Severance Pay: What Is It, Who Gets It, and How Does It Work?

Upon losing a job - whether due to a layoff, a company restructuring, or a business closure - one of the first questions many employees ask is, “Am I entitled to severance pay?”

The answer depends upon the laws of your state and the circumstances of your termination. Here’s what New Jersey workers should know about severance pay, eligibility, taxes, and how to protect yourself before signing any agreement.

What Is Severance Pay?

Severance pay is a form of compensation an employer provides to an employee after employment is terminated. Generally intended to help bridge the gap between jobs, it can include:

●      A lump-sum payment

●      Continuation of salary

●      Continued health insurance coverage or assistance with COBRA premiums

●      Payment for unused vacation time or PTO

Is Severance Pay Required Under Federal Law?

The Fair Labor Standards Act (FLSA) does not require employers to provide severance pay. At the federal level, severance is usually a matter of employer policy, an employment contract, or a collective bargaining agreement.

Although there is no federal guarantee to severance pay, states are free to impose their own requirements - and New Jersey has done just that in certain situations.

Who Is Entitled to Severance Pay in New Jersey?

New Jersey has enacted protections for terminated employees. While severance pay is not automatic, employees may be entitled to receive it:

●      If severance is promised in an employment contract or company policy

●      When severance is negotiated as part of a separation agreement

●      When a layoff, plant closing, or mass termination triggers the New Jersey WARN Act

The New Jersey WARN Act

In 2020, New Jersey became the first state in the country to require mandatory severance pay for mass layoffs when Governor Phil Murphy signed legislation expanding The New Jersey WARN Act. This updated version (which did not go into effect until 2023 due to COVID) provides stronger worker protections. It expands the definition of employer and what qualifies as an establishment, in addition to requiring severance pay in certain circumstances.

Who Must Comply with the Act

The WARN Act applies to employers with at least 100 employees nationwide - without regard to full-time or part-time status, years of employment, or hours worked per week.

When Does the NJ WARN Act Apply?

The Act is triggered when an employer conducts a mass layoff, transfer, or termination of operations that results in a job loss for 50 or more employees at an establishment within a 30-day period. These employees do not need to work at a single site in order to trigger the Act; remote and dispersed workers can still trigger the “establishment” number.

What Counts as Termination Under the Act?

A termination can include:

●      Layoffs

●      Involuntary terminations not for cause

●      Job losses resulting from plant closings or relocations

Termination for cause is generally excluded from the Act.

When Does the Act Require Severance and How Much Must an Employer Pay?

A qualifying employer must provide severance pay when one of the above termination acts occurs.

The employer must pay severance equal to one week of pay for each full year of employment. If the employer fails to provide the required 90 day’s termination notice required by the Act, the employees are entitled to an additional four weeks of severance pay. This notice must be given to the affected employees, any applicable unions, the New Jersey Department of Labor, and the elected official of the municipality where the establishment is located.

The Act considers severance pay to be compensation and it must be paid even if the employer is closing operations due because of financial hardship.

How Severance Pay is Taxed

At the federal level, severance pay is treated as wages. So, it’s subject to federal income tax, Social Security tax, and medicare tax. An employer can withhold the federal tax at a supplemental wage flat rate or using standard payroll deductions.

In New Jersey, severance pay is also subject to state income tax.

Clauses to Look For Before Signing a Severance Agreement

It is important to carefully review a severance agreement before signing for any clauses that may impact your rights, such as:

●      Release of Claims - Waivers of the right to sue for discrimination or retaliation

●      Confidentiality Provisions - Limits on what you can say about your employer or the agreement

●      Non-Disparagement Clauses - Restrictions on negative statements about your employer

●      Non-Compete or Non-Solicitation Clauses - These could still be enforceable in certain contexts

●      Rehire Eligibility - Whether you can apply for future positions

●      Payment Timing and Method - How and when you will be paid

Negotiating a More Favorable Severance Agreement

Even when a severance package is offered as standard, there may be room to negotiate, especially if you were a long-term employee. You can try to negotiate additional pay, extended health insurance coverage, or the removal of restrictive clauses.

For employers who want to fire an underperforming or troublesome employee, but are concerned that the person may come back and sue the employer for some form of discrimination (real or imagined), it may be good to offer that employee a severance package as an inducement for the employee to waive their right to sue that employer.

If you’re facing a mass termination, it is imperative to review your situation carefully. If you have further questions or would like more information, please reach out.