<PAGE>
                                                               EXHIBIT 10.12

                               SEVERANCE AGREEMENT

         AGREEMENT made as of the 22nd day of May, 2002 by and between Donald W.
Kappauf, residing at 1044 Tullo Farm Road, Bridgewater, New Jersey 08807
(hereinafter referred to as the "Executive") and TEAMSTAFF, INC., a New Jersey
corporation with principal offices located at 300 Atrium Drive, Somerset, New
Jersey 08873 (the "Company").

         WHEREAS, the Board of Directors (the "Board") of the Company recognizes
that the possibility of a termination without Cause (as defined below), and the
possibility of a Change in Control (as defined below), can create significant
distractions for its key management personnel because of the uncertainties
inherent in such situations; and

         WHEREAS, the Board has determined that it is essential and in the best
interest of the Company and its stockholders to retain the services of the
Executive, in general and particularly in the event of a threat or the
occurrence of a Change in Control, and to ensure his continued dedication and
efforts in such event without undue concern for his personal financial and
employment security; and

         WHEREAS, in order to induce the Executive to remain in the employ of
the Company, in general and particularly in the event of a threat or the
occurrence of a Change in Control, and to ensure the Executive agrees to a
restrictive covenant necessary to effectuate a transaction in the interests of
the Company's shareholders, the Company desires to enter into this Agreement
with the Executive to provide the Executive with certain benefits in the event
his employment is terminated without Cause or as a result of, or in connection
with, a Change in Control and to provide the Executive with certain other
benefits whether or not the Executive's employment is terminated.

         NOW, THEREFORE, it is agreed as follows:

         1. TERM OF AGREEMENT. This Agreement shall commence as of May 22, 2002,
and shall continue in effect until September 30, 2003; provided, however, that
commencing on September 30, 2003 and on each September 30th thereafter, the term
of this Agreement shall automatically be extended for one (1) year, unless
either the Company or the Executive shall have given written notice to the
other, at least one hundred eighty (180) days prior thereto, that the term of
this Agreement shall not be so extended; and provided, further, that
notwithstanding any such notice by the Company not to extend, the term of this
Agreement shall not expire prior to the expiration of twenty-four (24) months
after the occurrence of a Change in Control which occurs during the term of this
Agreement.

         2. DEFINITIONS

         2.1 ACCRUED COMPENSATION. "Accrued Compensation" shall mean an amount
which shall include all amounts earned or accrued through the "Termination Date"
(as defined below) but not paid as of the Termination Date, including (i) base
salary, (ii) reimbursement for business
<PAGE>
                                       2

expenses incurred by the Executive on behalf of the Company, pursuant to the
Company's expense reimbursement policy in effect at such time, (iii) car
allowance, (iv) discretionary time and vacation pay, (v) Gross Up Payments, and
(vi) bonuses and incentive compensation (other than the "Pro Rata Bonus" (as
defined below)).

         2.2 BASE AMOUNT. "Base Amount" shall mean the greater of the
Executive's annual base compensation (a) at the rate in effect on the
Termination Date or (b) at the highest rate in effect at any time during the
ninety (90) day period prior to the Termination Date or a Change in Control, and
shall include all amounts of his base compensation that are reported as income;
provided however, Base Amount shall not include the Bonus Amount or any other
payment contingent on performance.

         2.3 BONUS AMOUNT. "Bonus Amount" shall mean the greater of the most
recent annual bonus paid or payable to the Executive, or, if greater, the annual
bonus paid or payable for the full fiscal year ended prior to the fiscal year
during which a Termination Date or a Change in Control occurred.

         2.4 CAUSE. "Cause"shall mean if the Executive has been convicted of a
felony or the termination is evidenced by a resolution adopted in good faith by
two-thirds of the Board that the Executive (a) intentionally and continually
failed substantially to perform his reasonably assigned duties with the Company
(other than a failure resulting from the Executive's incapacity due to physical
or mental illness or from the assignment of duties that would constitute "Good
Reason"), which failure continued for a period of at least thirty (30) days
after a written notice of demand for substantial performance has been delivered
to the Executive, specifying the manner in which the Executive has failed
substantially to perform, or (b) intentionally and continually failed
substantially to follow or perform the lawful directives of the Chairman of the
Board of Directors (other than a failure resulting from the Executive's
incapacity due to physical or mental illness or from the establishment of
directives that would constitute "Good Reason"), which failure continued for a
period of at least thirty (30) days after written notice of demand for
compliance or substantial performance has been delivered to the Executive,
specifying the manner in which the Executive has failed substantially to perform
or comply. No act, nor failure to act, on the Executive's part, shall be
considered "intentional," unless the Executive has acted, or failed to act, with
a lack of good faith or with a lack of reasonable belief that the Executive's
action or failure to act was in the best interest of the Company.

         2.5 CHANGE IN CONTROL. For purposes of this Agreement, a "Change in
Control" shall mean any of the following events:

         (a)(i) An acquisition (other than directly from the Company) of any
voting securities of the Company (the "Voting Securities") by any "Person" (as
the term person is used for purposes of Section 13(d) or 14(d) of the Securities
Exchange Act of 1934, as amended (the "1934 Act")) immediately after which such
Person has "Beneficial Ownership" (within the meaning of Rule 13d-3 promulgated
under the 1934 Act) of twenty percent (20%) or more of the combined voting power
<PAGE>
                                       3

of the Company's then outstanding Voting Securities; provided, however, that in
determining whether a Change in Control has occurred, Voting Securities which
are acquired in a "Non-Control Acquisition" (as defined below) shall not
constitute an acquisition which would cause a Change in Control. A "Non-Control
Acquisition" shall mean an acquisition by (1) an employee benefit plan (or a
trust forming a part thereof) maintained by (x) the Company or (y) any
corporation or other Person of which a majority of its voting power or its
equity securities or equity interest is owned directly or indirectly by the
Company (a "Subsidiary"), or (2) the Company or any Subsidiary.

                  (ii) Notwithstanding the foregoing, a Change in Control shall
not be deemed to occur solely because a Person (the "Subject Person") gained
Beneficial Ownership of more than the permitted amount of the outstanding Voting
Securities as a result of the acquisition of Voting Securities by the Company
which, by reducing the number of Voting Securities outstanding, increases the
proportional number of shares Beneficially Owned by the Subject Person, provided
that if a Change in Control would occur (but for the operation of this sentence)
as a result of the acquisition of Voting Securities by the Company, and after
such share acquisition by the Company, the Subject Person becomes the Beneficial
Owner of any additional Voting Securities which increases the percentage of the
then outstanding Voting Securities Beneficially Owned by the Subject Person,
then a Change in Control shall occur.

         (b) The individuals who, as of the date this Agreement is approved by
the Board, are members of the Board (the "Incumbent Board"), cease for any
reason to constitute at least two-thirds of the Board; provided, however, that
if the election, or nomination for election by the Company's stockholders, of
any new director was approved by a vote of at least two-thirds of the Incumbent
Board, such new director shall, for purposes of this Agreement, be considered
and defined as a member of the Incumbent Board; and provided, further, that no
individual shall be considered a member of the Incumbent Board if such
individual initially assumed office as a result of either an actual or
threatened "Election Contest" (as described in Rule 14a-11 promulgated under the
1934 Act) or other actual or threatened solicitation of proxies or consents by
or on behalf of a Person other than the Board (a "Proxy Contest"), including by
reason of any agreement intended to avoid or settle any Election Contest or
Proxy Contest; or

         (c) Approval by stockholders of the Company of:

                  (1) A merger, consolidation or reorganization involving the
Company, unless

                           (i) the stockholders of the Company, immediately
                  before such merger, consolidation or reorganization, own,
                  directly or indirectly immediately following such merger,
                  consolidation or reorganization, at least eighty-five percent
                  (85%) of the combined voting power of the outstanding voting
                  securities of the corporation resulting from such merger or
                  consolidation or reorganization (the "Surviving Corporation")
                  in substantially the same proportion as their ownership of the
                  Voting Securities immediately before such merger,
                  consolidation or reorganization,
<PAGE>
                                       4

                           (ii) the individuals who were members of the
                  Incumbent Board immediately prior to the execution of the
                  agreement providing for such merger, consolidation or
                  reorganization constitute at least two-thirds of the members
                  of the board of directors of the Surviving Corporation, and

                           (iii) no Person (other than the Company, any
                  Subsidiary, any employee benefit plan (or any trust forming a
                  part thereof) maintained by the Company, the Surviving
                  Corporation or any Subsidiary) has Beneficial Ownership of
                  twenty percent (20%) or more of the combined voting power of
                  the Surviving Corporation's then outstanding voting
                  securities,

a transaction described in clauses (i) through (iii) shall herein be referred to
as a "Non-Control Transaction"; or

                  (2) An agreement for the sale or other disposition of all or
substantially all of the assets of the Company, or of a significant subsidiary,
to any Person, other than a transfer to a Subsidiary, in one transaction or a
series of related transactions. For purposes of this subparagraph 2.5 (c) (2),
"significant subsidiary " shall mean any subsidiary or business division of the
Company which accounts for more than 40% of the Company's income, revenue or
gross profits, and shall include Staff Rx.

                  (3) The stockholders of the Company approve any plan or
proposal for the liquidation or dissolution of the Company.

         (d) Notwithstanding anything contained in this Agreement to the
contrary, if the Executive's employment is terminated prior to a Change in
Control and the Executive reasonably demonstrates that such termination (i) was
at the request of a third party who has indicated an intention or taken steps
reasonably calculated to effect a Change in Control (a "Third Party") or (ii)
otherwise occurred in connection with, or in anticipation of, a Change in
Control, then for all purposes of this Agreement, the date of a Change in
Control with respect to the Executive shall mean the date immediately prior to
the date of such termination of the Executive's employment.

         2.6 COMPANY. For purposes of this Agreement, "Company" shall mean
TeamStaff, Inc. and shall include its "Successors and Assigns" (as defined
below).

         2.7 CONTINUATION BENEFITS. "Continuation Benefits" shall be the
continuation for a period of twenty-four (24) months from the Termination Date
(the "Continuation Period") at the Company's expense on behalf of the Executive
and his dependents and beneficiaries, of the life insurance, disability,
medical, dental and hospitalization benefits provided (x) to the Executive at
any time during the ninety (90) day period prior to the Change in Control or at
any time thereafter or (y) to other similarly situated executives who continue
in the employ of the Company during the Continuation Period. The coverage and
benefits (including deductibles and costs) provided during
<PAGE>
                                       5

the Continuation Period shall be no less favorable to the Executive, and his
dependents and beneficiaries, than the most favorable of such coverages and
benefits during any of the periods referred to in clauses (x) and (y) above. The
Company's obligation hereunder with respect to the foregoing benefits shall be
limited to the extent that if the Executive obtains any such benefits pursuant
to a subsequent employer's benefit plans, the Company may reduce the coverage of
any benefits it is required to provide the Executive hereunder as long as the
aggregate coverages and benefits of the combined benefit plans is no less
favorable to the Executive than the coverages and benefits required to be
provided hereunder. In the event any amounts attributable to these Continuation
Benefits are includible in the gross income of the Executive for federal income
tax purposes, the Company shall, in addition to the benefits set forth above,
pay the Executive a Gross Up Payment on the amount so includible in Executive's
gross income. Notwithstanding the foregoing, in lieu of providing the foregoing
benefits, the Company may pay the Executive an amount equal to the cost to the
Executive of obtaining comparable Continuation Benefits plus a Gross Up Payment
with respect to such amount. This definition of Continuation Benefits shall not
be interpreted so as to limit any benefits to which the Executive, his
dependents or beneficiaries may be entitled under any of the Company's employee
benefit plans, programs or practices following the Executive's termination of
employment, including, without limitation, retiree medical and life insurance
benefits.

         2.8  DISABILITY. A physical or mental infirmity which impairs the
Executive's ability to substantially perform his duties with the Company for a
period of one hundred eighty (180) consecutive days, and the Executive has not
returned to his full time employment prior to the Termination Date as stated in
the "Notice of Termination" (as defined below).

         2.9  EMPLOYMENT AGREEMENT. The Employment Agreement dated April 2,
2001, between the Company and the Executive, as same shall be modified, amended,
supplemented, renewed or replaced.

         2.10 GOOD REASON. (a) "Good Reason" shall mean:

                  (i)    the occurrence of a Change in Control;

                  (ii)   a change in the Executive's status, title, position or
                  responsibilities (including reporting responsibilities) which,
                  in the Executive's reasonable judgment, represents an adverse
                  change from his status, title, position or responsibilities;
                  the assignment to the Executive of any duties or
                  responsibilities which, in the Executive's reasonable
                  judgment, are inconsistent with his status, title, position or
                  responsibilities; or any removal of the Executive from or
                  failure to reappoint or reelect him to any of such offices or
                  positions, except in connection with the termination of his
                  employment for Disability, Cause, as a result of his death or
                  by the Executive other than for Good Reason;
<PAGE>
                                       6

                  (iii)  a reduction in the Executives base salary or any
                  failure to pay the Executive any compensation or benefits to
                  which he or she is entitled within five (5) days of the date
                  due;

                  (iv)   the Company's requiring the Executive to be based at
                  any place outside a 30-mile radius from Somerset, New Jersey,
                  except for reasonably required travel on the Company's
                  business which is not materially greater than such travel
                  generally required for such Executive;

                  (v)    the failure by the Company to continue in effect
                  (without reduction in benefit level, and/or reward
                  opportunities) any material compensation or employee benefit
                  plan in which the Executive was participating, unless such
                  plan is replaced with a plan that provides at least
                  substantially equivalent compensation or benefits to the
                  Executive;

                  (vi)   the insolvency or the filing (by any party, including
                  the Company) of a petition for bankruptcy of the Company,
                  which petition is not dismissed within sixty (60) days;

                  (vii)  any material breach by the Company of any provision of
                  this Agreement which is not cured within thirty (30) days
                  after notice to the Company by the Executive specifying the
                  breach;

                  (viii) any purported termination of the Executive's employment
                  for Cause by the Company which is inconsistent with the terms
                  of Section 2.4; or

                  (ix)   the failure of the Company to obtain an agreement,
                  satisfactory to the Executive, from any Successors and Assigns
                  to assume and agree to perform this Agreement, as contemplated
                  in Section 6(c) hereof; or

         (b) The Executive's right to terminate his employment pursuant to this
Section 2.10 shall not be affected by his incapacity due to physical or mental
illness.

         2.11 GROSS UP PAYMENT. With respect to any amount includible in the
Executive's gross income for federal income tax purposes (the "Taxable
Benefit"), an amount in cash equal to (i) the product of the Highest Marginal
Income Tax Rate and the Taxable Benefit, (ii) divided by one minus the Highest
Marginal Income Tax Rate. The Highest Marginal Income Tax Rate shall mean the
sum of the highest marginal combined local, state and federal personal income
tax rates (including tax rates associated with any state unemployment
compensation tax, any tax imposed under the Federal Insurance Contributions Act,
any excise tax or surtax, and any other tax on income based on the Company's
employment of the Executive), as in effect for the calendar year in which the
Taxable Benefit is includible in the gross income of the Executive for federal
income tax
<PAGE>
                                       7

purposes. The Gross Up Payment shall be paid within ten (10) days of the payment
or realization for federal income tax purposes of the Taxable Benefit.

         2.12 NOTICE OF TERMINATION. "Notice of Termination" shall mean a
written notice from the Company of termination of the Executive's employment
which indicates the specific termination provision in this Agreement relied
upon, if any, and which sets forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of the Executive's
employment under the provision so indicated.

         2.13 OUTPLACEMENT SERVICES. "Outplacement Services" shall mean all
reasonable costs and expenses associated with the engagement of an executive
outplacement firm to provide executive outplacement services to the Executive.

         2.14 PRO RATA BONUS. "Pro Rata Bonus" shall mean an amount equal to the
greater of (i) the Bonus Amount or (ii) an amount equal to the bonus objective
or target established by the Board for the Executive for the fiscal year in
which the termination occurs multiplied by a fraction the numerator of which is
the number of days in the fiscal year through the Termination Date and the
denominator of which is 365.

         2.15 RESTRICTIVE COVENANT. "Restrictive Covenant" shall mean a
reasonable restriction, not to exceed three years in duration, on the Executive
to engage in conduct competitive with a business, subsidiary or division of the
Company.

         2.16 SERP. The supplemental executive retirement plan including a split
dollar life insurance arrangement as currently established by the Company for
Employee.

         2.17 SEVERANCE PAYMENT. Severance Payment shall mean a lump sum cash
payment equal to twelve (12) months Base Amount.

         2.18 SUCCESS FEE. The Success Fee shall be a cash payment to Executive
of $2,000,000; provided, however, that in the event of any consolidation or
merger of the Company with or into another corporation (other than a merger
which does not constitute a Change of Control), or the conveyance of all or
substantially all of the assets of the Company to another corporation or entity,
and in which the value to the common shareholders of the Company is greater than
$9.00 per share (the "Common Stock Value"), the Success Fee shall be increased
by the sum of $50,000 for each $.10 per share that the Common Stock Value
exceeds $9.00. Common Stock Value shall mean the reasonable value of all
distributions to shareholders, including cash and the reasonable value of all
securities, divided by the number of common shares held by all security holders
actually receiving such distributions on a fully diluted basis.
<PAGE>
                                       8

         2.19 SUCCESSORS AND ASSIGNS. "Successors and Assigns" shall mean a
corporation or other entity acquiring all or substantially all the assets and
business of the Company (including this Agreement) whether by operation of law
or otherwise.

         2.20 TERMINATION DATE. "Termination Date" shall mean in the case of the
Executive's death, his date of death; in the case of Good Reason, the last day
of his employment; and in all other cases, the date specified in the Notice of
Termination; provided, however, that if the Executive's employment is terminated
by the Company for Cause or due to Disability, the date specified in the Notice
of Termination shall be at least 30 days from the date the Notice of Termination
is given to the Executive, and provided further that in the case of Disability,
the Executive shall not have returned to the full-time performance of his duties
during such period of at least 30 days.

         3. TERMINATION OF EMPLOYMENT.

         3.1 (a) If the Executive's employment with the Company shall be
terminated, in lieu of any further compensation for periods subsequent to the
Termination Date, the Company shall pay and/or provide to the Executive, the
following compensation and benefits:

                  (i)    if the Executive was terminated by the Company for
Cause, the Accrued Compensation; or

                  (ii)   if the Executive was terminated by the Company for
Disability, the Accrued Compensation, a Pro Rata Bonus, the Severance Payment
and the Continuation Benefits, less all disability insurance payments which
Employee may receive from insurance policies provided by the Company; or

                  (iii)  if termination was due to the Executive's death, the
Accrued Compensation and a Pro Rata Bonus; or

                  (iv)   if termination was by the Executive other than for Good
Reason, the Company shall pay to the Executive the Accrued Compensation.

         (b) If the Executive's employment with the Company shall be terminated
for any reason other than as specified in Section 3.1(a), in lieu of any further
compensation for periods subsequent to the Termination Date, the Company shall
pay and/or provide to the Executive each and all of the following compensation
and benefits:

                  (i)    all Accrued Compensation;

                  (ii)   a Pro-Rata Bonus;
<PAGE>
                                       9

                  (iii)  the Executive's Base Amount, for the period from the
                  Termination Date to the expiration of the term of the
                  Employment Agreement, including any renewal period which is
                  automatic on the Termination Date;

                  (iv)   a bonus payment equal to one-twelfth (1/12) of the
                  Bonus Amount times the number of months remaining from the
                  Termination Date to the expiration of the term of the
                  Employment Agreement, including any renewal period which is
                  automatic on the Termination Date;

                  (v)    The Severance Payment;

                  (vi)   The Continuation Benefits;

                  (vii)  Any Gross Up Payments to which the Executive would have
                  been entitled from the Termination Date to the expiration of
                  the term of the Employment Agreement, including any renewal
                  period which is automatic on the Termination Date; and

                  (viii) The Outplacement Services.

         (c) In the event the Executive's employment is terminated for any
reason other than as specified in Section 3.1(a), the conditions to the vesting
of any outstanding incentive awards (including restricted stock, stock options
and granted performance shares or units) granted to the Executive under any of
the Company's plans, or under any other incentive plan or arrangement, shall be
deemed void and all such incentive awards shall be immediately and fully vested
and exercisable.

         3.2 The amounts payable under this Section 3, shall be paid as follows:

         (a) Accrued Compensation shall be paid within five (5) business days
after the Executive's Termination Date (or earlier, if required by applicable
law).

         (b) The Pro-Rata Bonus shall be paid within thirty (30) days after the
Executive's Termination Date (or earlier, if required by applicable law).

         (c) If the Continuation Benefits are paid in cash, the payments shall
be made within thirty (30) days after the Executive's Termination Date (or
earlier, if required by applicable law).

         (d) The Severance Payment shall be paid within thirty (30) days after
the Executive's Termination Date (or earlier, if required by applicable law).

         (e) The amounts provided for in Sections 3.1(b)(iii) and (iv), shall be
paid within thirty (30) days after the Executive's Termination Date (or earlier,
if required by applicable law).
<PAGE>
                                       10

         3.2 The Executive shall not be required to mitigate the amount of any
payment provided for in this Agreement by seeking other employment or otherwise
and no such payment shall be offset or reduced by the amount of any compensation
or benefits provided to the Executive in any subsequent employment except as
provided in Section 2.7.

         3.3 Executive's employment and the Employment Agreement may be
terminated by the Company for Cause, Disability or death of the Executive, or by
the Executive for Good Reason, by service of a Notice of Termination in
accordance with this Agreement. For purposes of this Agreement, no such
purported termination shall be effective without service of a Notice of
Termination.

         4. CHANGE OF CONTROL.

         4.1 In the event of a Change of Control as described in Sections 2.5(a)
and (b), the Company shall provide notice to the Executive within ten (10) days
of the date the Company has notice of such Change of Control transaction. If the
Executive provides notice in writing to the Company, within ninety (90) days
after the Company's notice, that the Executive intends to terminate his
Employment Agreement for Good Reason effective thirty (30) days after the date
of such notice, in addition to the benefits provided elsewhere in this
Agreement, the Company shall pay and/or provide to the Executive, the following
compensation and benefits:

         (a) The Company shall pay the Executive as additional severance, in a
single payment, an amount in cash equal to three times the amount of the five
year average of the gross income of the Executive, as reported by the Company
for federal income tax purposes or, at the option of the Executive, credit such
amount against the exercise price of Executive's employee stock options; and

         (b) The conditions to the vesting of any outstanding incentive awards
(including restricted stock, stock options and granted performance shares or
units) granted to the Executive under any of the Company's plans, or under any
other incentive plan or arrangement, shall be deemed void and all such incentive
awards shall be immediately and fully vested and exercisable.

         4.2 Notwithstanding the provisions of Section 3 to the contrary, in the
event the Executive's employment is terminated for any reason within twenty-four
(24) months of a Change of Control, the amounts provided for in Sections 3.1(a)
and (b), including the Continuation Benefits, if the Continuation Benefits are
paid in cash, and the amounts payable under Section 4.1 shall be paid in a
single lump sum cash payment within five (5) business days after the Executive's
Termination Date (or earlier, if required by applicable law).

         4.3 In the event of a Change of Control as described in Section 2.5(c),
the Company shall provide thirty (30) days prior written notice to the Executive
of the anticipated closing date of such Change of Control transaction. If the
Executive provides notice in writing to the Company, at least five (5) days
prior to the closing date specified in the Company's notice, that the Executive
intends
<PAGE>
                                       11

to terminate his Employment Agreement for Good Reason effective on the closing
date, there shall be paid to the Executive in a single lump sum, cash payment
simultaneously with the closing of such Change of Control transaction, the
amounts provided for in Sections 3.1(a) and (b), including the Continuation
Benefits, if the Continuation Benefits are paid in cash. Upon the closing of
such Change of Control Transaction and the payments of the amounts due
Executive under this Agreement, Executive's employment, and the Employment
Agreement shall be deemed terminated for Good Reason.

         4.4 In addition to any of the payments or benefits under this
Agreement, in the event of any consolidation or merger of the Company with or
into another corporation (other than a merger which does not constitute a Change
of Control), or the conveyance of all or substantially all of the assets of the
Company to another corporation or entity, in a transaction or series of
transactions which are consummated prior to May 22, 2004, the Executive shall be
entitled to the Success Fee. The Success Fee shall be paid to the Executive in a
single lump sum, cash payment on the closing of the transaction to which the
Success Fee relates. Notwithstanding the foregoing, the Success Fee shall be
contingent on the agreement of the Executive to a Restrictive Covenant, if such
Restrictive Covenant is required as a condition to the closing of the
transaction on which the Success Fee is based.

         5. EXCISE TAX GROSS UP PAYMENT

         (a) The Company and the Executive acknowledge that the payments and
benefits provided under this Agreement, and benefits provided to, or for the
benefit of, the Executive under other Company plans and agreements (such
payments or benefits are collectively referred to as the "Payments") are subject
to the excise tax (the "Excise Tax") imposed under Section 4999 of the Internal
Revenue Code of 1986, as amended (the "Code"). In addition to the Payments, the
Company shall pay to the Executive within five (5) business days of Payment
subject to the Excise Tax, a gross up payment (the "Gross Up Payment") equal to
the amount which, after the deduction of any applicable Federal, State and Local
income taxes attributable to the Gross Up Payment, is equal to the Excise Tax
including the Excise Tax attributable to the Gross Up Payment.

         (b) The Company shall pay to the applicable government taxing
authorities, as Excise Tax withholding, the amount of the Excise Tax that the
Company has actually withheld from the Payment or Payments.

         (c) If it is established pursuant to a determination of a court, or an
Internal Revenue Service (the "IRS") decision, action or proceeding, that there
has been an underpayment of the Excise Tax (an "Underpayment"), the Company
shall pay to the Executive within thirty (30) days of such determination or
resolution, the amount which, after the deduction of any applicable federal,
state and local income taxes, including the Excise Tax, is equal to the
Underpayment, plus applicable interest and penalties until the date of payment.
<PAGE>
                                       12

         (d) The Company hereby agrees to indemnify, defend, and hold harmless
the Executive for any and all claims arising from or related to non-payment of
Excise Tax, including the amount of such tax and any and all costs, interest,
expenses, penalties associated with the non-payment of such tax to the fullest
extent permitted by law.

         6. SUCCESSORS: BINDING AGREEMENT

         (a) This Agreement shall be binding upon and shall inure to the benefit
of the Company, and its Successors and Assigns, and the Company shall require
any Successors and Assigns to expressly assume and agree to perform this
Agreement in the same manner and to the same extent that the Company would be
required to perform it if no such succession or assignment had taken place.

         (b) Neither this Agreement nor any right or interest hereunder shall be
assignable or transferable by the Executive, his beneficiaries or legal
representatives, except by will or by the laws of descent and distribution. This
Agreement shall inure to the benefit of and be enforceable by the Executive's
personal representative.

         (c) In the event that a Division (or part thereof) is sold, divested,
or otherwise disposed of by the Company subsequent to or in connection with a
Change in Control and the Executive accepts employment by the purchaser or
acquiror thereof, the Company shall require such purchaser or acquiror to
assume, and agree to perform, the Company's obligations under this Agreement, in
the same manner, and to the same extent, that the Company would be required to
perform if no such acquisition or purchase had taken place.

         7. PRIOR AGREEMENTS

         7.1 This Agreement supersedes and replaces the following sections of
the Employment Agreement: Article VIII, Article IX and Article XII.

         7.2 The Executive's entitlement to any other compensation or benefits
shall be determined in accordance with the Company's employee benefit plans and
other applicable programs, policies and practices then in effect, including the
SERP.

         7. FEES AND EXPENSES. The Company shall pay all reasonable legal fees
and related expenses (including the costs of arbitrators, experts, evidence and
counsel) incurred by, the Executive as they become due as a result of (a) the
Executive's termination of employment (including all such fees and expenses, if
any, incurred in contesting or disputing any such termination of employment) in
violation of this Agreement, (b) the Executive seeking to obtain or enforce any
right or benefit provided by this Agreement.

         8. ARBITRATION. Any dispute, controversy or claim arising out of or
relating to this Agreement, or the breach, termination or invalidity hereof,
(collectively, a "Claim") shall be settled
<PAGE>
                                       13

by arbitration pursuant to the rules of the American Arbitration Association.
Any such arbitration shall be conducted by one arbitrator, with experience in
the matters covered by this Agreement, mutually acceptable to the parties. If
the parties are unable to agree on the arbitrator within thirty (30) days of one
party giving the other party written notice of intent to arbitrate a Claim, the
American Arbitration Association shall appoint an arbitrator with such
qualifications to conduct such arbitration. The decision of the arbitrator in
any such arbitration shall be conclusive and binding on the parties. Any such
arbitration shall be conducted in the Somerset, New Jersey area.

         9. NOTICE. For the purposes of this Agreement, notices and all other
communications provided for in the Agreement (including the Notice of
Termination) shall be in writing and shall be deemed to have been duly given
when personally delivered or sent by certified mail, return receipt requested,
postage prepaid, addressed to the respective addresses as set forth below or to
any such other address as the party to receive the notice shall advise by due
notice given in accordance with this paragraph . All notices and communications
shall be deemed to have been received on the date of delivery thereof or on the
third business day after the mailing thereof, except that notice of change of
address shall be effective only upon receipt.

         The current addresses of the parties are as follows:

                  IF TO THE COMPANY:     TeamStaff, Inc.
                                         300 Atrium Drive
                                         Somerset, NJ 08873

                  IF TO THE EMPLOYEE:    Donald W. Kappauf
                                         1044 Tullo Farm Road
                                         Bridgewater, NJ 08807

         10. NON-EXCLUSIVITY OF RIGHTS. Nothing in this Agreement shall prevent
or limit the Executive's continuing or future participation in any benefit,
bonus, incentive or other plan or program provided by the Company (except for
any severance or termination policies, plans, programs or practices) and for
which the Executive may qualify, nor shall anything herein limit or reduce such
rights as the Executive may have under any other agreements with the Company
(except for any severance or termination agreement). Amounts which are vested
benefits or which the Executive is otherwise entitled to receive under any plan
or program of the Company shall be payable in accordance with such plan or
program, except as explicitly modified by this Agreement.

         11. SETTLEMENT OF CLAIMS. The Company's obligation to make the payments
provided for in this Agreement and otherwise to perform its obligations
hereunder shall not be affected by any circumstances, including, without
limitation, any set-off, counterclaim, recoupment, defense or other right which
the Company may have against the Executive or others.
<PAGE>
                                       14

         12. NO EMPLOYMENT RIGHT. Except as provided in the Employment
Agreement, this Agreement does not constitute, and shall not be construed to
provide, any assurance of continuing employment.

         13. MISCELLANEOUS. No provision of this Agreement may be modified,
waived or discharged unless such waiver, modification or discharge is agreed to
in writing, specifying such modification, waiver or discharge, and signed by the
Executive and the Company. No waiver by either party hereto at any time of any
breach by the other party hereto of, or compliance with, any condition or
provision of this Agreement to be performed by such other party shall be deemed
a waiver of similar or dissimilar provisions or conditions at the same or at any
prior or subsequent time.

         14. GOVERNING LAW. This Agreement shall be governed by and construed
and enforced in accordance with the laws of the State of New Jersey without
giving effect to the conflict of laws principles thereof. Any action brought by
any party to this Agreement to enforce any decision of an arbitrator made as
contemplated in Section 8 above shall be brought and maintained in a court of
competent jurisdiction in the State of New Jersey.

         15. SEVERABILITY. The provisions of this Agreement shall be deemed
severable, and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.

         16. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
between the parties hereto and supersedes all prior agreements, if any,
understandings and arrangements, oral or written, between the parties hereto
with respect to the subject matter hereof.

         IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed by its duly authorized officer and the Executive has executed this
Agreement as of the day and year first above written.

TEAMSTAFF, INC.

By:____________________________
Name:__________________________
Title:_________________________



Executive:_____________________