What a severance package is actually worth
Severance is not an entitlement in the United States. Outside a written severance plan, a collective agreement, an employment contract or a state-specific requirement, no federal law obliges a private employer to pay it at all. What the employer is buying with the offer is your signature on a release of claims, and what you are selling is the right to sue over the termination.
That framing matters, because it tells you what the offer has to be measured against. The relevant comparison is not "is twelve weeks generous?" but "does this cover the period I will be out of work, and what am I giving up to get it?"
Three adjustments turn a headline number into a usable one. Tax: severance is wages, subject to income tax withholding and to Social Security and Medicare tax. Employers commonly apply the flat 22% supplemental withholding rate described in IRS Publication 15, but that is a withholding rate, not your tax rate; a higher earner will owe more and a lower earner less when the return is filed. Health cover: the employer's contribution disappears, and continuation cover under COBRA costs the full premium plus a 2% administrative charge, which for a family is frequently over $1,500 a month. Unemployment benefits: often the largest offsetting item, and the one most affected by how severance is treated in your state.
The formula, and why the tax rate does not change the decision
The net bridge is the after-tax severance, plus the unemployment benefits you actually expect to receive, minus the cost of keeping yourself insured: B = w·p·(1 − t) + U − H. Dividing that by your weekly take-home pay converts it into weeks of runway, which is directly comparable to how long you expect the search to take.
One thing falls out of the algebra that surprises people. The tax rate does not change how many weeks of take-home pay a given number of severance weeks replaces. If U and H are both zero, the runway is w·p·(1 − t) ÷ (p·(1 − t)) = w exactly, whatever the tax rate is, because severance and salary are taxed as the same kind of income. Twelve weeks of severance replaces twelve weeks of take-home pay. What the tax rate does change is the absolute dollars, and therefore how far the money goes against fixed costs such as the health premium — which is why the COBRA line moves the runway and the tax line does not.
The unemployment term is where the real variation lives. Three treatments are in use across the states. Some ignore severance entirely and pay benefits from the first eligible week. Some treat severance as wages allocated to the weeks it covers, which delays the start of benefits by that many weeks. Some reduce the weekly benefit dollar for dollar against the severance paid in that week, which for anyone whose salary exceeds the benefit amounts to the same thing as a delay. Because most states cap benefits at 26 weeks, a delay does not always cost you benefits — it costs you only if your search runs shorter than the delay plus the cap.
Worked example: 12 weeks on a $1,000 weekly salary
An employee earning $1,000 a week with six years of service is offered 12 weeks. Their effective tax rate is 30%, COBRA is $600 a month, and they expect the search to take six months. The state pays $500 a week for up to 26 weeks and delays benefits by the severance period.
- Gross severance. 12 × 1,000 = $12,000, which is 12 ÷ 6 = 2 weeks per year of service.
- After tax. 12,000 × 0.70 = $8,400.
- Health cover. Six months at $600 = $3,600.
- Unemployment, delayed. Six months is 6 × 52/12 = 26 weeks out of work. The first 12 are covered by severance, leaving 14 payable weeks: 14 × 500 = $7,000.
- Net bridge. 8,400 + 7,000 − 3,600 = $11,800.
- Runway. Take-home pay is 1,000 × 0.70 = $700 a week, so 11,800 ÷ 700 = 16.9 weeks against 26 weeks out of work — a shortfall of 9.1 weeks.
Change the state rule to one that ignores severance and the same person collects 26 weeks of benefits rather than 14: 26 × 500 = $13,000, the bridge becomes 8,400 + 13,000 − 3,600 = $17,800, and the runway rises to 17,800 ÷ 700 = 25.4 weeks. That $6,000 difference comes from a rule the employee has no control over and which is not mentioned anywhere in the severance agreement.
How to read the result, and what you are being asked to sign
Compare the weeks of take-home pay replaced against the months you expect the search to take, converted to weeks. A package that funds sixteen weeks against a six-month search leaves a real gap, and the honest response to that is either to negotiate, to plan for the gap, or to revise the search estimate.
Then look at what the release is worth. The offer is consideration for giving up claims, so the package should be measured against the claims you have. If the termination looks like age discrimination, retaliation for a complaint, or a breach of contract, the release is worth considerably more than a standard package — the wrongful termination damages calculator puts a figure on that alternative. If you are owed unpaid overtime, note that private settlement of an FLSA claim is not always effective; the unpaid overtime back pay calculator values that separately.
The Older Workers Benefit Protection Act, 29 U.S.C. §626(f), gives specific protection to employees aged 40 and over. A release of age discrimination claims is valid only if it is written to be understood, advises you in writing to consult an attorney, gives you at least 21 days to consider it — 45 days in a group termination programme, together with disclosure of the job titles and ages of everyone selected and not selected — and allows seven days to revoke after signing. That seven-day revocation period cannot be waived. If you are over 40 and the paperwork does not contain those terms, something is wrong with it.
A rule of thumb widely used in US practice is one to two weeks of pay per year of service, often with a floor for senior staff. It is a convention rather than a right, and it is a weak guide when the real question is how long a particular market takes to hire.
Severance weeks against a search of a given length
| Weeks offered | After-tax severance | Benefits over a 26-week search | Health cost | Net bridge | Weeks replaced |
|---|---|---|---|---|---|
| 4 | $2,800 | $11,000 | $3,600 | $10,200 | 14.6 |
| 8 | $5,600 | $9,000 | $3,600 | $11,000 | 15.7 |
| 12 | $8,400 | $7,000 | $3,600 | $11,800 | 16.9 |
| 16 | $11,200 | $5,000 | $3,600 | $12,600 | 18.0 |
| 26 | $18,200 | $0 | $3,600 | $14,600 | 20.9 |
Each extra severance week adds $700 of after-tax pay but removes $500 of benefits, so the net bridge rises by $200 a week while the delay rule applies. Once the severance covers the whole 26-week search there are no benefits left to displace, and each further week adds the full $700.
Points to check before signing
- Whether the payment is a lump sum or salary continuation. Continuation often preserves benefits and delays unemployment eligibility; a lump sum arrives at once and may be allocated differently by the state agency.
- What happens to unvested equity and the bonus. Accrued bonus, commission and equity vesting are separately negotiable and are frequently omitted from the first draft.
- Accrued but unused vacation. In several states this is wages that must be paid regardless of the release, so it should not be presented as part of the severance consideration.
- Non-compete and non-solicit terms. A new or broadened restrictive covenant buried in a separation agreement is a real cost, because it narrows the market you are about to search.
- The reference and characterisation of the departure. Whether the separation is recorded as a layoff affects unemployment eligibility and is worth agreeing in writing.
- The consideration period and revocation right. If you are 40 or over, count the days the agreement gives you against the 21 or 45 days and the 7-day revocation the OWBPA requires.
Do not sign on the day you are told
Severance agreements are usually presented in a meeting designed to be brief, and the pressure to sign quickly is real. You are entitled to take the time the agreement provides, and for employees aged 40 and over that time is a statutory minimum rather than a courtesy. Use it to run the arithmetic, to check whether any claim you might be releasing is worth more than the offer, and to have a lawyer read the release — particularly the definition of released claims and any restrictive covenants.
Where severance sits among your other options
A severance package is one of several ways money can flow after a termination, and they interact. Unemployment insurance is an entitlement based on your work history, not on the employer's generosity, and the calculation above shows how the two interact in your state. WARN Act notice is a separate obligation: employers of 100 or more must generally give 60 days' notice of a mass layoff or plant closing, and pay in lieu of that notice is not the same thing as severance — an employer that offers "severance" covering exactly 60 days may simply be discharging a WARN obligation it already had.
Where the termination itself is unlawful, the severance is a floor rather than a resolution. Back pay, front pay and benefits in a discrimination or retaliation claim are computed on a different basis entirely and can exceed a standard package by an order of magnitude. Where the dispute is about pay rather than about the termination — misclassification, unpaid overtime, a prevailing wage shortfall — those claims have their own statutory remedies, including liquidated damages, and a general release may or may not reach them. The prevailing wage and fringe benefit calculator covers the public works version of that question.
Finally, treat the bridge figure as a budgeting number rather than a target. It tells you how long you can search at your current burn rate. Reducing that burn rate lengthens the runway just as effectively as negotiating another four weeks, and it is entirely within your control.