Legal

Severance pay laws by state 2023

By JD Farrugia

Aug. 3, 2023

Summary

  • There are no state or federal laws regarding severance pay.

  • Organizations might consider implementing severance pay agreements to improve employer-employee relations, boost employer branding, strengthen retention and acquisition, and avoid legal disputes. 

  • While there are no federal or state laws in relation to severance pay, there are state laws on when an employee’s final paycheck is to be processed. – More

Have you ever considered the critical role that severance pay plays in protecting your organization and its employees during workforce transitions? Severance pay refers to the financial compensation provided by an employer to an employee upon termination of employment. Severance payments are typically based on factors such as length of employment and employment contract terms. 

Severance benefits provide the terminated employee with a vital safety net, offering financial support and stability for people until they find a new job. They also offer significant benefits for organizations. 

Severance pay helps maintain employee morale and fosters a positive work environment during challenging workforce transitions. By including severance pay as part of your compensation package, you demonstrate your commitment to supporting employees and enhancing the organization’s reputation as a compassionate and responsible employer.

What does the law say about severance pay?

Neither federal nor state laws in the United States mandate severance pay. The U.S. Department of Labor clarifies that “severance pay is a matter of agreement between an employer and an employee (or the employee’s representative),” with no requirement under the Fair Labor Standards Act (FLSA).

However, it’s important to note that certain circumstances may trigger legal requirements related to severance pay. One such regulation is the Worker Adjustment and Retraining Notification (WARN) Act. The WARN Act applies to businesses with a certain number of employees and requires employers to provide advance notice of plant closings or mass layoffs. While the WARN Act doesn’t specifically mandate severance pay, it may come into play in situations where employers fail to comply with the required notice period.

Employers should know the WARN Act’s provisions and seek legal advice to ensure compliance when contemplating workforce reductions or closures. Although severance pay is not universally mandated, employers must navigate these potential legal considerations and make informed decisions to uphold fairness, ethical practices, and employee welfare if they are to offer it as an employee benefit.

Should your organization consider offering severance packages? 

In the absence of any state or federal law, is it worth offering severance packages to soon-to-be former employees? There are a number of pros and cons to including severance agreements in your company policies. Understanding these can help you make an informed decision that aligns with your organization’s values and goals.

The benefits of offering severance pay include the following:

  1. Employee transition support: Severance pay provides employees with a cushion to manage the transitional period between jobs. It can help cover expenses such as job search costs, the continuation of health insurance, and retraining and facilitate a smoother transition to new employment.
  2. Positive employer-employee relationships: Providing severance pay builds trust and fosters a positive relationship between employers and employees. It sends a message that the organization cares about its workforce beyond just their time of employment, strengthening loyalty and engagement. This positive relationship can increase productivity, employee satisfaction, and a more supportive work environment overall.
  3. Talent acquisition and retention: Offering severance pay as part of your compensation package can attract top talent to your organization. Prospective employees may view it as a sign of a supportive and compassionate workplace, increasing their interest in joining your team. Moreover, existing employees may feel more secure and committed, knowing that the organization values their well-being, potentially reducing turnover rates.
  4. Mitigation of potential legal risks: Although it’s not part of any employment law, offering severance pay can help mitigate potential legal risks. By providing a fair and structured severance package and establishing clear terms for separation in your employee handbook, you minimize the likelihood of unpleasant legal disputes.

 

The drawbacks of offering severance pay include:

  1. Financial impact: Severance pay can be a significant financial commitment for organizations, especially during large-scale layoffs or restructuring. Considering the potential costs and ensuring that offering severance packages aligns with your budgetary constraints is essential.
  2. Setting a precedent: Offering severance pay may establish a precedent for future terminations or workforce transitions. Establishing consistent HR policies and guidelines is crucial to avoid perceived inequalities or inconsistencies in severance package offerings.
  3. Impact on retention and turnover: While severance pay can support departing employees, it may also inadvertently encourage voluntary turnover. Some employees may view the availability of severance pay as an opportunity to leave the organization, potentially impacting retention efforts.

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Ultimately, the decision to offer severance packages should be based on your organization’s unique circumstances, values, and long-term objectives. By carefully considering the pros and cons, you can strike a balance that supports both your employees and your organizational goals.

Scenarios where severance pay might be beneficial

Severance pay is a valuable resource for employers and employees during workforce transitions. By exploring these scenarios, we can shed light on the benefits of severance pay and its role in supporting employees during critical moments of job loss or transition.

  • Workforce reductions or layoffs: During times of downsizing, layoffs, or restructuring, offering severance pay can help ease the financial impact on affected employees. It provides them with a lump sum or structured payments based on their service length, helping bridge the gap between jobs and maintain a sense of financial security.
  • Employment termination without cause:  When terminating an employee without cause, offering severance pay can mitigate the potential legal risks associated with such terminations. It demonstrates fairness and goodwill, providing a financial cushion to support the employee during their job search or transition period.
  • Non-compete and confidentiality agreements: In situations where employers require employees to sign non-compete or confidentiality agreements, offering severance pay can provide a financial incentive for departing employees to uphold their obligations, protecting the employer’s business interests.

It is important to note that the applicability and specifics of severance pay may vary based on the employer’s policy, employment agreements, and applicable federal and state laws for things like insurance benefits, unemployment benefits, non-compete clauses, and unused vacation. It is good practice to consult employment attorneys to ensure compliance and fairness.

Final paycheck laws

While there are no specific federal or state laws mandating severance pay, “final paycheck” laws surrounding termination of employment vary between states. Final paycheck laws dictate the timing and requirements for providing employees with their last paycheck after leaving a job.

Final paycheck laws refer to the legal regulations employers must adhere to when issuing final payments to employees leaving their positions. These laws cover aspects such as the timeframe for payment, differentiating between voluntary resignations and involuntary terminations, and whether accrued vacation time should be included in the final payment. The specifics of these laws can vary significantly from state to state, so it’s crucial to understand and comply with the regulations that apply to your jurisdiction.

To assist you in navigating the intricacies of final paycheck laws, we have compiled a comprehensive table outlining the specific requirements and guidelines for each state in the US as of 2023. In the table, we have differentiated between situations where an employee resigns voluntarily or if they are fired. For more in-depth information, click on the respective state hyperlinks. 

State Final wages (voluntary resignation) Final wages (if employee is fired)
Alabama N/A N/A
Alaska Paid by the next scheduled payday that is at least three (3) working days after their last day worked. Within three (3) working days of termination (not counting weekends and holidays)
Arizona Paid by the next scheduled payday Within seven (7) business days or the next payday (whichever is sooner)
Arkansas Paid by the next scheduled payday Paid by the next scheduled payday. 

If employers fail to do so within seven (7) days of the next regular payday, they must pay double the wages due
California Within 72 hours or at the time of quitting (time periods may vary by industry) Immediately
(time periods may vary by industry)
Colorado Paid by the next scheduled payday Immediately (check link for exceptions)
Connecticut Paid by the next scheduled payday Paid by the next business day
Delaware Paid by the next scheduled payday Paid by the next scheduled payday
District of Columbia Within seven (7) business days or the next payday (whichever is sooner) Paid by the next business day
Florida N/A N/A
Georgia N/A N/A
Hawaii Immediately or next scheduled payday, depending on date of final notice Immediately or next business day
Idaho 1) Within ten (10) working days or the next payday, or 2) if the employee requests an earlier payment in writing, it must be within 48 hours of receiving the request (whichever is sooner) 1) Within ten (10) working days or the next payday, or 2) if the employee requests an earlier payment in writing, it must be within 48 hours of receiving the request (whichever is sooner)
Illinois Paid by the next scheduled payday Paid by the next scheduled payday
Indiana Paid by the next scheduled payday Paid by the next scheduled payday
Iowa Paid by the next scheduled payday Paid by the next scheduled payday
Kansas Paid by the next scheduled payday Paid by the next scheduled payday
Kentucky Paid within fourteen (14) days or the next scheduled payday (whichever is later) Paid within fourteen (14) days or the next scheduled payday (whichever is later)
Louisiana Paid by the next scheduled payday or within fifteen (15) days (whichever is sooner) Paid by the next scheduled payday or within fifteen (15) days (whichever is sooner)
Maine Paid by the next scheduled payday Paid by the next scheduled payday
Maryland Paid by the next scheduled payday Paid by the next scheduled payday
Massachusetts  Paid by the next scheduled payday or, in the absence of a regular payday, the Saturday that follows an employee’s resignation Immediately
Michigan Paid by the next scheduled payday Paid by the next scheduled payday
Minnesota Paid by the next scheduled payday that’s at least five (5) days after an employee’s last day but no more than 20 days after their final day Within 24 hours of receiving a demand from employee
Mississippi N/A N/A
Missouri N/A Immediately
Montana Paid by the next scheduled payday or fifteen (15) calendar days (whichever is sooner) Immediately (within four hours or end of the business day, whichever occurs first)

 

OR

In presence of a written policy that extends the time for payment, the wages may not be delayed beyond the next payday or fifteen (15) calendar days (whichever is sooner)
Nebraska Paid by the next scheduled payday or within two (2) weeks (whichever is sooner) Paid by the next scheduled payday or within two (2) weeks (whichever is sooner)
Nevada Paid by the next scheduled payday or within seven (7) days (whichever is sooner) Within three (3) days
New Hampshire Paid by the next scheduled payday or within 72 hours (if employee gives notice of at least one pay period) Within 72 hours of time of termination
New Jersey Paid by the next scheduled payday Paid by the next scheduled payday
New Mexico Paid by the next scheduled payday Within five (5) days
New York Paid by the next scheduled payday Paid by the next scheduled payday
North Carolina Paid by the next scheduled payday Paid by the next scheduled payday
North Dakota Paid by the next scheduled payday Paid by the next scheduled payday
Ohio N/A N/A
Oklahoma Paid by the next scheduled payday Paid by the next scheduled payday
Oregon Immediately if the employee gave 48 hours’ notice. Otherwise, within five (5) days or the next scheduled payday (whichever comes first) Next business day
Pennsylvania Paid by the next scheduled payday Paid by the next scheduled payday
Rhode Island Paid by the next scheduled payday Paid by the next scheduled payday
South Carolina Within 48 hours or the next scheduled payday — not to exceed 30 days Within 48 hours or the next scheduled payday — not to exceed 30 days
South Dakota Paid by the next scheduled payday or when employee returns any company property Paid by the next scheduled payday or when employee returns any company property
Tennessee Paid by the next scheduled payday or within 21 days (whichever occurs last) Paid by the next scheduled payday or within 21 days (whichever occurs last)
Texas Paid by the next scheduled payday Within six (6) days
Utah Within 24 hours Within 24 hours
Vermont Paid by the next scheduled payday, or, if there is no regular payday, the following Friday  Within 72 hours
Virginia Paid by the next scheduled payday Paid by the next scheduled payday
Washington Paid by the next scheduled payday Paid by the next scheduled payday
West Virginia Paid by the next scheduled payday Paid by the next scheduled payday
Wisconsin Paid by the next scheduled payday Paid by the next scheduled payday
Wyoming Paid by the next scheduled payday Paid by the next scheduled payday

 

Get final paychecks right with Workforce.com

Ensuring wage and hour compliance across different states is a complex undertaking. Failing to adhere to these regulations can lead to severe consequences, including costly legal disputes, reputational damage, and potential financial penalties.

Ideally, you will never need to send final paychecks as a result of letting go of an employee. The best way to avoid this kind of situation is to proactively spot and address workplace problems as soon as they occur. For more on how to deal with these kinds of issues, check out our webinar below featuring SHRM’s Knowledge Center Director Amber Clayton.

Webinar: How to Tackle Critical Workplace Issues

Even if you aren’t firing or laying employees off, you’ll still face natural turnover in any industry. When an employee quits, their final paycheck better be on time and accurate.

Get a payroll system that makes sure this happens. Contact Workforce.com today to find out how we make payroll a breeze. 

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