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.

Lawyer Matches (46)

Wibbels, Joseph
Fighting for Employee Rights
Louisville, Kentucky

Hayber, Richard
Hartford Connecticut Employee Rights Attorney
Hartford, Connecticut

Hatzidakis, Christina
Providing employment advice and litigation
Chicago, Illinois

DeBrota, Amy
Experienced Employment Lawyer and Mediator
Carmel, Indiana

Fidlon, Gregory
Experienced and Effective Georgia Employment Law Specialist
Atlanta, Georgia

Pietrucha, Cynthia
Workplace Rights Advocate
Downers Grove, Illinois

Carnes, William
Experienced Employment Law Counsel
Tampa, Florida

Ballman, Donna

Ft. Lauderdale, Florida

Dabrowski, Doris
Legal analysis, advice and advocacy to help you achieve goals
Philadelphia, Pennsylvania

Kazazian, Nina
Free short telephone consultation
Vail, Colorado

Blanchard, David
Fight abusive non-compete lawsuits, wrongful termination and all employment retaliation
Ann Arbor, Michigan

Kazazian, Nina

Denver, Colorado

Pastor, Patricia
New York Employment Lawyer
Northport, New York

Yezbak, Charles

Nashville, Tennessee

Blumenthal, Norman B.
FREE CONSULTATION - CALIFORNIA LABOR LAWYERS - OBTAINED OVER $1.3 BILLION FOR EMPLOYEES & CONSUMERS
San Diego, California

Tsintolas, Suzanne
Experienced Employment Lawyer in DC & Maryland
Washington, District of Columbia

Outten, Wayne
Advocates for Workplace Fairness
New York, New York

Jackson, Marcus
Plaintiff-side Employment Lawyer handling cases throughout Southern California.
Temecula, California

Guleser, Ann
dgt4tet
Sherman Oaks, California

Rose, Patricia
COMPASSIONATE ADVICE AND COUNSEL ON EMPLOYMENT ISSUES
Seattle, Washington

Knecht, Todd
Grand Rapids Labor and Employment Lawyer
Grand Rapids, Michigan

Hardwick, Virginia
Employment Rights Advocate: Experience, Judgment, Commitment to Excellence
Doylestown, Pennsylvania

Hennessy, Brendan
Employment Attorney Philadelphia Malvern
Malvern, Pennsylvania

Miller, Judith

Newton, Massachusetts

Barasch, Patricia
Employee Rights Advocates
Moorestown, New Jersey

McKinney, Thomas
Experienced NJ Employment Lawyers focusing on Discrimination, Harassment, Overtime & Severance
Morristown, New Jersey

Tseng, Judy
Wage and Hour Act, sexual harassment, disparate treatment, wrongful termination, discrimination.
Cary, North Carolina

Glickman, Stephen
Aggressive, Responsive Chicago Employment Law Attorney with over 25 Years' Experience.
Chicago, Illinois

Rizzo, Albert
Experienced Employment Representation
New York, New York

Attardo, Loretta

Salem, Massachusetts

MIltenberger, Chris
Experienced & Aggressive = Efficient & Affordable Representation. Free Consultation
Southlake, Texas

Mertz, Andrea
Your vigorous advocate pursuing unscrupulous employers.
Wyomissing, Pennsylvania

Herman, Charles
Charles Herman Law - Ohio Employment Law Attorney
Toledo, Ohio

Adams, Christine
Exclusively Practicing Employment Law in California
Santa Barbara, California

Weinberg, Jill J.
Overtime claims, severance, non-compete & employment contracts
Dallas, Texas

Royer, Christina
Experienced, Respected Employment Lawyer
Independence, Ohio

Sedey, Kate
Partner at The Case Law Firm, LLC, a Chicago-based civil rights employment law firm.
Chicago, Illinois

Wagner, Lindsey
Employment Attorney
Jupiter, Florida

Goldsmith, Leizer
Outstanding Sexual Harassment and Employment Lawyers
Washington, District of Columbia

Wells, Samuel J.

Los Angeles, California

Barna, Jim
A WEALTH OF EXPERIENCE FOR EMPLOYMENT LAW REPRESENTATION.
Syracuse, New York

Maduff, Aaron
A Nationally Recognized Employment Lawyer Licensed in More than 20 Jurisdictions
Chicago, Illinois

Gerber, Karl
Successfully Representing California Discrimination Victims Since 1993
Los Angeles, California

Perotti, Patrick J.
Aggressive. Creative. Successful.
Painesville, Ohio

Case, Kristin
Founding Member of The Case Law Firm, LLC., a Chicago-based civil rights employment law firm.
Chicago, Illinois

Dettling, Rosemary
The Federal Employee Legal Services Center represents federal employees in EEOC and MSPB cases.
Washington, District of Columbia

Have an Employment Law question?

Virginia Employment Lawyers

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
Sheri Abrams Sheri Abrams
Sheri R. Abrams PLLC
Oakton, VA

more Virginia Employment Lawyers