Severance Laws in the United States

Learn how one company simplified severance.

There are no federal U.S. laws that require severance pay, but it’s generally good practice for employers. In addition to the financial support that severance pay provides, it reflects positively on brand reputation and employee morale, and it helps mitigate legal risk. 

Although there are no federal laws specific to severance, there are several things employers should keep in mind when developing their severance policies or overseeing severance-qualifying events.  

In this article, we cover: 

• Validity requirements for severance agreements 

• WARN Act, including New Jersey’s WARN Act 

• OWBPA 

• ERISA 

• Union contracts 

Severance is complex, and it’s important that employers understand the various legal requirements when drafting and administering severance policies. 

What makes a severance policy enforceable? 

For a severance policy to be valid, it must be carefully crafted. When properly written, severance agreements provide employers with legal protection. However, poorly written severance policies may expose the company to additional risk.  

Severance agreements should meet the following criteria: 

• Provides something of value (also known as “consideration”): Severance agreements must give employees something to which they weren’t already entitled, like extra pay, additional benefits, or outplacement services—also called “consideration.” In other words, the employee must receive something of value to legally waive their right to pursue certain legal actions against the company.  

• Easy to understand: A severance agreement should be written in plain language, meaning the average employee can understand it. If the agreement is written in legalese or is difficult for the typical person to comprehend, employers may be opening themselves up to legal risk.  

• Compliant: In certain circumstances, severance agreements must include additional information to comply with the law. For example, the Older Workers Benefit Protection Act (OWBPA) mandates specific language for employees aged 40 or older. Employers must also be mindful of claims that cannot be waived in a severance agreement, such as unemployment insurance, workers’ compensation, and more. It’s important to check state-level requirements as well. 

• Entered into voluntarily: Severance agreements must be entered into willingly and without pressure or intimidation. The waiver of rights must be “knowing and voluntary” to be valid under Title VII, the Americans with Disabilities Act (ADA), and the Equal Pay Act (EPA). Employers should make it clear that employees can choose whether to accept the severance package. If employees feel coerced in any way, the agreement may be invalid.  

Even if a severance agreement is deemed invalid, an employer may have already paid—or still have to pay—severance. So, in some cases, severance pay becomes a company expenditure without any of the protection it was designed to provide. 

Though not mandatory, employers should also consider adding language that recommends the employee consult with legal counsel of their choosing prior to signing the agreement. This is particularly useful for complex agreements that involve OWBPA. 

WARN Act (including New Jersey WARN Act) 

The U.S. federal WARN Act does not have a severance requirement, but it does mandate a 60-day notice in certain cases of mass workforce changes. Employers must provide employees with at least 60 days of pay and benefits upon giving them notice of separation. If employees aren’t given the requisite 60-days notice, employers are liable for 60 days’ pay and benefits as damages, which can function like severance pay. 

The New Jersey WARN Act, on the other hand, mandates severance pay. The NJ WARN Act has a 90-day notice period as opposed to the federal WARN Act’s 60-day requirement. The Act also mandates that employers pay impacted employees at least one week of severance pay per full year of employment. If an employer doesn’t give 90 days’ notice, they must provide employees an additional four weeks of severance pay. The NJ WARN Act has the only legally mandated severance pay requirement in the U.S., but other states may follow in New Jersey’s footsteps.  

Older Workers Benefits Protection Act (OWBPA) 

The Older Workers Benefit Protection Act (OWBPA) protects employees 40 years or older from age-based workplace discrimination. OWBPA is a federal law that amends the Age Discrimination in Employment Act (ADEA), which is enforced by the Equal Employment Opportunity Commission (EEOC). When employers offer severance to employees age 40 or older, they must fulfill certain requirements under OWBPA.  

We’ve written more about this in our article, ADEA/OWBPA: Severance Agreements for Older Workers, but we’ll share some of the highlights here. When offering severance to employees 40 years or older, employers must follow these OWBPA requirements. 

For a severance agreement to be valid under the OWBPA, the written agreement must: 

• Be clear and easy to understand 

• Specifically reference the ADEA and the employee's right to waive claims under the ADEA 

• Advise the employee to seek guidance from an attorney before signing the agreement 

• Give employees at least 21 days (or 45 days in a group layoff) to consider the agreement before signing it 

• Give employees seven days to revoke their signature after signing the agreement 

• Not include waivers of rights that could arise after the agreement is signed 

• Include consideration (i.e. something of value) beyond what the employee is already entitled to 

If severance is offered to two or more employees aged 40 and older as part of a reduction in force or group layoff, employers must also provide the OWBPA disclosure—which is often called Exhibit A, the ADEA attachment, or the OWBPA Chart. Regardless of name, this document must include:  

• The decisional unit—i.e. the group of employees considered for selection during the layoff 

• The eligibility factors and selection criteria used to select employees for the layoff 

• The job titles and ages of all employees who were considered, including those who were selected and those who were not selected. 

• The notification date and termination date for the layoff 

Employers must comply with these requirements to avoid questions of the severance agreement’s validity. If the severance agreement is deemed invalid, employees could opt to proceed with an age discrimination lawsuit. 

ERISA 

The Employee Retirement Income Security Act of 1974 (ERISA) protects employee rights and assets related to employer-provided group benefits, like health insurance or retirement plans. However, severance agreements can also fall under ERISA’s definition of a benefit plan—whether it’s in writing or not.  

Employers can face significant penalties if their severance plans are subject to ERISA but they don’t fulfill ERISA requirements. A severance plan may be ERISA qualifying if it includes an “ongoing administrative scheme.” Things to consider include the amount and form of payments under the plan, the level of discretion in determining eligibility, the length or term of the plan, and the level of administration. Generally speaking, if the plan does not involve significant employer discretion and administration, then it’s likely considered administrative in nature. Similarly, if the plan is implemented once, it’s unlikely to be considered an ERISA plan. 

To ensure severance plans are compliant with ERISA, employers must adhere to the following requirements: 

• Document the severance plan and create a summary plan description to provide to employees 

• File Form 5500 with the IRS if you have 100 or more employees  

• Provide a claims process for employee grievances 

Employees are generally offered greater protection when severance plans fall under ERISA. 

In some cases, severance plans may also qualify as pension plans. That happens if the following criteria are true: 

• The severance plan is directly or indirectly tied to an employee’s retirement; 

• The plan pays more than two times the employee’s annual compensation during the last full year of work; and 

• Severance payments extend beyond 24 months after the employee’s departure.  

In the situation above, employers must also ensure they follow ERISA’s funding and vesting requirements.  

Union Contracts 

For unionized employees, severance is often governed by a collective bargaining agreement (CBA). The CBA may outline eligibility for severance, as well as pay formulas based on tenure or job classification. Although federal law doesn’t require severance, union contracts must be enforced as written. If employers fail to fulfill the terms of the CBA, they are at risk of legal repercussions related to breach of contract.  

In Summary 

Workforce reductions are difficult for everyone involved, but severance pay can help ease the employee transition. Employers, however, need the proper processes in place to ensure their well-intended gesture of support doesn’t result in legal consequences. Specialized severance technology can give employers peace of mind while overseeing workforce reductions. 

Learn more about how Onwards HR’s Severance Automation tool helps employers adhere to corporate policies while mitigating legal risk.