Severance Agreements: What They Include and Whether to Sign One

The Transaction Behind the Departure

When a company offers severance, it is not charity. The employer is purchasing something of value: the employee's legal claims. A severance agreement is a contract in which the departing employee receives compensation — typically a lump sum or continued salary — in exchange for releasing the employer from potential lawsuits. Both sides get something. The employee gets money and sometimes continued benefits. The employer gets finality.

Severance is not legally required under federal law. The Fair Labor Standards Act does not mandate it. Most states have no severance requirement either. Employers offer it voluntarily — or to manage legal risk when a layoff or termination could expose them to discrimination or retaliation claims.

Standard Provisions in a Severance Agreement

Severance agreements vary in length and complexity, but most contain a consistent set of clauses:

The Release of Claims

The core provision. The employee agrees to release all known and unknown claims against the employer arising from the employment relationship. The release typically covers federal discrimination claims (Title VII, ADA, ADEA), state civil rights claims, breach of contract claims, and any other employment-related causes of action.

"Unknown claims" language is particularly significant in some states. California requires specific language under Civil Code Section 1542 when unknown claims are being released. Without that language, unknown claims in California may survive.

Severance Pay and Benefits

Agreements specify the amount of severance pay, the payment schedule (lump sum or installments), and whether benefits such as health insurance continuation, stock option acceleration, or outplacement services are included. COBRA continuation rights are mandatory under federal law regardless of the agreement.

Non-Disparagement and Confidentiality

Most agreements require the departing employee not to make negative statements about the employer and to keep the agreement's terms confidential. Some agreements impose mutual non-disparagement obligations — prohibiting the employer from making disparaging references as well.

Note: The National Labor Relations Board has issued guidance indicating that overly broad non-disparagement clauses may violate Section 7 of the National Labor Relations Act by restricting protected concerted activity.

Non-Compete and Non-Solicitation Clauses

Some severance agreements introduce or reaffirm post-employment restrictions. State law governs enforceability — non-competes are unenforceable in California, for instance, but may be enforceable in other states if reasonable in scope and duration.

The OWBPA and ADEA Waiver Requirements

The Older Workers Benefit Protection Act of 1990 (OWBPA) amended the ADEA to set strict requirements for waivers of age discrimination claims. A waiver of ADEA claims is not valid unless:

• It is written in plain language and specifically references the ADEA
• It does not waive rights arising after the date the waiver is signed
• The employee received something of value beyond what they were already entitled to
• The employee was given at least 21 days to consider the agreement (45 days for group layoffs)
• The employee has 7 days after signing to revoke the agreement

These requirements cannot be waived by the employee or accelerated by the employer. A release that does not comply with OWBPA is unenforceable as to ADEA claims — even if the employee signed it voluntarily.

Group Layoff Disclosure Requirements

When an employer lays off a group of workers and offers severance with ADEA waivers, OWBPA requires disclosure of:

• The decisional unit considered for the layoff
• The eligibility factors for the program
• The job titles and ages of all employees selected and not selected for the program

This disclosure must be given to each employee along with 45 days to consider the agreement. The purpose is to allow older workers to detect whether age influenced the selection.

Evaluating Whether to Sign

What Cannot Be Released

Some rights cannot be waived through a severance agreement, regardless of what the document says:

• The right to file a charge with the EEOC (though the right to monetary recovery from the claim can be waived)
• Workers' compensation claims (in most states)
• Claims for vested pension or 401(k) benefits under ERISA
• Claims arising after the agreement's effective date
• Unemployment insurance eligibility (though agreements sometimes include false statements employers will not contest it)

Negotiating a Severance Agreement

Severance terms are often negotiable, particularly when legal exposure exists. Employees frequently secure:

• More weeks of pay than initially offered
• Extended health insurance coverage beyond COBRA
• Removal of or narrowing of non-compete clauses
• Neutral reference agreements specifying exactly what will be said
• Accelerated vesting of equity awards
• Outplacement services

Consulting an employment attorney during the consideration period — before signing — is advisable when significant claims may exist, when the severance amount is substantial, or when non-compete or other restrictive covenant provisions could affect future employment. The 21 or 45 day consideration period exists precisely for this purpose.

This article is for informational purposes only and does not constitute legal advice.