2024 state-by-state final paycheck laws and what to know about severance pay

Severance pay: what is it and how does it work

Simply put, severance pay is money or benefits an employer offers an employee who is leaving the company and is typically granted upon termination. There are several instances related to employee termination where severance pay applies. For example, employers can choose to extend severance because of a:

• Layoff
• Termination
• Mutual agreement to part ways

Additionally, severance pay is negotiable and can be scaled depending on several factors including the employee’s years of service with the company or their level of seniority. Additionally, employees typically are required to have 21 days to consider the contents of an agreement.

There’s no federal or state legislation requiring employers to offer severance pay (although we’ll discuss a potential scenario below), but many do opt for it. Additionally, there are no requirements for severance pay under the Fair Labor and Standards Act (FLSA).

An example of when severance pay may come into play is when employers require employees to sign a release preventing them from pursuing any legal action against the business in the future. In exchange for signing such an agreement, the employee may be offered severance pay, which can potentially save your company headaches in the long run.

In other instances, companies may offer severance pay to keep the separation from the employee amicable, ending the working relationship on positive terms as both parties look ahead.

Severance pay may also be offered to employees who retire or to those whose jobs are eliminated amid downsizing.

When might severance pay be required?

Although severance pay is not required in the majority of cases, the WARN Act (Worker Adjustment and Training Notification) does outline a few situations in which employees can legally be entitled to severance pay in the form of back pay and benefits.

Depending on the size of your business, laying off a certain number of employees requires you to give them at least 60 calendar days (as opposed to business days) notice. If an employer fails to give notice in time, employees are then legally entitled to severance pay. Here’s a breakdown of all the situations in which the WARN act would apply:

• The company employs 100 or more full-time workers (not counting employees who have worked less than six months or part-time workers) and an employment loss affects: at least 50 people at a single site of employment; or a mass layoff affecting at least 50 employees and one-third of the worksite’s total workforce.
• The company lays off 500 or more employees (not including part-time workers) at a single site of employment during a 90-day period.
• The company lays off 50-499 workers (not including part-time workers) and these layoffs constitute 33% or more of the employer’s total active workforce (not including part-time workers) at the single site of employment.

You can also reference this employer guide developed by the Employment and Training Administration for more information on the scenarios listed above.

So, if you find yourself in a position where you foresee a big employment cut, make sure to give your employees 60 days’ notice so you still have the option to decide if severance pay is something you may want to consider.

Severance pay versus final paychecks: what’s the difference?

Severance is paid out for a certain period of time after the loss of employment, and the amount received varies depending on the industry, role, and the amount of time the employee was employed at the company.

For example, an employer may offer a week or two of salary for every year of employment. And, severance pay can also be negotiated, so employees might often negotiate the amount based on how long they’ve been at the company, their position or rank, or whether or not you included language on severance in the initial employment contract.

Conversely, final paychecks are not negotiable and are required to be paid out. Final paycheck laws vary from state-to-state, but it is required that you don’t withhold unpaid wages that are due to the employee, whether it was their choice to leave or yours.

Final paychecks also often include unused PTO days (depending on company policy), bonus pay, or commissions owed. Laws from state-to-state can vary depending on whether the employee quit or was terminated. Below is the 2024 state-by-state breakdown, with links included to the individual state websites — or statutes — where applicable.

Note: When referencing the chart below, a “business day” is defined as any day in which normal business operations are conducted. Generally, business days are considered to be Monday through Friday and exclude weekends and public holidays.

When dealing with offboarding employees — whether they are leaving voluntarily or not — make sure you’re aware of the final paycheck laws in your state to avoid any challenges. And in cases where you need to lay off an employee (or multiple), considering severance pay as an option can help you avoid any disputes in the future, while also providing financial support for your former employees as well.

Please note all material in this article is for educational purposes only and does not constitute tax or legal advice. You should always contact a qualified tax, legal or financial professional, in your area for comprehensive tax or legal advice.