Severance Package

A severance package is the set of payments and benefits an employer provides when employment ends, offered as a matter of negotiation or policy rather than as a general legal entitlement. A typical package includes a cash payment expressed as weeks or months of pay, some period of employer-subsidized continuation health coverage, terms addressing vested and unvested equity, payment of accrued but unused leave where state law or policy requires it, and sometimes outplacement services.

Nearly always it also includes a release of claims, and that document is the legal center of the transaction. The employer is buying the certainty that the departing employee will not sue, and the payment is the price. Understanding a severance package therefore means reading the release first and the number second, because the number is negotiable in a way the legal machinery around the release is not.

The most repeated claim about severance is wrong: the review and revocation periods are not a general right. The Older Workers Benefit Protection Act amended the Age Discrimination in Employment Act, and 29 USC 626(f)(1) opens: "An individual may not waive any right or claim under this chapter unless the waiver is knowing and voluntary." The chapter is the age-discrimination statute, whose protections are limited to individuals who are at least 40 years old and which reaches employers with twenty or more employees. So the machinery attaches to a waiver of age-discrimination claims. A 32-year-old handed a release of other claims has none of these periods, and telling them they have 21 days to think about it is telling them to rely on a protection they do not have.

Where the machinery does apply, the details matter more than the numbers. Section 626(f)(1) requires that the agreement be written to be understood, that it specifically refer to rights arising under the age-discrimination statute, and that the individual be advised in writing to consult an attorney. Two provisions are worth reading closely. Subparagraph (C) prevents a waiver of claims that may arise after the date it is executed, so a release cannot cover the future. And subparagraph (D) requires that the waiver be given "only in exchange for consideration in addition to anything of value to which the individual already is entitled," which means severance already promised by a plan, a contract or a stated policy cannot itself be the price of the release. That is a negotiating fact of real value and it is almost never volunteered.

The trigger for 45 days is the program, not the headcount. Subparagraph (F)(i) gives at least 21 days to consider an individual agreement, and (F)(ii) gives at least 45 days where the waiver is requested in connection with an exit incentive or other employment termination program offered to a group or class of employees. What matters is whether a program exists, not how many people happen to be leaving.

The seven-day revocation cannot be shortened or traded away. Subparagraph (G) requires that the agreement provide at least seven days to revoke and that it "shall not become effective or enforceable until the revocation period has expired." So an offer to pay sooner in exchange for skipping the wait is not something the employer can lawfully deliver on an ADEA release, and a worker does not have to choose between the money and the time.

The group disclosure is the most useful and least known provision in the whole area. In a group program, subparagraph (H) obliges the employer to inform the individual in writing, at the start of the consideration period, of any class or group covered, the eligibility factors, any time limits, and "the job titles and ages of all individuals eligible or selected for the program, and the ages of all individuals in the same job classification or organizational unit who are not eligible or selected for the program." That is precisely the information needed to see whether the selection skewed by age, and it is meant to arrive before the clock starts rather than after.

Two further limbs correct beliefs people commonly bring to the table. Section 626(f)(3) puts the burden of proving that a waiver was knowing and voluntary on the party asserting its validity, which is the employer. And section 626(f)(4) means no waiver may be used to justify interfering with the right to file a charge with the Equal Employment Opportunity Commission or to participate in an investigation, so "you can never complain to anyone again" is not something a release achieves. Note also that a waiver settling a charge already filed, or a case already in court, is held to a shorter list of requirements and to "a reasonable period of time" rather than to the fixed 21 or 45 days.

Severance is wages, which surprises nearly everyone. In United States v. Quality Stores, Inc., 572 U.S. 141 (2014), the Supreme Court held that "the severance payments at issue are taxable wages for FICA purposes," because the statute defines wages as all remuneration for employment. So Social Security and Medicare tax come out of severance in addition to income tax. A lump sum is also commonly withheld at a flat supplemental-wage rate rather than at the rate that applied to regular pay, and because that is a withholding rate rather than the tax actually owed, the difference is settled when the return is filed. Whether accrued unused leave is paid out at all is a matter of state law and employer policy rather than federal law.

There is no general federal requirement to pay severance, and one federal statute nonetheless creates something that looks exactly like it. The Worker Adjustment and Retraining Notification Act requires an employer of 100 or more employees to give 60 days' written notice of a plant closing, meaning 50 or more employment losses at a single site within 30 days, or of a mass layoff, meaning either at least 33 percent of the workforce and at least 50 people, or 500 people. Every one of those counts excludes part-time employees, which 29 USC 2101(a)(8) defines as someone averaging fewer than 20 hours a week or employed for fewer than six of the preceding twelve months, so a workforce that looks large enough on a headcount may not be. An employer that fails is liable under 29 USC 2104(a)(1) for back pay and benefits for each day of violation, capped at 60 days and at no more than half the number of days the employee was employed. That liability is then reduced by wages paid for the period of the violation, and by "any voluntary and unconditional payment by the employer to the employee that is not required by any legal obligation." So a payment presented as severance may in substance be discharging a notice claim, and a release signed for it may be waiving a claim the worker never knew they had. Whether a particular payment reduces the liability turns on the statute's own conditions, which are worth reading against the actual offer.

An employer presents a written agreement setting out the payment, the timing, the treatment of benefits and equity, and the release. Where the release covers age-discrimination claims the employee gets at least 21 days to consider it, or 45 in a group program, with the group disclosure delivered at the start of that period, followed by at least seven days after signing during which the agreement can be revoked and cannot take effect. Payment usually follows the expiry of the revocation period. Everything about the amount, the timing, the health-coverage subsidy, an extended equity exercise window and a reference or non-disparagement term is negotiable; the statutory machinery is not.

A hypothetical illustration of the notice question, because it is the piece most packages do not mention. An employer with 400 full-time employees shuts a site, producing 120 full-time employment losses within a 30-day period, and gives no advance notice. Under the notice statute an affected employee's back-pay entitlement runs for each day of the violation, capped at 60 days, and capped again at half the days that employee was employed. For a worker of several years' service the 60-day cap is the binding one. For a worker who had been employed 90 days, half of 90 is 45, so 45 days is the cap instead. If the employer now offers eight weeks of pay conditioned on a release, the offer is in the same range as the notice liability it may be reducing, which is a reason to establish whether a notice obligation was triggered before signing rather than afterward.

Two items on the checklist are time-critical and sit outside the agreement. Continuation health coverage has its own election window running from the loss of coverage, and where an employer had been subsidizing that coverage and completely ceases its contribution, the cessation opens a Marketplace special enrollment period of its own, which voluntarily dropping the coverage does not. And a claim for unemployment benefits is generally worth filing promptly rather than after the severance runs out, because states differ on how a severance payment interacts with a claim and several pay from the filing date.

Pros

• The payment is real money at the moment income stops, and the amount, the timing and most of the benefit terms are negotiable.
• The consideration must be something over and above what the employee was already entitled to, so an existing severance promise is a floor rather than the price of the release.
• Where age-discrimination claims are being released, the review and revocation periods give genuine time to take advice, and the seven days cannot be waived away.
• In a group program the employer must hand over the ages and job titles of those selected and not selected, which is evidence a worker would otherwise have no way to obtain.
• Subsidized continuation coverage in a package can be worth more than an extra week or two of pay, and it is a term rather than a fixed outcome.

Cons

• The release is usually broad and permanent, and it is priced by an employer who knows more about the claims than the employee does.
• Below age 40, or with an employer too small for the age-discrimination statute, none of the review and revocation machinery applies at all.
• Severance is wages, so payroll tax comes out on top of income tax, and lump-sum withholding often does not match the tax finally owed.
• A payment may be reducing a notice-statute liability the employee is unaware of, which makes the offer look more generous than it is.
• There is no general federal right to severance, so an employee with no contract or policy behind them is negotiating from a weak position.