In most states, severance pay is not required unless you have a contract that provides for severance pay. It is within the employer’s discretion whether to provide laid-off employees with severance pay, as long as the employer does not discriminate (e.g., provide only white employees with severance). If an employer does provide severance pay, employees are usually only eligible if they are laid off–not if they leave voluntarily or are fired for cause.

Many employers offer severance plans contingent on an employee’s agreement not to sue the company or make disparaging remarks about the employer. This is generally legal. In addition, plans may limit eligibility to certain employees. For example, an employer may provide severance pay to only executive-level employees or exclude hourly employees from eligibility for severance.

Amount of severance

The amount of severance an employee is entitled to is completely up to the employer. Typically, the amount is based on the employee’s length of service. A typical severance plan might, for example, offer two weeks of severance for every year of employment. In addition, high-level employees typically receive more severance pay than low-level employees.

In addition to pay, severance plans may also include a continuation of benefits such as health insurance. Again, it is entirely up to the employer’s discretion. Employees may be able to negotiate a better plan, but it can be risky. Technically, if you make a counteroffer, you are rejecting the original offer–and there is no guarantee the employer will re-extend it.

Federal protections

While providing a severance plan is voluntary, once an employer has a plan, the plan may be covered by federal law. Some severance plans are “welfare-benefit plans” under the Employee Retirement Income Security Act (ERISA). If your employer’s severance plan requires any ongoing administration, it is likely covered by ERISA. If it is a one-time plan–because the employer is going out of business, for example–it would probably not be covered by ERISA.

Under ERISA, employees have the right to a summary plan description, which describes in understandable terms an employee’s rights, benefits and responsibilities under the plan. However, even if a severance plan is covered by ERISA, employers still have considerable flexibility–they can still change or terminate a plan and determine what they can afford to pay.

Are you entitled to severance?

The decision whether to provide severance is voluntary. However, if you have a contract that entitles you to severance pay, your employer is bound. For a severance plan to be considered a contract, the language of the plan must clearly indicate the employer is making a promise. The employee must be made aware of the plan and believe that it is an offer. Finally, the employee must accept the plan by accepting a job offer or continuing to work for the employer after learning about the plan.

If there is no formal, written severance plan, you may still be able to argue you are entitled to severance pay if you have an employment handbook or personnel manual that provides for severance pay. In some circumstances, handbooks and personnel manuals may be considered contracts. In addition, if your employer has a long pattern or history of providing severance to employees, you may be able to argue the employer has a contractual obligation to provide severance. To create a contract, the practice of providing severance would have to be clear and consistent–you must be able to tell who is eligible for benefits, when an employee is eligible, and how much he or she would receive.

Mass layoffs or plant closings

While severance is voluntary, some employers are required to give notice to employees who face a plant closing or mass layoff, so that employees have a chance to find another job, get additional training and adjust to the loss of employment. The Worker Adjustment and Retraining Notification Act (WARN) requires employers to give employees a 60-day notice before closing a plant or conducting mass layoffs. WARN applies to employers with 100 or more employees who work more than 20 hours a week. Federal, state and local governments are not covered. A mass layoff occurs when a layoff of six months or longer affects:

  • 500 or more workers or
  • 33 percent of the employer’s workforce.