Severance Pay Basics

Although many employees assume they have a legal right to severance pay when they are laid off, that's generally not the case. A handful of states require employers to pay a small amount of severance or continue to pay for health insurance coverage for certain employees who lose their job in a mass layoff or plant closing. Otherwise, no law requires employers to pay severance. 

That's not the end of the story, however: An employer can obligate itself to pay severance in a contract, by policy, or because it has a history of paying severance in the past.

Learn about Wrongful Dismissal and Being Let Go.

Are You Entitled to Severance? 

An employer may be legally obligated to pay you severance by:

• Written or oral contract. If your employer has promised you, in writing or orally, that you would receive severance, then it must honor that promise. Some employment contracts promise severance if the employee is terminated before the end of the contract term, meets certain performance goals, or stays at the company for a certain period of time. Some contracts also include restrictions on the payment of severance, such as that the employee won't be entitled to severance if he or she is fired for willful misconduct. The terms of your employment contract (if you have one) will determine whether you are entitled to severance -- and if so, how much. 
• Policy. If your employer has a written policy stating that it will pay severance, it must follow the policy. You might find a severance policy in your employee handbook or another communication from management, such as an email or memo to all employees. A policy of paying a week or two of salary for every year worked at the company was once common (although it's less so now). Like contracts, a policy might carry its own conditions or limitations, such as making severance available only to employees who have been with the company for a minimum number of years. 
• Practice. If your employer has an unwritten company practice of paying severance to employees in certain positions or employees who lose their jobs for certain reasons (typically, to those who are laid off rather than fired), it may be obligated to continue. At some point, a practice like this becomes a policy that employees are entitled to rely on.

Learn more about Employment Contracts.

Releases and Waivers

If your company offers severance, there may be a catch: Many companies ask employees to sign a waiver or release, giving up their right to sue the company for claims related to their employment in exchange for receiving severance pay. 

An agreement like this is valid only if you receive something above and beyond what you are already entitled to for signing the release. For example, if your company has a written policy of paying laid off workers one week of severance for every year with the company, it must give you more than this in exchange for a release. The release agreement won't be enforceable unless each side gets something out of it. 

If you are asked to sign a release, think about it carefully. Do you believe you have any legal claims against the company? This may be a good time for a quick consultation with an employment lawyer, who can let you know about potential legal claims you may have, review the release agreement with you, and perhaps negotiate a better deal with your employer. 

Continuation of Health Insurance Coverage

A federal law called the Consolidated Omnibus Benefits Restoration Act (COBRA) and similar state laws require most employers to offer their employees the opportunity to continue their health insurance for 18 months after the employee quits, is laid off, or is fired for reasons other than gross misconduct. If you want to continue your benefits under COBRA, you'll have to pay the full premium (the employer can charge you a small additional amount to pay administrative expenses). Although Congress approved a subsidy that paid about two-thirds of the cost of COBRA coverage for employees who were involuntarily terminated, that program expired in 2010 and has thus far not been renewed. 

Learn more about Unemployment Benefits.

Getting Legal Help

If your employer refuses you to pay severance to which you think you were entitled, or you want some advice about whether to sign a release agreement, consider speaking to an experienced employment lawyer. A lawyer can assess your claims and help you decide how to proceed. Often, a lawyer can negotiate a better severance package -- but of course, this strategy is worthwhile only if you will see a net gain in the money coming to you after paying your attorney's fee.