In this guide
What Is a Severance Agreement?
A severance agreement is a legally binding contract between an employer and an employee that outlines the terms of the employee's departure from the company. In exchange for signing, you typically receive a severance package, which may include a lump-sum payment, continued benefits, or other compensation.
These agreements are common in layoffs, reductions in force, or when an employee is terminated without cause. They often include a release of claims, meaning you agree not to sue the employer for wrongful termination, discrimination, or other legal claims.
Understanding the components of a severance agreement is crucial because once you sign, you usually cannot change the terms. You should review it carefully and consider consulting an employment attorney, especially if you have concerns about your rights.
- Payment amount and schedule (lump sum vs. installments)
- Continuation of health insurance (COBRA) or other benefits
- Outplacement services or career counseling
- Confidentiality and non-disparagement clauses
- Release of claims and non-compete restrictions
Key Clauses to Watch For
Severance agreements are filled with legal jargon, but certain clauses have significant implications. The release of claims is the most important: it waives your right to sue under federal and state laws, including Title VII, ADEA, and state anti-discrimination laws. Ensure the release is mutual if you have potential claims against the company.
Confidentiality clauses prevent you from disclosing the terms of the agreement or proprietary company information. Non-disparagement clauses prohibit you from making negative statements about the employer. These are standard but can be broad, so make sure they don't prevent you from discussing your experience with future employers or cooperating with investigations.
Non-compete and non-solicitation clauses restrict your ability to work for competitors or poach clients and employees. These are often enforceable if reasonable in scope and duration. If you're in a state like California where non-competes are void, they may be unenforceable. Always check your state's laws.
- Release of all claims (including unknown claims)
- Confidentiality of agreement terms
- Non-disparagement (no negative comments)
- Non-compete and non-solicitation restrictions
- Return of company property and cooperation clauses
Your Legal Rights and Protections
You have certain rights when it comes to severance agreements. The Older Workers Benefit Protection Act (OWBPA) requires that employees aged 40 and older be given at least 21 days to consider the agreement and 7 days to revoke after signing. This is federal law, but state rules vary, and some states require even more time.
You also have the right to consult an attorney before signing. Many employees fear that asking for more time will anger the employer, but it's your right. Employers often expect you to negotiate, and they may provide a reasonable extension if you request it.
If you believe you were discriminated against or retaliated against, signing a severance agreement may waive your right to pursue those claims. However, you cannot waive claims that arise after signing, and certain claims (like unemployment benefits) cannot be waived. Always know what you're giving up.
- Right to take time to consider (21 days for age 40+ under federal law)
- Right to revoke within 7 days after signing (for OWBPA)
- Right to consult an attorney
- Right to negotiate for better terms
- Cannot waive claims that arise after signing
How to Negotiate Better Severance
Negotiating a severance package can feel daunting, but it's common and often successful. Start by evaluating the offer: is it fair compared to industry standards? Research typical severance packages for your role and tenure. Many employers offer one to two weeks of pay per year of service, but this varies.
Identify what you want: more money, extended benefits, or better references. Be professional and courteous in your request. You can say, 'I appreciate the offer, but given my years of service and the current job market, I'd like to request an additional month of severance.'
Consider non-monetary benefits: ask for outplacement services, extended health insurance, or help with job search. Employers may be more flexible on these than on cash. Also, ask for a deadline extension to review the agreement—this gives you time to negotiate without pressure.
- Research typical severance in your industry
- Prioritize what matters: cash, benefits, or references
- Request a written agreement with clear terms
- Ask for a reasonable deadline extension
- Get any verbal promises in writing
Common Pitfalls and Mistakes
One major mistake is signing a severance agreement without understanding the tax implications. Severance pay is taxable income, and if you receive a lump sum, it could push you into a higher tax bracket. You can request that the payment be structured to minimize taxes, such as spreading it over two tax years.
Another pitfall is failing to consider the impact on unemployment benefits. In some states, severance pay can affect your eligibility or the timing of benefits. Check with your state's unemployment office to understand the rules.
Don't sign under pressure. If your employer gives you a short deadline, you can ask for more time. Also, avoid signing if you have an active discrimination claim or if the agreement contains an overly broad non-compete that could harm your future employment. Consult an attorney before signing.
- Overlooking tax consequences
- Not understanding how severance affects unemployment benefits
- Signing under time pressure
- Ignoring non-compete restrictions
- Failing to negotiate because you fear losing the offer
When to Consult an Attorney
While you can review a severance agreement yourself, certain situations warrant legal advice. If you're over 40, have a potential discrimination claim, or are being asked to sign a broad release, an attorney can protect your rights. They can also help you negotiate better terms.
Attorneys who specialize in employment law often offer free initial consultations. They can review the agreement for enforceability issues, such as overly broad non-competes or illegal clauses. The cost of an attorney is often worth the benefit of a better severance package.
If you're in a union, your union representative may also provide guidance. Remember, you don't have to sign immediately. Take time to get advice, and don't let the employer rush you. Your financial future depends on making an informed decision.
- You are over 40 and subject to OWBPA protections
- You suspect discrimination or retaliation
- The agreement contains a non-compete clause
- You have questions about tax or unemployment consequences
- You want to negotiate a better package