Understanding Severance Pay and Final Paycheck Laws in Minnesota

ARTICLE | June 03, 2025

Authored by Schlenner Wenner & Co

Severance pay is a form of compensation that employers provide to employees upon the termination of their employment. It's often based on the length of employment and agreed upon in an employment contract or employee handbook. Although there is no specific federal or state law requiring severance pay, it's considered a good practice and can improve employer-employee relations, strengthen retention and acquisition, and avoid legal disputes.

The Fair Labor Standards Act (FLSA) does not mandate severance pay. Instead, it's typically a matter of agreement between an employer and an employee or the employee's representative. It's important to note that offering severance pay can be beneficial during workforce transitions, providing financial support and stability for individuals until they find new employment.

In Minnesota, as per Sec. 465.72 MN Statutes, a governmental subdivision can pay severance to its employees and adopt rules for the payment of severance pay to an employee who leaves employment. The severance pay must be excluded from retirement deductions and from any calculations in retirement benefits. It should be paid in a manner agreeable to both the employee and employer over a period not exceeding five years from retirement or termination of employment. Severance pay provided for an employee leaving employment should not exceed an amount equivalent to one year of pay.

There are two common methods to calculate severance pay – the flat rate and the aggregate rate. The flat rate method involves paying a fixed amount, regardless of the length of service. This might be one or two weeks’ worth of salary, for example.

On the other hand, the aggregate method, which is more common, ties the severance amount to the length of service. For instance, the employee may be paid one week's salary for every year they have worked for the company.

Choosing between the flat rate and aggregate rate methods depends on the employer’s specific circumstances, values, and long-term objectives. However, it is always advisable to consult with an employment attorney to ensure compliance with all applicable laws and to maintain fairness in the process.

In conclusion, while severance pay is not mandatory under Minnesota law, it can play a significant role in supporting employees during job transitions and maintaining positive employer-employee relations.

Please refer to the following articles for more guidance, or contact our offices. We're here to help.

https://www.revenue.state.mn.us/supplemental-payments

https://www.revenue.state.mn.us/sites/default/files/2024-12/wh-inst-25_0.pdf