Severance pay is allowable and should be determined according to established organizational policies applied without regard to the source of funds. It should be reasonable and should take into consideration the practice of similar types of organizations. Grantees will find this information useful when providing severance pay to their employees.

Severance pay is allowable only to the extent that such payments are required by law, are included in an employer-employee agreement, are part of an established policy effectively constituting an implied agreement on the part of the organization, or meet the circumstances of the particular employment.

The amount of severance pay to be provided should be determined according to established organizational policy consistently applied regardless of the source of funds and should be reasonable, taking into consideration the practice of similar types of organizations and the extent of the organization’s dependence on Federal funds. The applicable cost principles should be consulted regarding the different treatment of severance pay in regular and mass termination situations. 

Last Updated: June 4, 2024