No federal law requires most companies to pay severance

In the United States, there is no blanket federal requirement that employers pay severance when they lay off or fire an employee. Severance is a voluntary benefit — companies choose whether to offer it, and if they do, they set the amount and conditions. The only exceptions are narrow: union contracts that mandate it, state laws in a few places that require it under specific circumstances, and employment contracts that promise it.

This means that if you are laid off tomorrow and your company has no severance policy, no contract, and no union agreement, the company owes you nothing beyond your final paycheck for hours worked and any accrued paid time off that your state requires them to pay out. The absence of severance is legal almost everywhere.

What matters is whether your situation falls into one of the categories where severance is actually required, or whether your company has chosen to offer it as part of its standard practice. Understanding which applies to you changes what you can reasonably expect.

Key Takeaways

  • Federal law does not require severance pay for most terminations, and companies can lay off workers without offering any payment beyond final wages and accrued time off.
  • Severance becomes mandatory only if a union contract requires it, a state law covers your situation, or your individual employment contract promises it.
  • Some states require severance only in mass layoffs or plant closures, and the rules vary significantly by state and by number of employees affected.
  • If your company has a written severance policy, it must follow that policy consistently, but it can change or eliminate the policy for future terminations with proper notice.
  • Your final paycheck must include all wages earned and, in most states, accrued paid time off, even if the company offers no severance.

When state law requires severance

A handful of states have passed laws that mandate severance under specific conditions. These laws almost always explore only to large-scale layoffs or plant closures, not individual terminations.

California requires severance only if a company closes a facility and lays off 50 or more workers at once. The amount is one week of pay per year of employment, up to a maximum of 12 weeks. New York has a similar rule for mass layoffs of 25 or more workers at a single location. Illinois requires severance for plant closures affecting 75 or more workers. Maine requires one week of pay per year of service for workers laid off in a mass termination of 100 or more employees.

If you were laid off individually or as part of a smaller group, these state laws almost certainly do not explore to you. The threshold is the key: the law protects workers only when the layoff is large enough to be considered a mass separation. A company that lays off 10 people in your department is not covered by these laws, even in California or New York.

A few other states have considered severance laws but have not passed them. Check your state's labor department website if you want to confirm whether your state has a requirement — the list is short and does not change often.

How union contracts override company policy

If you are represented by a union, your collective bargaining agreement may require severance. Union contracts often specify the amount, the conditions under which it is paid, and how it is calculated. These terms are binding on the employer and override any company-wide policy that offers less.

If you have a union contract that requires severance and your employer does not pay it, you have a grievance right — you can file a complaint through your union's grievance procedure. This is different from an individual employment contract, which is between you and the company alone.

To know whether your union contract includes severance, check the contract itself or ask your union representative. The contract is a public document that your union must provide to you on request.

What happens when an employment contract promises severance

Some employees — often executives, managers, or specialized professionals — have individual employment contracts that specify severance terms. These contracts are legally binding. If your contract says you will receive six months of pay if you are laid off without cause, the company must pay it.

The contract must be clear about when severance is owed. Most contracts distinguish between termination "for cause" (where severance may not explore) and termination "without cause" (where it does). The contract also usually specifies whether severance is paid if you resign, if the company is acquired, or if you are offered a different role.

If you have an employment contract and you are terminated, review the contract carefully or have an employment attorney review it. The company's verbal statements about severance do not override what the contract says — only the written terms matter.

Company severance policies and whether they are binding

Many companies publish a severance policy in their employee handbook or on their intranet. This policy describes how much severance employees receive, how it is calculated, and under what circumstances it is paid. If your company has such a policy, it must follow it — the company cannot ignore its own written policy and pay less.

However, a company can change its severance policy at any time, as long as it gives employees notice of the change. The change applies to future terminations, not to people who were already laid off under the old policy. If your company announces that it is cutting severance from three months to one month, that new amount applies to people laid off after the announcement date, not to you if you were laid off before.

A severance policy is not a contract unless the company explicitly states that it is. Most handbooks include language saying the handbook is not a contract and can be changed at any time. This means the company can eliminate severance entirely for future terminations, even if it has paid severance for years. The only exception is if you can show that the company made a specific promise to you individually that severance would never be cut — a very high bar to meet.

What you must receive even without severance

Even if your company offers no severance and is not required to, you are may have access to to your final paycheck. This paycheck must include all wages you earned up to your last day of work, calculated at your regular rate of pay.

In most states, your final paycheck must also include any accrued paid time off — vacation days, sick days, or personal days that you earned but did not use. A few states (like California and New York) require this by law. Other states leave it to company policy, but if your company has a policy that says unused time off is paid out, it must follow that policy. The timing varies: some states require the final paycheck on your last day, others allow a few days.

Your final paycheck does not include severance unless the company chooses to pay it or is required to by law, contract, or policy. It also does not include benefits continuation, health insurance, or other perks — those are separate from severance and have their own rules under federal law (like COBRA for health insurance).

The difference between severance and other payments you might receive

Severance is sometimes confused with other payments that happen at termination. Understanding the difference matters because they have different tax treatment and different legal requirements.

Accrued paid time off is time you earned by working. It is owed to you regardless of whether the company offers severance. Severance is extra pay the company chooses to give you (or is required to give you) as compensation for the job loss itself. Unemployment insurance is a state program you pay into through payroll taxes; it is not paid by your employer and is separate from severance. COBRA continuation is the right to keep your health insurance for up to 18 months after termination, but you pay the full premium yourself — it is not a payment from the company.

If your company offers a severance package, it may include some of these items bundled together. For example, a severance package might include two months of pay plus three months of health insurance continuation. The severance itself is the two months of pay; the health insurance is a separate benefit. Knowing which is which helps you understand what you are actually receiving and what your tax obligations are.

Frequently Asked Questions

If my company has always paid severance, can they stop paying it tomorrow?

Yes, if the severance policy is not part of an employment contract or union agreement. The company can announce that severance is being eliminated for future terminations. However, if you were already laid off under the old policy, you are may have access to to severance under the terms that existed when you were terminated. The change applies going forward, not backward.

Does severance count as income for taxes?

Yes, severance is taxable income. Your employer will include it on your W-2 or 1099, and you will owe federal and state income tax on it. Some severance packages include a gross-up (extra money to cover the taxes), but most do not. Consult a tax professional if you receive a large severance payment.

Can a company require me to sign a release to get severance?

Yes. Most companies condition severance on signing a release that says you will not sue the company. This is legal. If you refuse to sign, the company does not have to pay severance (unless it is required by law or contract). However, you should read the release carefully or have an attorney review it before signing, because you may be giving up rights you want to keep.

What if I was fired for cause — do I still get severance?

It depends on the company policy or contract. Most severance policies do not pay severance if you are terminated for cause (such as theft, violence, or gross misconduct). However, some policies do pay a reduced amount, and some do not distinguish between cause and no-cause terminations. Check your company's policy or contract to see what it says.

Is severance different if the company is being acquired or going out of business?

It can be. Some employment contracts specify different severance amounts if the company is sold or closes. If there is no contract, the company's policy applies. In a bankruptcy, severance may not be paid at all unless it is required by law or the bankruptcy court approves it. If your company is being acquired, ask whether severance terms are changing as part of the deal.