What is a Severance Agreement?
A severance agreement is a legal contract between an employer and a departing employee that outlines the terms of separation, including any post-employment compensation or obligations. These agreements are often presented at the end of employment—whether due to layoffs, restructuring, or mutual separation—and typically include a release of legal claims in exchange for severance pay or other benefits. Understanding what severance agreements are and what they mean in practice is essential for employees navigating the end of their employment.
Severance pay is compensation that an employer may offer to an employee upon termination of employment. It typically comes in the form of a lump-sum payment or continued salary for a period of time after the employee’s departure. However, contrary to popular belief, severance pay is not legally required in most cases.
When employees hear the term severance pay, they often assume it’s a gesture of goodwill or a financial cushion to soften the blow of losing a job. While severance can certainly provide short-term relief for a terminated employee, the reality is that severance packages are often crafted to protect the employer more than the employee.
Why Severance Pay Exists: The Employer’s Perspective
From an employer’s point of view, severance is a strategic tool. Severance agreements usually come with strings attached, such as:
- A release of claims: The most common provision in a severance agreement is a waiver, in which the employee agrees not to pursue legal claims against the company. This could include claims for discrimination, retaliation, or wrongful termination.
- Non-disparagement clauses: Employers may include language that prohibits the departing employee from speaking negatively about the company, its leadership, or its employees.
- Confidentiality provisions: Severance agreements often require the employee to keep the terms of the agreement—and sometimes even the circumstances of their departure—confidential.
- Non-compete or non-solicitation clauses: In some cases, employers use severance agreements to reinforce or extend restrictions on competition or client solicitation.
In other words, severance pay is a legal transaction, not just a payout. The employer is buying peace of mind and legal protection.
What’s Typically Included in a Severance Agreement?
While severance agreements can vary depending on the company, the employee’s position, and the reasons for termination, a typical severance package may include:
- The severance payment itself (often based on tenure, such as one or two weeks’ pay per year of service)
- Continuation of health benefits for a limited period under COBRA or company policy
- A release of claims (you agree not to sue the company for issues related to your employment or termination)
- Confidentiality and non-disparagement clauses (you promise not to disclose certain information or speak negatively about the company)
- Return of company property
- Non-compete or non-solicitation obligations (you may be restricted from working for competitors or contacting former clients for a set period, if applicable)
What Should Employees and Employers Expect?
For Employees:
If you’re presented with a severance agreement, it’s crucial to understand that you are giving up certain legal rights. You are not required to sign right away, or at all, but be aware the offer may include a deadline and can be withdrawn at any time before it’s signed. You have the right to review the terms, and in many cases, you should consult with an employment attorney before signing.
For Employers:
Severance agreements are an opportunity to close the door on potential disputes before they begin. However, poorly drafted agreements can backfire, especially if they violate state or federal labor laws or fail to comply with the Older Workers Benefit Protection Act (OWBPA), which imposes strict requirements when releasing age discrimination claims. Employers should consult with an employment attorney to ensure severance agreements are carefully crafted and legally compliant.
Support on Both Sides of the Table
Severance pay can feel like a lifeline to a terminated employee and like a routine process to employers, but it’s important to understand its true purpose and implications. For employees, severance may present a valuable opportunity to negotiate. For employers, it often serves as a legal safeguard, particularly when tied to a release of claims. Whether you’re drafting, reviewing, or negotiating a severance agreement, knowing what’s really at stake is essential to protecting your rights and interests.
If you’ve been offered a severance agreement or are considering implementing one for your organization, our employment attorneys can help you evaluate the terms and make informed decisions. Contact our firm to schedule a consultation.