Is Severance Pay Required? Rules, Releases and Taxes

No federal law requires a US employer to pay severance. The Department of Labor calls it “a matter of agreement between an employer and an employee”, so it is owed only when a contract, union agreement, written severance plan or state law requires it. New Jersey is the main state that mandates severance, in covered mass layoffs and closings.

Many employers still offer severance in a layoff, usually in exchange for a signed release of legal claims. What you are entitled to is written in your offer letter, employment agreement, the company’s severance plan document or the separation agreement itself.

When does an employer have to pay severance?

The Fair Labor Standards Act has no severance requirement, according to the Department of Labor. An obligation comes from one of these sources:

If your employer has a severance plan covered by ERISA and does not pay, the Labor Department’s Employee Benefits Security Administration may be able to help.

Which state requires severance pay?

New Jersey requires severance for workers who lose their jobs in mass layoffs, closings and transfers covered by its WARN law, as amended effective April 10, 2023. The law applies to employers with 100 or more employees when 50 or more workers are terminated within a 30-day period, and it requires 90 days’ notice.

• Severance equals one week of pay for each full year of employment.
• If the employer gives less notice than required, it owes four more weeks of pay.
• The pay rate is the higher of the worker’s average regular rate over the last three years or the final regular rate.
• A waiver of the right is not effective without approval by the state labor commissioner or a court.

The rules are in N.J. Stat. § 34:21-1 and following, and the New Jersey Department of Labor posts the current text with its WARN notices. Other states have mini-WARN notice laws but no general severance mandate. The federal WARN Act requires notice rather than severance; an employer that skips the notice can owe back pay for up to 60 days, explained in our guide to WARN Act notice rules.

What is a severance agreement and release?

A severance agreement pays you money or benefits in exchange for promises, most often a release of legal claims against the employer. Common terms include:

• a general release of claims, such as discrimination or wrongful termination claims;
• confidentiality and non-disparagement clauses;
• return of company property and a reminder of existing non-compete or confidentiality obligations;
• continuation of health coverage or a COBRA subsidy for a set period.

Some claims cannot be waived by a private agreement, such as the right to file a charge with the EEOC. Pay for work already performed, including any final paycheck owed under state law, is not severance and should not depend on signing; our guide to final paycheck laws covers state deadlines.

What extra rules apply if you are 40 or older?

If a release waives age discrimination claims for a worker aged 40 or older, the Older Workers Benefit Protection Act (OWBPA) sets minimum conditions. According to the EEOC, a valid waiver must:

1. be written in plain language and refer to the Age Discrimination in Employment Act by name;
2. not waive claims that arise after you sign;
3. give you something of value beyond what you are already owed;
4. advise you in writing to consult an attorney;
5. give you at least 21 days to consider it, or at least 45 days if it is part of a group layoff or exit incentive program;
6. give you 7 days after signing to revoke, a period that cannot be shortened;
7. in a group program, include the job titles and ages of the people selected and not selected.

You can sign before the 21 or 45 days are up. Under the ADEA, you do not have to return the severance before challenging whether an age discrimination waiver was valid.

How is severance pay taxed?

Severance pay is wages. IRS Publication 15 (2026) lists severance payments as subject to Social Security and Medicare taxes and federal income tax withholding, and they appear on your Form W-2.

Because severance is usually treated as supplemental wages, many employers withhold federal income tax at a flat 22%, or 37% on supplemental wages above $1 million in a calendar year, as of 2026. Withholding is not the final tax; your actual tax depends on your total income for the year. State income taxes also apply in most states. A tax professional can help with timing questions, such as a payment that spans two tax years.

Does severance affect unemployment benefits?

It depends on the state. Some states, including California, generally do not reduce unemployment benefits for severance, while others delay or reduce benefits while severance is being paid. Our guide to unemployment benefits after a layoff explains how to check your state’s rule and why you should file promptly either way.

Bottom line

Before signing a severance agreement, find the date by which you must accept, check whether health coverage or a COBRA subsidy is included, and compare the offer with any plan or contract that already promises severance. An employment attorney can review a release; many offer short consultations, and the agreement’s consideration period gives you time to get one.

FAQ

Can I negotiate a severance offer?

Yes. Nothing stops you from asking for more money, longer health coverage or changes to terms, although the employer is not required to agree. Any change should be in the final written agreement.

Can my employer withhold my final paycheck until I sign?

Wages already earned are owed under state law whether or not you sign. Only the additional severance can be conditioned on the release.

Is severance paid as a lump sum or over time?

Either. The agreement or plan sets the schedule. Some employers continue regular paychecks for a number of weeks, while others pay one lump sum after the revocation period ends.

Do I get severance if I am fired for cause?

Usually not. Most plans and agreements exclude terminations for cause, and the definition of “cause” in your contract or plan controls.