When a layoff or termination occurs, one of the most common questions is whether the employee is entitled to severance (also known as separation) pay. An important thing to note for both employees and employers is that under New Jersey law, an employer is generally not required to give an employee severance pay. There are specific circumstances where severance pay is required under New Jersey law. Speaking with a qualified employment attorney can help you understand whether you, or your employees, are entitled to automatic severance.
Severance pay should not be confused with earned wages. Earned wages is the sum that an employee has earned for work performed. Whether an employee quits or is fired, their employer must pay the employee all wages earned. The employee is entitled to receive a final paycheck, including earned commissions and guaranteed bonuses, on the first scheduled payday after the employment ends.
Severance pay, on the other hand, is a benefit that may be offered by an employer voluntarily upon the employee’s termination or offered pursuant to company policy. Typically, the amount of severance pay is calculated based on the length of the employee’s employment. It is best practices for an employer to memorialize the terms accompanying any severance payment with a severance agreement.
Generally, New Jersey law does not provide employees with an automatic right to severance pay. If you are unsure whether you are entitled to severance, the first place to check is your employment agreement or your union agreement as well as under any applicable company policies. If an agreement or policy states that you are entitled to severance in the event of separation from the company, it is important to review the terms carefully, since your entitlement may vary depending on the reason for termination. Often, severance pay is not available if the termination was for cause such as termination for wrongdoing by the employee.
Recently, in April 2023, New Jersey passed a new severance pay law that requires employers to provide severance pay to workers terminated in “mass layoffs.” Under this new law, you would be entitled to automatic severance – meaning, even if your agreement does not provide a right to severance, your employer would still have to pay you severance – if the following conditions are met:
If all those conditions are satisfied, your employer must offer you severance pay and that amount must be equivalent to one week’s worth of pay for each year of employment at the company.
Furthermore, the law also requires employers to send a notice to affected employees 90 days before a mass layoff or plant closure. If this notice requirement is not followed, the company will be obligated to provide the affected employees with an additional four weeks of pay.
In most circumstances, the employee will be required to sign a general release of all claims against the employer in order to receive the offered severance package. By signing a release of claims, the employee is giving up the right to sue the employer. The release generally only covers events that occurred up to the date of the layoff or termination. However, the scope of the release can be as broad (i.e., where the employee releases all claims relating to his employment) or as narrow (i.e., where the employee waives the right to sue the employer for specific claims) as the parties want.
In addition to a release of claims, the employee often must agree to certain restrictive covenants. A restrictive covenant is a contract provision that prohibits an employee from engaging in certain activities after the layoff or termination. The most common restrictive covenants in a severance agreement include:
In any event, the employer and employee can seek to negotiate alternative or additional terms. For instance, the employee can request additional pay, an extension of health care and other benefits, the exercise of stock options, outplacement assistance and other conditions.
In New Jersey, where there is no automatic right to severance for most employees, it is important to understand whether you fit in the exception that triggers mandatory severance payments. For employees, an important issue to consider is whether getting a severance payment is worth giving up the right to sue the company for any reason under the circumstances. If you have a potential claim against your employer, an experienced employment attorney can help you weigh the strength of the claim against the benefits offered by your employer. Relatedly, if you are an employer, planning your employment agreements with an attorney can help protect you against liability in the future and requiring employees to sign a severance agreement waiving any claims against the company in exchange for a severance payment. For more guidance on severance, feel free to reach out to a member of our employment team.