Severance Pay

Severance pay is money an employer gives an employee whose job is ending, beyond the wages and accrued leave already owed, almost always in exchange for a signed release of legal claims. No federal law requires it, and only a handful of state laws do in narrow circumstances. What makes it feel mandatory is the release: an employer that wants the certainty of a signed waiver has to pay something for it, and the going rate is measured in weeks of pay per year of service.

The calculator below applies a formula to a service history and adds the COBRA subsidy and the release timing. The rest of the page covers what employers typically offer, the situations where severance is required or effectively required, the rules a release has to meet for employees aged 40 and over, and the WARN Act notice that a large layoff triggers regardless of what is paid.

Severance pay calculator

What employers typically offer

The most common formula in the United States is one to two weeks of base pay for each completed year of service, with a floor of two to four weeks and a cap somewhere between twelve and twenty-six weeks. Executives and senior managers are often on a month per year. Technology and finance employers have tended toward two or more weeks per year with generous floors; retail, hospitality and non-profits toward one week with low caps. Challenger, Gray & Christmas, which has surveyed severance practice for years, reported in its 2025 benchmarking study that average severance across surveyed employers rose to around 19 weeks in 2024, driven by higher floors and larger technology reductions, though the median employer remains closer to the one-to-two-weeks formula.

Accrued vacation is not severance. In states that treat it as earned wages it is owed on the final pay deadline whatever the employee signs, and elsewhere it is owed if the policy says so. A release supported only by money the employee was already entitled to is not supported at all. The calculator shows the PTO figure separately for that reason.

When severance is required

• A contract or offer letter promises it. Executive agreements commonly do. An offer letter that mentions severance has made it a term.
• A severance plan exists. A written policy or a consistent past practice of paying severance in defined circumstances can be an employee welfare benefit plan under ERISA, with disclosure and claims-procedure obligations, and can be enforced by employees the employer would rather not pay.
• A collective bargaining agreement provides for it. Common in manufacturing and the public sector.
• The WARN Act is violated. An employer that fails to give the 60-day notice owes up to 60 days' back pay and benefits to each affected employee, which is severance by another name. New Jersey's amended mini-WARN law goes further and requires one week of severance per year of service for covered mass layoffs regardless of notice.
• The employer wants a release. Not a legal requirement, but a practical one. A waiver of claims has to be supported by consideration the employee was not otherwise owed, so a release without severance is unenforceable.

Outside those situations severance is discretionary. Paying it inconsistently, however, is not free: an employer that paid two weeks per year to one laid-off employee and nothing to another in the same reduction will be asked why, and the answer had better not track a protected characteristic.

The release and the ADEA rules

The release is a contract in which the employee gives up the right to sue over anything that happened up to the date of signing, in exchange for the severance. For it to hold, it must be knowing and voluntary, written in plain language, and supported by consideration. For employees aged 40 and over, the Older Workers Benefit Protection Act, codified at 29 U.S.C. 626(f), adds specific requirements, and a release that misses any of them does not waive age claims at all.

Severance is paid after the revocation period ends, never before. Several other claims cannot be released at all: the right to file a charge with the EEOC or to cooperate with an agency, unemployment insurance, workers' compensation, vested retirement benefits, and in many states claims for unpaid wages. A release that purports to waive them is not void, but those clauses are, and an overbroad release invites a challenge to the rest. Since 2023 the National Labor Relations Board has also treated broad confidentiality and non-disparagement clauses in severance agreements offered to non-supervisory employees as potential unfair labour practices, so those clauses need narrow drafting and a carve-out for protected activity.

The WARN Act and large layoffs

The Worker Adjustment and Retraining Notification Act, 29 U.S.C. 2101, applies to employers with 100 or more employees, excluding part-time workers. It requires 60 days' written notice before a plant closing that causes 50 or more employment losses at a single site within 30 days, or a mass layoff that causes employment losses for 500 or more employees, or for 50 to 499 employees where they make up at least a third of the site's workforce. Notice under section 2102 goes to each affected employee or their union representative, to the state dislocated worker unit, and to the chief elected official of the local government.

Three exceptions shorten the notice: the faltering company (actively seeking capital that notice would jeopardise, for plant closings only), unforeseeable business circumstances, and natural disaster. Each is narrowly read, and the employer still owes as much notice as is practicable with a statement of why the full period was not given. Employment losses over a 90-day period are aggregated to stop an employer splitting a layoff into batches below the threshold.

Around a dozen states have mini-WARN laws with lower thresholds or longer notice: California (75 employees, 50 losses), New York (50 employees, 90 days' notice, 25 losses), New Jersey (100 employees, 90 days' notice and mandatory severance), Illinois (75 employees), and others. A layoff plan starts with the WARN count, because 60 or 90 days of notice, or pay in lieu of it, is the largest number on the page. Our furlough versus layoff guide covers how temporary reductions interact with the thresholds.

Tax, unemployment and how to pay it

Severance is wages for tax purposes: subject to federal and state income tax withholding, Social Security and Medicare, and reported on the W-2. A lump sum is usually withheld as supplemental wages at the flat 22 per cent federal rate, which is why employees are often surprised by the net figure. Salary continuation is withheld as ordinary pay. Employer-paid COBRA is generally not taxable to the employee if paid directly to the plan; a cash allowance for it is.

The effect on unemployment insurance varies by state. Some states treat severance as wages that delay benefits for the weeks it covers; others disregard it. Salary continuation is more likely to delay benefits than a lump sum, because the person is still on payroll. The separation agreement should not promise anything about unemployment eligibility, and the employer should not contest a claim it agreed not to contest.

Lump sum after the revocation period is the simplest structure: the release is effective, the money is paid, the file is closed. Salary continuation keeps benefits running and spreads the cost, but it also means a release signed in week one covers claims only up to that date while the relationship continues for months. Whichever is chosen, the termination letter refers to the agreement and makes clear that severance depends on it, and the offboarding checklist tracks the revocation date and the payment date.

Key takeaways

• Severance is not required by federal law. It is required by contract, by an established plan or practice, by some union agreements, and effectively by any employer that wants a signed release.
• The common formula is one to two weeks per year of service, with a two-to-four-week floor and a cap of twelve to twenty-six weeks. Executives are often on a month per year.
• Accrued vacation is owed separately and is not consideration for a release.
• For employees aged 40 and over, the release needs 21 days to consider (45 for a group), 7 days to revoke, written advice to consult an attorney, and for groups the disclosure of titles and ages.
• WARN requires 60 days' notice for plant closings and mass layoffs at employers of 100 or more; state mini-WARN laws lower the thresholds, and New Jersey mandates severance.
• Severance is taxable wages, usually withheld at the supplemental rate, and in some states delays unemployment benefits.