Colorado Severance Pay Laws: What Employers and Employees Need to Know
Colorado does not require employers to provide severance pay. However, once a severance package is offered, the employer is legally prohibited from rescinding the offer unless and until (1) it is rejected or a counteroffer is made, or (2) the consideration period for the offer expires. This is true whether the offer appears in a contract, company policy, or a severance agreement. The employer may not rescind the offer during the period the employee is provided to consider the severance offer, even if no agreement has yet been signed by the former employee. Knowing how to craft or respond to a severance offer determines whether a departure goes smoothly or ends in a dispute. Baker Law Group, PLLC assists employers and employees across Colorado with severance reviews, negotiations, and enforcement.
What Is Severance Pay in Colorado?
Severance pay is compensation offered when employment ends. It may take the form of a lump-sum payment, continued salary, or extended health benefits. Often, severance packages combine more than one of these options.
In Colorado, severance pay is not mandated by state law. Whether an employee receives severance depends on whether the employer and employee have an agreement to provide severance at the time of the employee’s separation. Such an agreement may be made in advance of separation, such as through an employment contract or company policy. It can be made through terms negotiated at the time employment ends. Employers often offer severance to maintain goodwill or reduce litigation risk. In exchange, employees are frequently asked to sign an agreement waiving their right to pursue certain legal claims against the employer.
Is Severance Pay Required in Colorado?
No. Colorado has no statute requiring employers to provide severance pay. The obligation arises only when an employer promises it in writing. That promise may appear in an employment contract, a company policy, or a collective bargaining agreement. It may also arise from a separate severance agreement signed at the time of termination.
Once a severance obligation exists in writing and is agreed to by both parties, Colorado law treats it as a binding contract. An employer who offers severance and then fails to deliver it can face a breach of contract claim. For that reason, both parties benefit from clearly defined written terms before signing anything.
What Should a Colorado Severance Agreement Include?
A severance agreement is a legal contract. Its terms define what benefits each party receives in exchange for the rights each side gives up. A properly drafted agreement typically covers the payment amount and timeline. It also may address the release of specific legal claims, confidentiality obligations, and non-disparagement language. Restrictions on the employee’s ability to seek future employment with the employer may be included as well.
Each provision can affect an employee’s legal options, job prospects, and finances. For that reason, employees should consult a Colorado employment attorney before signing. Terms that appear standard may contain restrictions that are difficult to reverse.
Legal Requirements for Colorado Severance Agreements
The specific terms of a severance package are generally negotiable. However, federal and state law impose requirements that limit what agreements can include.
Employees aged 40 or older receive special protections under the federal Older Workers Benefit Protection Act, a nationwide law that applies regardless of which state the employment relationship is based in. Anyone waiving their right to pursue claims under the Age Discrimination in Employment Act against the employer must receive at least 21 days to review the agreement before signing and consult with an attorney, but they are not required to use the full 21-day consideration period prior to signing. After signing, that employee must be provided an additional seven days in which they are permitted to revoke their waiver. Neither party may waive or shorten the seven-day revocation period.
Colorado employers must also ensure that non-compete language complies with Colorado’s non-compete statute C.R.S. § 8-2-113. Recent changes to Colorado law significantly limit these restrictions. Most restrictive covenants are unenforceable unless they meet strict criteria tied to job duties and compensation level. However, including an overly broad non-compete clause does not just make it unenforceable. It can also expose the employer to legal and financial liability.
Severance agreements in Colorado must also comply with Colorado’s Protecting Opportunities and Workers’ Rights Act. The POWR Act sets requirements for any agreement that limits the employee’s ability to disclose or discuss any alleged discriminatory or unfair employment practice, such as agreements that contain confidentiality or non-disparagement clauses. Among other requirements, the POWR Act states that any provision limiting disclosure must apply equally to all parties to the agreement, that certain carveouts must be provided to enable the employee to discuss information with specific individuals and groups, and that the employer must abide by the non-disparagement provision or it will render the provision unenforceable against the employee. Employers who attempt to enforce agreements that are not compliant with POWR may face legal and financial penalties.
When Is Severance Pay Due in Colorado?
Colorado does not set a specific statutory deadline for severance pay unless the agreement specifies one. However, Colorado’s wage payment laws apply directly to severance. Employers must pay any contractually owed compensation by the next regularly scheduled payday after termination. The specific terms of the agreement may require an earlier payment date.
If the parties agree to a lump-sum severance, the employer should pay it on the timeline stated in the agreement. Delays or failures to pay can trigger a wage claim under the Colorado Wage Claim Act. In certain circumstances, employees can recover the amount owed plus additional penalties.
Does Severance Pay Affect Unemployment in Colorado?
In Colorado, certain severance payments may delay the start of unemployment benefits, but accepting a severance package does not necessarily disqualify you from collecting unemployment. Whether a payment affects unemployment benefits depends on whether it qualifies as a “severance allowance” under Colorado law. Payments made to induce an employee to waive rights or claims against the employer are not considered severance allowances for this purpose.
Colorado law requires unemployment benefits to be postponed when a claimant receives a qualifying severance allowance. As a result, severance can be postponed when a claimant becomes eligible for unemployment checks.
For example, a qualifying lump-sum severance equal to four weeks of the employee’s usual weekly wage may postpone unemployment benefits for four weeks. Once that period ends, eligibility resumes if all other requirements are met.
Employees should file their unemployment claim at the time of separation, not after severance ends. The CDLE processes claims while severance is still being paid. Severance delays when payments begin, but filing early prevents further delays once the severance period closes.
Colorado law does not allow severance agreements to block unemployment claims. Any clause attempting to prevent an employee from filing is unenforceable. The same applies to clauses requiring repayment of benefits received. Employees uncertain about their specific situation should contact the Colorado Department of Labor and Employment before filing. Consulting a Colorado employment attorney is also advisable.
How the Delay Works
The delay mechanism works by treating a qualifying severance allowance as a postponement period under Colorado law. C.R.S. § 8-73-110(1)(a) calculates the postponement by dividing the total severance allowance by the individual’s usual weekly wage to determine how many weeks of benefits are postponed.
The delay period typically begins with the calendar week in which the severance allowance is received. This is why filing immediately at separation rather than waiting until the severance period ends is important. Filing early locks in your place in the queue and ensures benefits begin as soon as the delay period concludes.
How Payout Types Affect Benefits
The structure of the severance payment affects how the delay calculation applies.
A lump-sum severance payment is the most straightforward. C.R.S. § 8-73-110(1)(a) divides the total qualifying amount by the weekly wage equivalent to determine the postponement period. Once that period ends, unemployment eligibility resumes.
Salary continuation severance, where the employer continues making payments for a defined period after separation, may also delay unemployment benefits. How the payments affect benefits depends on the structure and timing of the payments.
Extended benefits only, such as continued health insurance coverage without additional cash payments, are generally not treated as a severance allowance and typically do not delay unemployment eligibility the way cash severance does. However, the specifics depend on how the benefit extension is structured in the agreement.
If your severance package combines multiple types, such as a lump-sum payment plus several months of insurance continuation, only the qualifying cash components typically affect the unemployment delay calculation. Confirming the treatment of your specific package with the CDLE or an employment attorney before filing is advisable.
Can You Receive Severance Pay If You Were Fired for Cause?
Yes. Employers and employees are free to form severance agreements regardless of the reason for termination or separation. Whether a for-cause termination triggers severance generally depends on the terms of any applicable severance agreement, employment contract, or company policy.
Some employment contracts exclude severance for employees terminated for cause. Others are silent on the distinction. Consider a company policy that provides severance but says nothing about for-cause terminations. In that case, a terminated employee may still have a contractual right to severance. Anyone in this situation should review their employment agreement carefully. Consulting a Colorado employment attorney before drawing conclusions is strongly advisable.
Your Legal Rights as an Employee When Offered Severance
Colorado employees have specific legal rights when a severance offer is made. Understanding these rights before signing protects you from unknowingly giving up more than you intended.
The Right to Review Time
If you are 40 years of age or older and the agreement asks you to waive age discrimination claims, federal law generally requires that you receive at least 21 days to review the agreement before signing. If the waiver is offered in connection with an exit incentive or other employment termination program offered to a group or class of employees, the review period is at least 45 days. You are not required to use the full review period, but the employer cannot pressure you to sign before it expires. After signing, you have seven days to revoke the waiver. This revocation period cannot be shortened or waived by either party.
If you are under 40, no federally mandated review period applies, though you retain the right to consult an attorney before signing. You should take that time regardless of the deadline the employer sets.
The Right to Negotiate
A severance offer is not a take-it-or-leave-it proposition in most cases. When no fixed contractual severance obligation exists, the terms are generally negotiable. Employees can negotiate the payment amount, the length of salary continuation, the scope of the claims release, the duration of non-disparagement obligations, and the timing of payment. Employers often offer a starting position that has room to move. An employment attorney can identify which terms are worth pushing back on and which restrictions may be unenforceable under Colorado law.
The Right to Unemployment Benefits
Colorado law does not allow a severance agreement to block your ability to file for unemployment benefits. Any provision in a severance agreement that attempts to prevent you from filing for unemployment or requires you to repay unemployment benefits you receive is unenforceable. You retain the right to file at separation regardless of what the severance agreement says.
The Right to Disclose Workplace Violations
Under Colorado’s POWR Act, confidentiality and non-disparagement clauses in severance agreements cannot prevent you from disclosing alleged discriminatory or unfair employment practices to certain individuals and agencies. Any clause that attempts to impose a blanket prohibition on disclosure broader than what the POWR Act permits is unenforceable against you, and the employer who tries to enforce it faces additional liability.
Important Steps to Take After Receiving a Severance Offer
The steps you take between receiving a severance offer and signing the agreement significantly affect your financial and legal position. Rushing the process is one of the most common mistakes employees make.
Step 1: Do not sign immediately. Take the full review time you are given, especially if you are 40 or older and the 21-day OWBPA period applies. If the waiver is offered as part of a group or class termination program, you may have 45 days. Even if you are younger, there is no legal requirement to sign on the spot. An employer who pressures you to sign before you have read and understood every provision is creating a situation that warrants extra caution.
Step 2: Read every provision carefully, not just the payment terms. The payment amount is only one part of the agreement. The claims release, non-compete restrictions, non-disparagement obligations, confidentiality scope, and any clawback provisions can have lasting effects on your career and legal options. Provisions that appear routine may restrict your ability to work for competitors, discuss your experience, or pursue legal claims you may not yet know you have.
Step 3: File for unemployment at the time of separation. Do not wait until your severance period ends to file. Colorado allows you to file while severance is being paid. Filing early locks in your claim start date and ensures benefits begin as soon as the delay period calculated from your severance concludes. Waiting to file can extend the gap before benefits arrive.
Step 4: Consult an employment attorney before signing. An attorney can identify provisions that may be unenforceable under Colorado law, terms that are worth negotiating, and claims you may be releasing without realizing it. In many cases, the attorney fee for a severance review is recovered through improved terms or protected rights. Consulting an attorney does not obligate you to reject the offer. It gives you the information you need to make an informed decision.
Step 5: Respond in writing if you have questions or want to negotiate. Keep a written record of all communications with your employer about the severance offer. If you propose changes, send them in writing. If the employer makes verbal promises about terms that are not in the agreement, ask for those to be incorporated into the written document before you sign. Verbal promises may be difficult to enforce and may also conflict with the terms of the written agreement.
Have More Questions? We Have Answers
For employees aged 40 or older, the Older Workers Benefit Protection Act requires a seven-day revocation period after signing. This applies to any agreement waiving Age Discrimination in Employment Act claims. During those seven days, the employee can withdraw without penalty. For individual waivers, the 21-day review period before signing and the seven-day revocation period after signing are both mandatory. For waivers offered in connection with a group or class termination program, the review period extends to 45 days, and the seven-day revocation period still applies.
For employees under the age of 40, no revocation period is required, and one is not generally provided. Under those circumstances, the agreement becomes binding the moment it is signed.
Yes. Severance terms are generally negotiable when no fixed contractual obligation already exists. Employees can negotiate the payment amount, length of salary continuation, scope of any claim release, and timing of payment. Employers are not required to negotiate, but many do to achieve a clean separation. An employment attorney can identify which terms are worth pushing back on and which restrictions may be unenforceable under Colorado law.
If an employer offers severance in writing and then fails to pay it, the employee may have a breach of contract claim. Depending on how the agreement is structured, the employee may also file a wage claim under the Colorado Wage Claim Act. That law allows recovery of unpaid amounts plus statutory penalties. The appropriate remedy depends on the specific facts and agreement language. Consulting a Colorado employment lawyer promptly is advisable.
Generally no. Unless the employment contract or company policy specifically provides for severance upon voluntary resignation, a resigning employee has no legal right to it. Most severance packages cover involuntary separations such as layoffs or restructuring. However, an employee who resigns may still be able to negotiate a separation package depending on the circumstances. Best practice is to consult with an employment attorney to determine whether it is possible to negotiate a severance package under the circumstances that led to your resignation.
Yes. Severance pay is treated as ordinary income and is subject to federal and Colorado state income taxes, as well as Social Security and Medicare taxes. Employers must withhold applicable taxes from severance payments in the same way they would from regular wages. Employees receiving a large lump-sum severance should note that withholding may not cover their full tax liability for the year.
Talk to a Colorado Employment Lawyer Today
Colorado severance pay laws leave significant room for interpretation. The terms of any given agreement determine what rights and obligations apply. Whether you are structuring a departure or reviewing an offer, the stakes are real.
Baker Law Group, PLLC assists clients across Colorado with severance agreement review, negotiation, and enforcement. Contact Baker Law Group, PLLC today to speak with a Denver employment lawyer. Reaching out early, before signing or drafting, can prevent disputes before they start.