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Severance Pay: Requirements and Different Types

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Severance pay is a benefit that some employers provide to their employees when they are fired or laid off. While there are only two situations that severance pay is required, many employers will offer severance packages to their employees for varying reasons.

When severence pay is required

  1. A handful of states require employers to pay severance to employees when the company is closing a facility or laying off a large number of employees.
  2. If the employer led the employee to believe that a severance package would be paid upon termination. This is evidenced by:
    1. A written contract stating severance would be paid
    2. Employee handbooks or personnel policies stating severance would be paid
    3. A history of other employees in the same position being paid severance
    4. An oral promise to the employee that severance would be paid

When severence pay is not required

Why would an employer provide severance pay to an employee when it isn’t required? Many times it is a sound business decision to do so. Providing severance to long term employees who are fired for reasons other than serious misconduct can make the employee feel better about the termination and less likely to sue the company.

An important thing to consider when providing severance however, is to be consistent. Not having a system in place to be fair about the payment of severance can open the company up for discrimination suits.

Types of severance

Severance pay isn’t always in the form of monetary gain. Consider these types of severance pay:

  • Money: For most employees this is the most important type of severance. Many times this is a week or two of pay for every year the employee has been with the company
  • Insurance: Some employers will opt to continue health insurance benefits for employees for a short time. Many states have laws that do require employers to pay for insurance for a short time but many only require employers to continue to allow access to coverage and not pay for it.
  • Unemployment: Fired employees can claim unemployment benefits if they haven’t been fired due to serious misconduct. Employers may choose to dispute an employee’s claim to unemployment.
  • References: A benefit an employer can offer to terminated employees is to give them letters of reference for future employment

If you have questions about severance pay, Goldman & Ehrlich has answers for workers and employers. Call us at 312.332.6733 today or contact our Chicago office online