What Severance Pay Rules Must Employers Follow in The United States?

Which Employees Qualify for Severance Pay?

• Employees covered by a written severance plan, policy, or handbook that promises severance under defined termination scenarios.
• Employees whose individual employment contracts or offer letters expressly provide for severance on termination without cause.
• Unionized employees where a collective bargaining agreement includes severance or separation benefits for certain layoffs or plant closures.
• Employees affected by group layoffs or facility closures where your company has adopted a formal severance program to manage reductions in force.
• Employees who are offered severance in exchange for signing a separation or release agreement, even if no prior policy existed.
• In some states, employees may also qualify where past practice has made severance an implied benefit your company consistently provides.

What Are the Legal Timelines for Paying Severance?

In the US, there is no single federal deadline for severance payments, but wage-payment laws in each state set strict timing rules for final pay that you must respect. Most employers either pay severance as a lump sum shortly after the termination date or in installments on the regular payroll cycle. If severance is tied to a release of claims, you should build in time for review and revocation periods, especially for employees aged 40 or over under federal age-discrimination rules. Your plan documents or agreements should clearly state when severance starts, how long it lasts, and whether payments stop if the employee finds new work or breaches post-termination obligations.

What Penalties Apply if Severance Is Not Paid Correctly?

If you mishandle severance in the US, the main legal exposure usually comes from violating wage-payment laws, breaching written plans or contracts, or mismanaging releases of claims. Courts and agencies can require you to pay what was promised, plus additional damages and the employee’s legal fees, and you may also lose the legal protections you expected from a signed release.

• State wage laws can impose waiting-time penalties, daily fines, or double or treble damages for late or unpaid amounts treated as wages.
• Courts may award contract damages and attorneys’ fees if you fail to follow your own severance plan or written agreement.
• Improperly drafted or rushed releases can be invalidated, leaving you exposed to discrimination or wrongful-termination claims.
• Regulators can scrutinize large reductions in force, especially where severance is used to sidestep notice obligations under the WARN Act.
• Reputational damage and employee-relations fallout can increase union activity, complaints, and future litigation risk.

Does Outsourcing Employment via an EOR Change Severance Liability?

Using an Employer of Record (https://www.playroll.com/employer-of-record) in the US can shift day-to-day HR administration, but it does not eliminate your economic responsibility for severance you choose to offer. Typically, the EOR is the legal employer on paper, while your company directs the work and funds any severance obligations agreed in the service contract. You and the EOR should clearly define who designs severance policies, who approves individual packages, and how payments are processed. If the EOR is sued, your company may still be drawn into disputes as a joint or co-employer, especially where you control hiring, firing, and working conditions.

Be 100 Percent Compliant in Offering Severance with Playroll

Playroll helps your company turn ad hoc severance decisions into a clear, repeatable framework that fits US legal norms and your internal risk appetite. Your team can standardize eligibility rules, formulas, and approval workflows so managers are not improvising under pressure at the point of termination. With structured documentation and consistent templates, you reduce the chance of creating unintended promises or inconsistent treatment that employees can later challenge.

Playroll’s platform and Employer of Record network support compliant terminations across states, aligning severance timing with local wage-payment rules and best practices. You keep strategic control over who receives severance and on what terms, while Playroll handles calculations, documentation, and payment logistics. That combination lets your company move faster on tough workforce decisions while staying aligned with US employment-law expectations.