Do you have to pay severance? (and how to write a severance agreement)

When you owe severance

The Fair Labor Standards Act (FLSA) does not require severance pay. The DOL describes severance as a matter of agreement between an employer and an employee. You can still end up owing it:

• Your own promise: an offer letter, employment contract, handbook or written severance policy that says what departing employees get.
• New Jersey mass layoffs: employers with 100 or more employees must pay one week of pay for each full year of employment to every employee terminated in a covered layoff or closing, plus four more weeks if they gave less than 90 days' notice. That severance cannot be waived without approval from the state labor commissioner or a court. See WARN notice.
• Federal WARN: severance you owe under a contract or policy does not offset back pay owed for missing a WARN notice. Only voluntary and unconditional payments do.

Many companies offer severance for a different reason: in exchange for a signed release of legal claims, a smoother exit, and goodwill with the team that stays.

What a severance agreement usually contains

1. The payment: the amount, whether it is a lump sum or paid over time, and when it is paid (usually after the revocation period ends).
2. Benefits: whether you will pay some or all of the COBRA premium, and for how long.
3. The release: the claims the employee gives up, listed clearly. For employees 40 and older, the Age Discrimination in Employment Act (ADEA) must be named.
4. What is not released: future claims, rights that cannot be waived by law, and the right to file a charge with or take part in an investigation by the EEOC or a state agency.
5. Return of company property and confirmation that access has ended.
6. Confidentiality and non-disparagement, written narrowly. State and federal rules limit how far these can go, so have counsel review them.
7. References: who answers reference requests and what they will say.
8. Time to consider, the right to revoke, and written advice to consult a lawyer.

The payment must be something the employee was not already owed. Final wages, earned commissions and any vacation payout your state requires are due anyway and do not count. Pay them on time whether or not the agreement is signed. See final paycheck laws.

Employees 40 and older: the OWBPA rules

The Older Workers Benefit Protection Act (OWBPA) amended the ADEA to set minimum rules before a worker 40 or older can validly waive age discrimination claims. The EEOC lists them:

• Written in plain language that the average employee can understand.
• Refers specifically to rights or claims under the ADEA.
• Does not waive rights or claims that arise after the employee signs.
• Gives something of value beyond what the employee is already entitled to.
• Advises the employee in writing to consult a lawyer before signing.
• Gives at least 21 days to consider the agreement. The employee may sign sooner if the choice is knowing and voluntary. The EEOC says material changes to the final offer restart the period.
• Gives at least 7 days after signing to revoke. Because the employee can still revoke during those 7 days, schedule the payment after they pass.

For employees under 40, the general test still applies: the release must be knowing and voluntary, and courts look at whether the language was clear, whether there was enough time to review it, and whether the employee could consult a lawyer.

Group layoffs: 45 days and the disclosure

When you offer severance for a release to a group or class of employees, as in a layoff, employees 40 and older must get at least 45 days to consider it, and you must give them written information about the program:

• The decisional unit: the group of employees considered (a department, facility or job classification, for example).
• Who is eligible for the program and the factors used to choose who is laid off.
• Any time limits that apply.
• The job titles and ages of everyone selected, and of everyone in the same unit who was not selected. Use individual ages, not age bands.

Planning a layoff? Check WARN notice rules at the same time, because the timelines overlap.

California adds its own rules

Under California Government Code 12964.5, a separation agreement cannot stop the employee from disclosing information about unlawful acts in the workplace. Any confidentiality or non-disparagement clause must include this sentence, in substantially this form: "Nothing in this agreement prevents you from discussing or disclosing information about unlawful acts in the workplace, such as harassment or discrimination or any other conduct that you have reason to believe is unlawful."

You must also tell the employee they have the right to consult a lawyer about the agreement and give them at least five business days to do so. The employee can sign sooner if the decision is knowing and voluntary. See firing an employee in California.

Taxes on severance

The IRS treats severance as wages. It is subject to federal income tax withholding, Social Security and Medicare taxes, and federal unemployment (FUTA) tax, and it goes on the employee's W-2. Severance is a supplemental wage, so you can withhold federal income tax at the flat 22 percent rate, or 37 percent on supplemental wages above $1 million in the year. Run it through payroll, not accounts payable.

Common questions

Sources

1. DOL: Severance pay
2. EEOC: Q&A, Understanding Waivers of Discrimination Claims in Employee Severance Agreements
3. California Government Code 12964.5
4. IRS: Publication 15 (2026), Employer's Tax Guide
5. New Jersey DOL: N.J.S.A. 34:21-1 et seq. (WARN law as amended)
6. DOL ETA: WARN Employer's Guide to Advance Notice of Closings and Layoffs

Last reviewed October 2, 2026. This page is general information, not legal advice. Laws change and exceptions apply, so check the sources above or an employment lawyer before you act on a specific case.

Related

• How to fire an employee legally (a checklist)→
• Employee offboarding checklist→
• Do you need to give WARN notice before a layoff?→
• Firing an employee in California: what the law requires→
• When is an employee's final paycheck due? (final pay laws by state)→