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How Does Severance Pay Work?

Posted by Jamison Mark on May 16, 2024 9:00:00 AM

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Severance pay is money a company pays to an employee after they have been let go from their job. It’s intended to provide a cushion for the employee as they search for a new source of income. In most cases, there is no right to receive severance pay; however, a severance package may be offered as a matter of company policy, negotiated at the time of an employee’s departure, included in an employment contract, or in the case of mass layoffs, required by New Jersey law. In this article, we’ll look at some of the different ways an employee could be entitled to severance pay and how employees can protect their rights to severance compensation.

Employer Policy

Some employers have a policy of paying severance to departing employees in specific circumstances. For example, if the company is downsizing or restructuring, it may have a policy of offering severance packages as a gesture of goodwill and to assist employees during their transitions into other positions. If an employer offers severance to some departing employees, however, it must treat similarly situated employees the same.

If an employer voluntarily provides severance pay, it should have a clearly stated policy (in an employee handbook, for example) and apply it equally to all employees. That doesn’t mean, however, that all employees would be entitled to severance at departure. Severance is typically offered to employees who are leaving the company on good terms—not to those who are fired for cause or who quit unexpectedly. Employers who fail to provide severance in a consistent and predictable way, however, may be vulnerable to claims of employment discrimination.

Employment Contracts & Collective Bargaining

Employment contracts, whether individually negotiated or the product of collective bargaining, often contain severance provisions. These could take the form of paying employees for unused vacation, sick time, or other paid time off; the contract could specify a payment schedule (based on an employee’s regular pay and time in service, for example); or it could use a combination of these. If you have an employment contract or collective bargaining agreement, see the terms of that agreement for details about your contractual rights to severance pay.


Sometimes, employers will negotiate a severance package with a departing employee. In doing so, however, they will ask for certain things from the employee in return. If your employer offers you a severance package, it’s wise to resist the temptation to sign it immediately and instead have a qualified employment attorney look over the offer and advise you of your options. Depending on its terms, signing a severance agreement could limit your rights in several ways.

  • The agreement could stipulate that you waive your rights to legal claims against your employer.
  • It could include a non-compete provision that would limit your future employment opportunities.
  • It could waive rights to indemnification against third-party claims that arise in connection with your employment.
  • It might include a waiver of COBRA benefits, which extend your access to employer-provided health insurance.
  • The agreement could require your cooperation in an investigation or legal action by the employer.

An experienced employment attorney can examine your employer’s proposed severance agreement, highlight provisions that may be problematic, and, if appropriate, help you negotiate a better deal.

New Jersey’s WARN Act

New Jersey’s Worker Adjustment and Retraining Notification (WARN) Act[1] requires employers to pay workers severance when they’re let go due to mass layoffs. This is a stronger version of the federal WARN Act,[2] which requires employers to provide workers at least 60 days’ notice before a mass layoff event that affects 50 or more employees at a single location. The federal WARN act does not include a provision for severance pay.


New Jersey’s WARN Act not only requires more notice than the federal version, but it also applies to a broader set of events and employers and, unlike the federal law, requires them to pay severance to covered employees. As a result, New Jersey employees enjoy much stronger protections from mass layoff events as well as business sales, closures, and relocations than other workers in the U.S. Here are some key points of the act:

  • It applies to employers who have been operating for more than three years and have at least 100 employees.
  • It applies to events that displace 50 or more employees, who may work at a single location or report to different work sites in New Jersey for the same employer.
  • It requires the employer to provide a minimum of 90 days’ notice before a mass layoff or other covered event.
  • It requires employers to pay covered employees at least one week of regular pay for each full year of service with the company.
  • Employers who fail to meet the 90-day notice requirement must provide employees with an additional four weeks of pay.


Severance pay can be an important benefit that gives you some breathing room between jobs, ensuring that you can continue to pay your bills and avoid going into debt as a result of sudden and unexpected job loss. If you think you may be entitled to severance pay, an employment attorney can help you understand your rights and how to enforce them. The attorneys at the Mark Law Firm are experienced at pursuing employment law claims, including those based in employment contracts and New Jersey wage and hour law.


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[1] N.J. Stat. § 34:21-2.

[2] 29 U.S. Code Chapter 23.


Topics: Wage & Hour, Employment Law

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