Severance Agreements: What to Know Before You Sign

When you're laid off, you may be handed a severance agreement and asked to sign it—sometimes with pressure to do so quickly. Before you sign anything, understand that this is a legal contract that trades your rights for money. This guide explains what's typically in severance agreements, what you're giving up, and when you should push back or consult an attorney.

What Is a Severance Agreement?

A severance agreement is a contract between you and your employer. In exchange for severance pay (and sometimes other benefits), you agree to certain terms—typically including giving up your right to sue the company.

Key points:

• Severance is NOT required by law (in most cases)
• It's a negotiated benefit, even if it feels non-negotiable
• You're trading legal rights for money
• The agreement is designed to protect the company

Common Components of Severance Agreements

Understanding what's typically included helps you know what to look for.

Severance Pay

The primary compensation for signing the agreement.

Common formulas:

• One to two weeks pay per year of service
• A flat amount regardless of tenure
• Continued salary for a specified period
• Some combination of lump sum and continued pay

How it's paid:

• Lump sum payment (all at once)
• Salary continuation (regular paychecks continue)
• Combination of both

Release of Claims

The most important part from the employer's perspective—you agree not to sue them.

Claims typically released:

• Wrongful termination
• Discrimination (age, race, sex, disability, etc.)
• Harassment
• Retaliation
• Breach of contract
• WARN Act violations (60-day notice requirement)
• Wage and hour violations
• Any other employment-related claims

What you're giving up: By signing a release, you forever give up the right to pursue legal claims against your employer for anything that occurred during your employment, even things you don't yet know about.

COBRA and Health Benefits

The agreement may address health insurance continuation.

Common provisions:

• Employer pays COBRA premiums for a period
• Lump sum payment for health insurance
• Extended coverage through their plan
• Clarification of when benefits end

Confidentiality Provisions

Most agreements require you to keep the terms confidential.

What's typically covered:

• The existence of the agreement
• The amount of severance
• The terms and conditions
• Sometimes, the circumstances of your departure

Potential issues:

• Overly broad confidentiality can prevent you from discussing with family, financial advisors, or future employers
• Some provisions may conflict with your right to discuss workplace conditions

Non-Disparagement Clauses

You agree not to say negative things about the company.

Typical language: "Employee agrees not to make any statements that disparage, defame, or damage the reputation of the Company, its officers, directors, or employees."

What to watch for:

• Is it mutual? (Does the company also agree not to disparage you?)
• Is it overly broad?
• Does it prevent you from giving honest references?

Non-Compete and Non-Solicitation

Some agreements include restrictions on future work.

Non-compete: Prohibits working for competitors for a specified period and geographic area.

Non-solicitation: Prohibits recruiting former colleagues or contacting former clients.

Important note: Non-competes in severance may be unenforceable in some states (like California) or may be subject to new FTC rules. Consult an attorney.

Reference and Rehire Provisions

The agreement may address what the company will say about you.

Common provisions:

• Company will provide neutral reference (dates and title only)
• You agree not to apply for rehire
• Company will not contest unemployment benefits

Intellectual Property

Clarifies ownership of work you did during employment.

Common provisions:

• Confirmation that company owns work product
• Your agreement to help with patents or copyrights
• Return of company materials and information

Cooperation Clause

You agree to cooperate with the company on matters related to your employment.

What this might require:

• Providing information for litigation
• Testifying if needed
• Being available for questions about your work
• Helping with transition

What to Look For Before Signing

Review your agreement carefully for these potential issues.

Overly Broad Release Language

Watch for releases that go too far:

Red flags:

• Waiving claims you don't know about yet
• Waiving rights under future laws
• Releasing individuals who weren't your employer
• Waiving claims unrelated to employment

Unreasonable Restrictions

Consider whether restrictions are fair:

Questions to ask:

• Are non-competes enforceable in your state?
• Is the geographic scope reasonable?
• Is the time period appropriate?
• Will these restrictions meaningfully affect your job search?

Missing Provisions

Consider what's NOT in the agreement:

Items to request:

• Mutual non-disparagement (company also can't disparage you)
• Neutral reference language
• COBRA subsidy
• Outplacement services
• Accelerated vesting of equity
• Extension of exercise period for stock options

Concerning Language

Watch for provisions that could cause problems:

Examples:

• Non-cooperation clauses (requiring you to help defend against others' claims)
• Forfeiture provisions (losing severance if you violate any term)
• Arbitration requirements for disputes about the agreement itself
• Confession of judgment clauses

Your Legal Rights Regarding Severance

Certain rights cannot be waived or must be handled specially.

Age Discrimination Protections (OWBPA)

If you're 40 or older, the Older Workers Benefit Protection Act provides special protections for waiving age discrimination claims.

Requirements for a valid age discrimination waiver:

• The waiver must be written in understandable language
• It must specifically refer to ADEA (age discrimination) claims
• You must be advised to consult an attorney
• You must be given 21 days to consider (45 days for group layoffs)
• You must have 7 days to revoke after signing
• You must receive something of value beyond what you're already owed

If these requirements aren't met: The waiver of age discrimination claims may be invalid, even if you signed.

Unemployment Benefits

Severance typically doesn't prevent you from collecting unemployment:

General rules:

• Signing a severance agreement doesn't affect unemployment eligibility
• You were still laid off through no fault of your own
• Severance may affect timing but usually not eligibility

Separation characterization: Ensure the agreement characterizes your departure as a layoff, not resignation or termination for cause.

Unpaid Wages

You cannot waive your right to wages you've already earned:

Non-waivable compensation (in most states):

• Unpaid salary or hourly wages
• Accrued vacation (in states requiring payout)
• Earned bonuses and commissions
• Expense reimbursements

WARN Act Claims

Whether WARN Act claims can be waived is debated:

Considerations:

• Some courts treat WARN back pay as non-waivable wages
• Releases may not specifically mention WARN
• You may not have known you had a WARN claim
• Consult an attorney if you think WARN was violated

Negotiating Your Severance

Despite what employers suggest, severance is usually negotiable.

Your Leverage

Understanding your leverage helps you negotiate effectively.

Potential leverage points:

• You may have legal claims worth pursuing
• The company wants a clean break without litigation risk
• You have information they want to remain confidential
• They need your cooperation on transition
• Timing pressure (they may need quick agreement)
• You know things that could be embarrassing or costly if revealed

What to Negotiate

Common negotiable items include:

Money:

• Higher severance amount
• Lump sum vs. continuation
• Bonus proration
• Equity acceleration or extended exercise periods
• COBRA coverage
• Outplacement services

Terms:

• Reduction or elimination of non-compete
• Narrower confidentiality provisions
• Mutual non-disparagement
• Better reference provisions
• Elimination of cooperation requirements
• Carve-outs for discussing with family, attorneys, or new employers

How to Negotiate

Approach negotiation thoughtfully:

Do:

• Take all available time before responding
• Focus on your strongest leverage points
• Make specific, reasonable requests
• Be professional and non-emotional
• Put requests in writing
• Consult an attorney for significant agreements

Don't:

• Sign immediately under pressure
• Accept the first offer if you have leverage
• Make threats you won't follow through on
• Burn bridges unnecessarily
• Assume everything is non-negotiable

When to Consult an Attorney

While not every severance agreement requires a lawyer, some situations warrant professional review.

Definitely Consult an Attorney If:

High stakes:

• Severance exceeds $10,000-$20,000
• You have unvested equity worth significant amounts
• The agreement includes non-compete restrictions

Potential legal claims:

• You believe you were discriminated against
• You were harassed or retaliated against
• The layoff may have violated WARN Act
• You have unpaid wages or commissions
• You witnessed illegal activity

Concerning provisions:

• You don't understand parts of the agreement
• Something seems unusual or unfair
• There's pressure to sign immediately
• You're uncomfortable with specific terms

Finding an Employment Attorney

How to find one:

• State bar association referral service
• NELA (National Employment Law Association)
• Personal referrals
• Initial consultations are often free

What to bring:

• The severance agreement
• Your employment contract and offer letter
• Recent performance reviews
• Any relevant emails or documentation
• Questions you have about the agreement

Cost considerations:

• Many attorneys offer free initial consultations
• Some review agreements for a flat fee ($500-$1,500 common)
• If you have significant claims, attorneys may work on contingency

Common Mistakes to Avoid

Signing Too Quickly

You're usually entitled to time to consider. Don't let pressure tactics rush you into signing.

Remember:

• 21 days consideration period (by law if you're 40+)
• 7 days revocation period after signing (if 40+)
• Even if not legally required, reasonable time is usually acceptable

Not Reading Carefully

Read every word. Provisions buried in dense language may significantly affect your rights.

Not Negotiating

Many people assume severance is take-it-or-leave-it. It's often not—especially if you have any leverage.

Not Understanding What You're Giving Up

Make sure you understand every claim you're releasing and every obligation you're accepting.

Keeping a Copy

Keep a signed copy of your severance agreement in a safe place. You may need to reference it later.

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Key Takeaways

1. Severance is a contract — you're trading rights for money
2. Read everything carefully before signing
3. Take your time — you have at least 21 days if you're 40+
4. Severance is often negotiable — don't assume it's fixed
5. Know what you're giving up — releases waive important rights
6. Consult an attorney for significant agreements or if you have potential claims
7. Keep copies of everything you sign

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Related Resources:

• WARN Act: Your Rights When Companies Don't Give Notice →
• Non-Compete Agreements: What You Need to Know →
• Legal Rights Overview →