How Severance Pay Is Calculated When You’re Laid Off in the U.S.

Getting laid off can be a stressful experience, especially when you’re unsure of what financial compensation you’re entitled to. Severance pay, although not mandated by federal law, is a common practice in the U.S. that provides financial relief to employees after termination. This article breaks down how severance pay is calculated, what affects the amount, and what your legal rights are.

Is Severance Pay Required by Law?

Table of Contents

Under U.S. federal law, employers are not legally required to provide severance pay. The Fair Labor Standards Act (FLSA) does not cover severance packages. However, if severance is outlined in:

An employment contract
A collective bargaining agreement
A company policy or employee handbook

then the employer is legally bound to honor that agreement.

For more on federal severance guidelines, check U.S. Department of Labor – FLSA.

How Is Severance Pay Calculated?

Most companies calculate severance based on the employee’s length of service and final salary. There are several common formulas:

Seniority-Based Formula

A standard approach is paying one week’s salary for every year of service. For example:

5 years at the company
Weekly salary = $1,200
Severance = 5 x $1,200 = $6,000

Flat Payment Model

Some employers offer a fixed severance amount regardless of tenure:

Two weeks’ salary for all employees
One-month salary regardless of service duration

This is common in mass layoffs or restructuring situations.

Executive-Level Packages

High-ranking executives often receive larger severance, sometimes calculated as 3–6 months’ salary, or including bonuses and stock options.

What Else Might Be Included in a Severance Package?

Besides base pay, a severance package may include:

Unused vacation/PTO payouts
Bonus compensation (if contractually obligated)
Extended healthcare coverage (typically via COBRA)
Outplacement services to help with finding a new job

Some companies also negotiate non-disparagement clauses, non-compete agreements, or waivers as part of severance.

Learn more about COBRA continuation coverage at Healthcare.gov COBRA.

Does Severance Affect Unemployment Benefits?

Yes, in some states, receiving severance pay may delay or reduce your unemployment benefits. Each state has different regulations, so it’s crucial to check with your state’s labor department.

You can look up your specific state’s guidelines at CareerOneStop.

Severance Agreements: What to Watch For

Before signing a severance agreement, review it carefully. Consider the following:

Are you waiving your right to sue?
Is the payment amount clearly outlined?
Are there any restrictions (non-compete, non-disclosure)?
Does it cover all compensation owed to you?

If unsure, consult with an employment attorney to protect your rights. Many offer free consultations or work on a contingency basis.

Earnings Example: Real-World Calculation

Let’s say Sarah worked at a tech company for 7 years and earned $1,500 per week. The company offers 1.5 weeks of pay for every year of service.

7 years × 1.5 weeks = 10.5 weeks
10.5 × $1,500 = $15,750 in severance pay

If she had 2 weeks of unused PTO, she may receive an additional $3,000, making her total payout $18,750.

Evolving Trends in Severance Packages

With the rise of remote work and tech layoffs, severance practices are also evolving. Some companies now:

Include mental health support in packages
Provide equity vesting options
Offer flexible end dates for smoother transitions

Check out this report on modern severance practices by SHRM – Society for Human Resource Management.

Important Notes:

Employment laws vary by state. While federal law does not mandate severance pay, many states have additional rights or requirements. It’s crucial to review the labor laws specific to your state.
Seeking professional help during severance negotiations can be very beneficial. Employment lawyers can review severance agreements to ensure your rights are protected and you don’t unknowingly waive important claims.
Besides severance pay, other benefits like unemployment insurance and healthcare continuation should be considered. Understanding COBRA health coverage options is especially important after job loss.
Severance offers often come with agreements. Before signing, carefully read and fully understand all terms, as you may be waiving your right to sue or agree to non-compete clauses.

Useful External Links:

U.S. Department of Labor – Severance Pay (FLSA)
https://www.dol.gov/general/topic/wages/severancepay
Healthcare.gov – COBRA Coverage Information
https://www.healthcare.gov/unemployed/cobra-coverage/
CareerOneStop – State Unemployment Benefits Guide
https://www.careeronestop.org/LocalHelp/UnemploymentBenefits/Find-Unemployment-Benefits.aspx
SHRM – Severance Trends and Practices Report
https://www.shrm.org/resourcesandtools/hr-topics/employee-relations/pages/severance-trends.aspx

Do you want to share this news?