Severance Glossary
Plain-English definitions of the legal and tax terms that show up in severance agreements, each with a primary-source citation.
WARN Act
The federal Worker Adjustment and Retraining Notification Act requires employers of 100 or more employees to give 60 days advance written notice before a mass layoff or plant closing. Notice must go to affected workers, the state dislocated-worker unit, and the chief elected local official. If the employer shortens the notice period, it must pay wages and benefits for the days of notice not given.
Source: 29 U.S.C. ch. 23 (§§ 2101–2109)
Related: Mass layoff · Plant closing · Cal-WARN · NYS-WARN
OWBPA
The Older Workers Benefit Protection Act amends the ADEA. When an employer asks an employee age 40 or older to waive age-discrimination claims in a severance agreement, the waiver is enforceable only if the employee receives 21 days to consider it (45 days for group exits) and 7 days after signing to revoke. Group exits additionally require disclosure of the ages and job titles of all selected and non-selected employees in the decisional unit.
Source: 29 U.S.C. § 626(f)
Related: ADEA
Section 280G
IRC § 280G governs "golden parachute" payments to disqualified individuals — officers, 1%-or-more shareholders, and highly compensated employees — that are contingent on a change in control. If total parachute payments reach or exceed 3× the individual's base amount (5-year average W-2 compensation), the excess over 1× base amount is non-deductible to the company and the recipient owes an additional 20% excise tax under § 4999.
Source: 26 U.S.C. § 280G
Supplemental wage
An IRS classification for wages paid outside the regular payroll cycle, including severance, bonuses, commissions, back pay, and RSU vesting income. Employers withhold federal income tax at a flat 22% on supplemental wages up to $1,000,000 cumulative per employee per year and at 37% on any amounts above that threshold. FICA (Social Security and Medicare) applies normally.
Source: IRS Publication 15 (Circular E)
Related: RSU (Restricted Stock Unit)
COBRA
A federal continuation-of-coverage right under ERISA. After a qualifying event — involuntary termination for reasons other than gross misconduct, or a reduction in hours — an employee of an employer with 20 or more employees may elect to continue group health coverage for up to 18 months. The employee pays the full premium (both the employer's and employee's share) plus a 2% administrative fee.
Source: 29 U.S.C. § 1161
ADEA
The Age Discrimination in Employment Act of 1967 prohibits employment discrimination against workers age 40 and older. It applies to employers with 20 or more employees. A severance agreement that asks an employee to waive ADEA claims must satisfy OWBPA's procedural requirements — a 21-day (or 45-day for group exits) consideration period and a 7-day revocation right — or the waiver is unenforceable.
Source: 29 U.S.C. § 621
Related: OWBPA
At-will employment
The default US employment rule: absent a contract or statute to the contrary, either party can end the employment relationship at any time, for any reason or no reason, without notice. Exceptions include employment contracts, collective bargaining agreements, anti-discrimination and anti-retaliation statutes, and public-policy exceptions recognized by most states. Montana is the only state that has abolished pure at-will employment by statute (Mont. Code § 39-2-904).
Mass layoff
A WARN Act statutory term. A reduction in force at a single site of employment that, during any 30-day period, results in employment loss for either 500 or more full-time employees, or 50–499 full-time employees if they constitute at least 33% of the active workforce. Meeting either threshold triggers federal WARN notice obligations for covered employers.
Source: 29 U.S.C. § 2101(a)(3)
Related: WARN Act · Plant closing
Plant closing
A WARN Act statutory term. The permanent or temporary shutdown of a single site of employment — or one or more facilities or operating units within a site — that results in employment loss for 50 or more full-time employees during any 30-day period. Plant-closing WARN notice is required independently of whether the mass-layoff test is met.
Source: 29 U.S.C. § 2101(a)(2)
Related: WARN Act · Mass layoff
Garden leave
A period during which a departing employee remains on the payroll and receives salary and benefits but is not required — and usually not permitted — to perform work or access company systems. It is used to keep the employee away from competitors during a notice period or to satisfy state non-compete consideration requirements. Massachusetts requires garden leave or equivalent consideration to enforce a post-employment noncompete (Mass. Gen. Laws c. 149 § 24L).
Source: Mass. Gen. Laws c. 149 § 24L
Related: Non-compete release
RSU (Restricted Stock Unit)
A promise by the employer to deliver shares (or a cash equivalent) on a future vesting date, conditioned on continued employment. Unvested RSUs typically forfeit at termination unless the grant agreement or a severance agreement provides for acceleration. At vesting, the fair market value of the shares is ordinary W-2 income subject to supplemental-wage withholding.
Source: IRS Publication 525
Related: Supplemental wage
ISO 90-day exercise window
To retain incentive stock option (ISO) tax treatment after termination, the option must be exercised within 3 months of separation (extended to 12 months for termination due to death or disability). After that window closes, any unexercised ISO automatically converts to a nonqualified stock option and loses the preferential long-term capital-gain and AMT treatment that ISOs offer.
Source: 26 U.S.C. § 422
Non-compete release
A negotiated provision in a severance agreement under which the employer waives or narrows an existing post-employment non-compete covenant in exchange for the employee signing a general release. Enforceability varies by state: California voids non-competes by statute (Cal. Bus. & Prof. Code § 16600); Minnesota, North Dakota, and Oklahoma substantially restrict them. The FTC's federal ban was vacated by Ryan LLC v. FTC (N.D. Tex. Aug 2024) and formally removed from the CFR in February 2026, so state law governs.
Source: Cal. Bus. & Prof. Code § 16600
Related: Garden leave
Cal-WARN
California's state mini-WARN statute. It applies to industrial or commercial facilities with 75 or more employees and requires 60 days advance written notice for a mass layoff (50 or more affected employees in any 30-day period), relocation (100 or more miles), or termination of operations. Cal-WARN's employee threshold is lower than federal WARN's; affected employees can recover back pay plus the value of lost benefits for each day notice was not given.
Source: Cal. Lab. Code §§ 1400–1408
Related: WARN Act · Mass layoff
NYS-WARN
New York's state mini-WARN statute. It applies to private employers with 50 or more employees in New York State and requires 90 days advance written notice — 30 days longer than federal WARN — for mass layoffs of 25 or more affected employees at a single site, plant closings, relocations, or covered reductions in hours. Both the employer-size threshold and the affected-worker threshold are lower than their federal counterparts.
Source: N.Y. Lab. Law § 860 et seq.
Related: WARN Act · Mass layoff