay

When are Managers and Assistant Managers Entitled to New York Overtime Pay?

California Superior Court Validates Piece-Rate Pay For Drivers That Covers Both Driving And Non-Driving Duties

Unpaid "Interns" File Minimum Wage and Overtime Pay Lawsuit Against Movie Studio

Employee Rights Short Takes: New Evidence Of Gender Pay Gap, Race Discrimination, Disability Discrimination And More

Employee Rights Short Takes: New Evidence Of Gender Pay Gap, Race Discrimination, Disability Discrimination And More

Coronavirus Update 4-8-2020: Employers, if you are requiring your employees to wait in line for a coronavirus fever check, please pay them for waiting

STATE OF ALASKA TO PAY OUT OF STATE FISHERMAN $ 70 MILLION

Team Mascot Sues Team for Overtime Pay

The Federal HIRE Act: It Can Pay To Hire The Unemployed

The New York State Department Of Labor Issues Guidelines, Instructions and Model Notices For New York's Notice of Pay Law

Bathroom breaks do not equal breaks in pay

Exempt or Not Exempt, The Key to Overtime Pay

Bathroom breaks do not equal breaks in pay

Following Federal Government’s Extension of Overtime Benefits To Home Health Care Aides, California Signs Law Granting Overtime Pay To Domestic Workers

Equal Pay for Equal Work, Maybe

Court Finds One Plaintiff Not Owed Reporting Time or Split Shift Pay For Scheduled Meetings and Finds Second Plaintiff Waived Claims - But Employer Denied Award of Fees!

Have an Employment Law question?

Virginia Employment Lawyers

Sheri Abrams Sheri Abrams
Sheri R. Abrams PLLC
Oakton, VA
Matthew Kaplan Matthew Kaplan
The Kaplan Law Firm
ARLINGTON, VA
Matthew Sutter Matthew Sutter
Sutter & Terpak, PLLC
Annandale, VA
Gerald Lutkenhaus Gerald Lutkenhaus
Virginia Workers Compensation & Disability Lawyer
Richmond, VA
Edward Lowry Edward Lowry
MichieHamlett
Charlottesville, VA

more Virginia Employment Lawyers