Severance pay in Illinois is not required by law. No state or federal statute forces a private employer to pay it. What makes severance enforceable is the employer’s own promise, whether that promise lives in an individual employment contract, a written company policy, or a collective bargaining agreement.1Illinois Department of Labor. Bonus Pay and Severance and Commission FAQ Once that promise exists, the Illinois Wage Payment and Collection Act treats the money as “final compensation” owed to a separated worker, with the same collection tools that apply to a missing paycheck.2Justia. Illinois Code 820 ILCS 115 – Illinois Wage Payment and Collection Act
That’s the legal frame. The practical stakes are bigger than the check itself: a severance package usually pulls in tax withholding, a release of legal claims, restrictive covenants, and unemployment and health coverage decisions that can each be worth thousands of dollars.
When You Are Actually Owed Severance
Three sources typically create the obligation:
- An individual employment contract with severance terms, such as a set number of weeks’ pay on termination without cause.
- A published company policy or handbook that lays out severance benefits. A distributed policy can create an enforceable obligation even without a separate signed contract.
- A collective bargaining agreement negotiated by a union, which binds the employer just as firmly.
Severance is almost always tied to involuntary separation. Employers rarely offer it to workers fired for misconduct or who quit. If your contract or policy is silent on those scenarios, the precise language will control whether you have a claim, so read it before you assume anything.
How Severance Is Usually Calculated
There is no standard formula. The most common structure ties severance to length of service, often one or two weeks of base salary per year worked. Some employers use flat amounts, some scale by title or seniority, and some negotiate every package individually. Collective bargaining agreements tend to be more rigid, spelling out exact dollar amounts per year of service so covered employees get consistent treatment.
A few details in the offer are worth pinning down before you sign:
- Whether the weekly rate is base salary only or includes regular bonuses and commissions.
- How accrued but unused vacation and earned bonuses are handled. Those are separately owed as final compensation under the IWPCA regardless of severance, and an agreement that bundles them can obscure what is actually new consideration versus what you were already owed.2Justia. Illinois Code 820 ILCS 115 – Illinois Wage Payment and Collection Act
- Whether the money comes as a lump sum or as continued payroll over weeks or months. The structure affects tax withholding and, in some cases, whether the plan becomes subject to federal ERISA requirements.
What You Give Up by Signing
Almost every severance agreement asks you to sign a general release, giving up the right to sue the employer for anything that happened during the employment relationship. Releases are enforceable, but only if you sign knowingly and voluntarily and only if the employer gives you real consideration beyond what you were already owed.3U.S. Equal Employment Opportunity Commission. Q and A – Understanding Waivers of Discrimination Claims in Employee Severance Agreements Money you would have received anyway under an existing policy doesn’t count.
Extra Protections If You Are 40 or Older
When the departing employee is 40 or older, the Older Workers Benefit Protection Act adds strict procedural rules to any waiver of age discrimination claims. A valid waiver must:
- Be written in plain language you can understand.
- Specifically name the Age Discrimination in Employment Act.
- Advise you in writing to consult an attorney before signing.
- Give you at least 21 days to consider the agreement, or 45 days if the waiver is part of a group layoff program.
- Allow at least 7 days after signing to revoke.
- Not waive any rights or claims that arise after the date of signing.
- Be supported by consideration beyond what you already earned.
The 7-day revocation window can’t be shortened by either side, and the agreement isn’t enforceable until those 7 days expire.4Office of the Law Revision Counsel. 29 US Code 626 – Recordkeeping, Investigation, and Enforcement In a group layoff, the 45-day version also requires the employer to disclose the job titles and ages of all employees who were and were not selected.5eCFR. 29 CFR 1625.22 – Waivers of Rights and Claims Under the ADEA Skip any of these steps and the waiver can be thrown out, which would let the employee keep the money and still file an age discrimination claim.
Limits on Confidentiality and Non-Disparagement Clauses
Employers routinely include confidentiality and non-disparagement language. In 2023, the National Labor Relations Board’s McLaren Macomb decision held that offering a severance agreement that broadly prohibits a non-supervisory employee from disparaging the employer or from disclosing the terms of the agreement itself violates federal labor law.6National Labor Relations Board. Board Rules that Employers May Not Offer Severance Agreements Requiring Employees to Broadly Waive Labor Law Rights Simply making the offer is an unfair labor practice, whether or not the employee signs. Narrow trade-secret confidentiality remains fine; a blanket gag clause does not.
Non-Compete and Non-Solicit Language in the Package
Severance agreements often include restrictive covenants that limit where and how you can work next. Illinois tightened the rules through amendments to the Illinois Freedom to Work Act that took effect January 1, 2022.
Non-compete agreements are prohibited with any employee earning $75,000 or less per year. Non-solicitation agreements are prohibited with any employee earning less than $45,000 per year.7Justia. Illinois Code 820 ILCS 90 – Illinois Freedom to Work Act Those thresholds are set to increase periodically starting in 2027. Above the thresholds, a covenant still needs adequate consideration. If the only consideration is continued at-will employment, you must actually work for at least two years after signing for it to hold up. Otherwise the employer needs to offer something more, like a signing bonus or a promotion.
The amendments also require the employer to advise the employee in writing to consult an attorney and to allow at least 14 days to review the covenant before signing. The Illinois Attorney General can now enforce the Act and seek civil penalties up to $5,000 per violation, or $10,000 for repeat violations within five years. A covenant that looked enforceable a few years ago may no longer be, so check any restrictive language in a severance package against the current rules.
Health Insurance After You Leave
Losing employer health coverage is often the most immediate financial hit after a layoff. Severance agreements usually address it one of two ways: the employer pays COBRA premiums for a set number of months, or the employer hands you a lump sum meant to offset the cost of replacement coverage.
Federal COBRA
COBRA lets employees of companies with 20 or more workers continue their existing group health plan for up to 18 months after a qualifying event like job loss. You pay the full premium, including the share your employer used to cover, plus a 2% administrative fee, and you have 60 days from receiving the election notice to decide.8U.S. Department of Labor. FAQs on COBRA Continuation Health Coverage for Workers If the employer subsidizes COBRA as part of severance, find out exactly how long the subsidy lasts and what your premium looks like when it ends.
Illinois Continuation Coverage
Illinois has its own continuation law that applies even to employers too small for federal COBRA. Employees with fully insured group health plans can continue coverage for up to 12 months after termination or a hours reduction that causes loss of coverage. That fills a real gap for workers at smaller companies.
Taxes on Your Severance Check
Severance is taxable income. The IRS treats it as supplemental wages, and both the federal government and Illinois take their share before the money hits your account.
Federal Income Tax
Using the flat-rate method for supplemental wages, federal withholding is 22% on severance up to $1 million and 37% on any amount above that threshold.9Internal Revenue Service. Publication 15 (2026), Circular E, Employers Tax Guide Some employers instead combine severance with regular wages for the pay period and withhold on the aggregate, which can pull you into a higher withholding bracket even when your actual tax liability is lower. What’s withheld isn’t necessarily what you’ll owe; you settle up on your return.
FICA
Severance is subject to Social Security tax at 6.2% on earnings up to the 2026 wage base of $184,500, and Medicare tax at 1.45% with no cap.10Social Security Administration. Contribution and Benefit Base If your regular wages during the year already exceeded $184,500 before the severance payment, no additional Social Security tax applies to the severance itself. The Additional Medicare Tax of 0.9% kicks in on combined wages above $200,000 for single filers.
Illinois Income Tax
Illinois withholds its flat 4.95% income tax on severance, calculated the same way as regular wages.11Illinois Department of Revenue. 2026 Illinois Withholding Tax Tables Between the 22% federal flat rate, FICA, and Illinois withholding, expect roughly a third of a lump-sum payment to go to taxes before any other deductions.
Severance and Unemployment: You Can Collect Both
Illinois is more generous than many states on this point. Under state administrative rules, severance pay does not make you ineligible for unemployment benefits.12Legal Information Institute. Illinois Admin Code Title 56 Section 2920.45 – Severance Pay Some states delay benefits or reduce them dollar-for-dollar during the severance period. Illinois does not. File your unemployment claim without waiting for severance to run out.
One caveat: watch the separation language in the agreement. If it describes your exit as a voluntary resignation rather than a layoff, the employer may contest your unemployment claim on that basis. Read it carefully before signing.
Large Layoffs and WARN Notice
For big layoffs, notice requirements can effectively function as mandatory pay.
The federal WARN Act applies to employers with 100 or more full-time employees and requires at least 60 calendar days’ written notice of a plant closing or mass layoff. A mass layoff is triggered when 50 or more employees are laid off in a 30-day period and that group is at least 33% of the site’s workforce, or when 500 or more are laid off regardless of percentage.13eCFR. Part 639 Worker Adjustment and Retraining Notification An employer that skips required notice owes each affected employee back pay and benefits for every day of the violation, up to 60 days. That liability functions as de facto severance even where no severance agreement exists.
Illinois has its own WARN Act with a lower trigger: employers with 75 or more full-time employees must give 60 days’ notice of a plant closing or mass layoff.14Illinois Department of Labor. Worker Adjustment and Retraining Notification Act (WARN) An employer with 80 full-time workers who slips under the federal threshold still has to comply with the state one.
If the Employer Won’t Pay
When an employer promised severance and doesn’t deliver, the IWPCA has real teeth. You can recover the unpaid amount plus damages of 5% of the underpayment for each month it stays unpaid.15Illinois General Assembly. 820 ILCS 115/14 – Penalties On a $20,000 severance, that’s $1,000 per month, and it keeps accruing. In court, you can also recover attorney fees and court costs.
You have two paths, and you cannot pursue both for the same claim: file with the Illinois Department of Labor or file a civil lawsuit.
The IDOL Route Has Narrowed
The Department of Labor’s wage claims division investigates IWPCA complaints and holds administrative hearings. However, beginning in late 2025, the Department implemented a triage pilot program under which it does not accept claims that are purely for disputed severance payments.16Illinois Department of Labor. Wage Payment and Collection Act – Fair Labor Standards Division As of 2026, the IDOL route may not be available for a straightforward severance dispute, and the Department directs those claimants to court.
Going to Court
Civil court is where most contested severance claims land now. You can recover the unpaid severance, the 5% monthly penalty, reasonable attorney fees, and court costs. The fee-shifting provision matters because it makes cases economically viable for lawyers even when the underlying amount alone wouldn’t justify litigation.
Before filing, a demand letter that cites the specific IWPCA penalty provisions often gets an employer’s attention, because the 5% monthly damages keep compounding while they stall. Many employment attorneys offer initial consultations at low or no cost for wage claims, and if you win, the employer may ultimately pay the legal costs.