Severance pay is a topic that often surfaces when employees leave a company, yet many people don’t fully understand how it works. Whether someone is laid off, terminated, or leaving voluntarily, severance pay can play an important role in easing the transition. This FAQ-style guide breaks down severance pay in simple terms.

What is severance pay?

Severance pay is money or benefits an employee may receive when their job ends. It is paid in addition to earned wages, such as regular pay or unused vacation time. Severance can be paid as a lump sum or as continued salary over time. It may also include extended benefits like health insurance.

Is severance pay required by law?

No. In the U.S., federal law does not require employers to provide severance pay. Severance is usually offered because of a company policy, an employment contract, a union agreement, or a negotiated severance agreement.

Why do employers offer severance pay?

Employers often offer severance to make job separations smoother. Severance can also protect company reputation, maintain morale, and safeguard confidential information.

How is severance pay calculated?

There is no fixed formula. Most companies base severance on an employee’s length of service and salary.

What is included in a severance package?

A severance package may include:

• A lump-sum payment or salary continuation
• Continued health insurance or benefits
• Payment of unused vacation (depending on state law)
• Outplacement or career support services

Is severance pay taxable?

Yes. Severance pay is taxed as regular income. Employers usually withhold federal income tax, Social Security, and Medicare taxes.

Can severance pay affect unemployment benefits?

Yes. If severance is paid over time, it may delay unemployment benefits. A lump-sum payment may allow benefits to start sooner, depending on state rules.

What about non-compete or non-disclosure clauses?

Severance agreements may include non-compete or nondisclosure clauses. However, these must follow state and federal laws.

Why do companies offer severance pay?

Companies offer severance pay for several reasons. One major reason is to reduce legal risk by having employees sign a release of claims. Severance also helps maintain goodwill and support employees while they search for a new job. In some cases, it ensures a smoother transition during layoffs or restructuring.

Do companies offer severance pay to all employees?

Severance eligibility often depends on factors such as job level, length of service, company policy, or employment agreements. Some organizations only offer severance to full-time or higher-level employees, while others may offer it only during large layoffs.

Is severance offered if an employee is terminated?

Employees laid off due to restructuring, downsizing, or company closures are more likely to receive severance. However, employees terminated for misconduct or performance issues are less likely to be offered severance, unless a contract or policy requires it.

Is severance offered if an employee quits voluntarily?

In most cases, no. Employees who voluntarily resign typically do not receive severance pay. These situations are usually outlined in company policies or agreements.

Severance pay is not automatic. It depends on agreements, policies, and laws. For HR professionals, understanding severance basics helps reduce risk and support fair employee transitions.

ASE Connect

More resources are available on the ASE Layoff Resources page.