Severance pay—also known as “severance” or a severance package—is the compensation and benefits an employer may provide an employee upon termination of employment. In addition to cash paid as compensation (1-3 months of the employee’s pay, for example), upon severance of employment an employee’s health insurance may be extended for a number of months and the employee may be paid for unused, accrued vacation time and other paid time off.

Whether to provide any severance pay—and if so, how much—is usually in the discretion of the employer. There is no requirement in the Fair Labor Standards Act (FLSA) (federal law) for severance pay. Severance pay is a matter of agreement between an employer and an employee (or the employee's representative) and is often based on the employee’s length of employment with the employer. The federal government’s Employee Benefits Security Administration (EBSA) may be able to assist an employee who did not receive severance benefits under their employer-sponsored plan.

Employers often offer severance packages to employees who are laid off or whose jobs are eliminated because of downsizing. Some employees who resign, retire, or who are terminated may also be paid a severance package—usually in exchange for signing a waiver of any claims against the employer. Although federal and (most) state laws do not require employers to pay severance pay, severance pay can be a gesture of goodwill by the employer and may help the employee transition to a new job or career.

But if an employer pays an employee severance pay in a lump sum (without the continuation of ongoing benefits like health insurance and vacation pay) the employee will no longer be on the employer’s payroll and may promptly file for unemployment insurance benefits. For this reason, an employer may require an employee to sign a statement that the employee is voluntarily resigning and will not seek unemployment insurance (unemployment insurance claims may increase an employer’s insurance premiums). An employer may also extend the severance pay over some period of time to keep the employee on the payroll and ineligible for unemployment insurance—at least for the near future.

Some states (Idaho, Maine, Massachusetts, Rhode Island) may require an employer to pay severance pay in the event of a mass layoff or plant-or-facility closing.

Severance pay that is promised in a written policy (such as an employee handbook) or employment agreement is generally enforceable as wages due under a state’s payday laws.

In Michigan, severance pay is not mandated by state law or the Fair Labor Standards Act (FLSA), but is typically a matter of agreement between the employer and employee. Employers may offer severance packages as a goodwill gesture to assist employees transitioning from employment due to layoffs, downsizing, or other separations. These packages can include extended health insurance, compensation for unused vacation time, and other benefits. While some states require severance pay under certain conditions, Michigan does not have such a requirement. However, if severance pay is outlined in an employment contract or company policy, it may be enforceable under Michigan's wage and hour laws. Employees receiving a lump sum severance may be eligible for unemployment benefits unless they agree not to apply for them as part of the severance agreement. Employers sometimes spread out severance payments to keep the employee on payroll, which may affect eligibility for unemployment insurance.