What to include in a severance agreement

What a severance agreement is and when it applies

A severance agreement (also called a separation agreement or a separation and release agreement) is a contract between an employer and a departing employee that sets the terms of the separation. In exchange for severance pay and other benefits, the employee typically agrees to release the employer from legal claims and to honor continuing obligations such as confidentiality and return of company property.

In most of the United States, employment is at will, and there is generally no legal duty to offer severance unless an employment contract, a written policy, or a collective bargaining agreement promises it. Employers still use severance agreements often, because the real value to the company is the release of claims and the certainty it buys. These agreements come up in individual terminations, negotiated exits, and larger reductions in force, and the rules tighten as more employees are involved.

A few situations change the analysis and deserve a closer look. A mass layoff or plant closing can trigger notice duties under the federal WARN Act or a state equivalent, which are separate from any severance offer. A group termination also brings extra disclosure requirements when the release waives age discrimination claims. Naming the triggering situation early tells you which rules apply before you draft a single term.

Core financial and benefit terms to include

The commercial heart of the agreement is what the employee actually receives. Spell out each item so there is no dispute later about amounts or timing:

• Severance pay. State the total amount or the formula (for example, a set number of weeks of base salary per year of service), whether it is paid as a lump sum or in installments, and the payment dates.
• Consideration that is genuinely new. The severance must be something the employee is not already entitled to. Wages already earned and accrued but unused paid time off are usually owed regardless, so they do not count as consideration for the release.
• Accrued wages and expenses. Confirm that final wages, earned commissions, and outstanding business expenses will be paid on the required schedule under state law, separate from the severance.
• Bonus and commission treatment. Address any pro rata bonus, unpaid commissions, or draws, and state clearly whether they are included or excluded.
• Benefits continuation. Describe health coverage after separation, including any employer subsidy toward COBRA premiums, and the date active coverage ends.
• Equity and retirement. Clarify what happens to stock options, restricted units, or other equity, including vesting cutoffs and exercise windows, and note that vested retirement benefits cannot be signed away.
• Outplacement and references. Include any outplacement support and, where offered, a neutral reference commitment naming who will give it and what they will confirm.
• Return of property and offboarding. Require the return of laptops, phones, badges, credentials, and data, and address access shutoff.

The release of claims and statutory safeguards

The release is the reason most employers pay severance at all, so it has to be drafted with care. A general release usually covers claims the employee may have against the company up to the signing date, including claims under federal, state, and local law. To be effective, it must be clear, specific about the categories of claims covered, and supported by the new consideration described above.

Certain claims cannot be waived, and trying to waive them can jeopardize the whole release. Employees keep the right to file for unemployment, to claim workers’ compensation, to enforce vested benefits, and to file a charge with or cooperate with agencies such as the EEOC or the National Labor Relations Board. A release can waive the employee’s ability to recover money personally, but not the right to participate in an agency proceeding, so the agreement should carve these rights out expressly.

When the employee is 40 or older, the release of age claims must satisfy the Older Workers Benefit Protection Act to be knowing and voluntary. That means the agreement must be written in plain language, advise the employee in writing to consult an attorney, give at least 21 days to consider the offer (45 days in a group termination or reduction in force), and allow 7 days after signing to revoke. In a group termination, the employer must also disclose the job titles and ages of the individuals selected and not selected within the affected decisional unit. Because the effective date falls only after the 7-day revocation window closes, the payment schedule should tie to that date, not the signature date.

Restrictive covenants and post-employment obligations

Beyond the release, most severance agreements impose or restate obligations that continue after the employee leaves. Draft these to the minimum needed, because overbroad terms are increasingly vulnerable:

• Confidentiality. Protect trade secrets and confidential business information, and define what counts and how long the duty lasts.
• Non-disparagement. Limit negative statements, but keep the wording narrow. Recent labor law developments have restricted overly broad non-disparagement and confidentiality terms for many non-supervisory employees, so blanket gag language can be unlawful.
• Limits on silencing harassment claims. Federal and state laws restrict clauses that prevent an employee from speaking about sexual harassment or assault, so confidentiality terms need a carve-out for those disclosures.
• Non-compete and non-solicitation. Enforceability of non-competes varies widely by state and is a moving target, and several states sharply limit or ban them. Non-solicitation of customers or employees is more commonly enforced but still state-dependent.
• Cooperation. Require reasonable help with transitions, audits, or litigation, and address whether the former employee is reimbursed for time or expenses.
• Housekeeping terms. Include no admission of liability, the governing law, an integration or entire agreement clause, severability so one bad term does not sink the rest, and how the agreement may be amended.

Common mistakes to avoid

Even a well-intentioned template can fail on the details. Watch for these recurring errors:

• Treating already-owed wages or accrued PTO as the consideration for the release, which can leave the release unsupported.
• Skipping the OWBPA timing and disclosure rules for employees 40 or older, which can void the age-claim waiver.
• Purporting to bar the employee from filing an EEOC or NLRB charge, which is unenforceable and can taint the release.
• Using boilerplate non-compete or non-disparagement language that ignores the employee’s state and current law.
• Failing to address bonuses, commissions, equity, and benefits end dates, leaving open disputes after signing.
• Paying before the revocation period expires, or dating the effective date to the signature rather than the end of the revocation window.
• Ignoring tax treatment and Section 409A timing rules for installment or deferred payouts.

Severance agreement checklist

Before sending or signing, confirm the agreement covers the essentials:

• Parties, separation date, and reason for separation are identified.
• Severance amount, structure, and payment dates are stated.
• Consideration is genuinely new and beyond what is already owed.
• Final wages, accrued PTO, expenses, bonuses, and commissions are addressed.
• Benefits, COBRA subsidy end dates, and equity treatment are covered.
• The release scope is clear and carves out non-waivable rights.
• OWBPA language, review period, and 7-day revocation apply where the employee is 40 or older.
• Confidentiality, non-disparagement, non-solicitation, and any non-compete are narrow and state-appropriate.
• Return of property, cooperation, governing law, and severability are included.
• Tax withholding and reporting are handled correctly.

Disciplined contract management, with counsel in the lead

A severance agreement rewards discipline: the same document has to be commercially fair, legally valid, and consistent with the rules that apply to the specific employee and situation. Managing these agreements in a single repository, with approval workflows, electronic signature, and deadline alerts, keeps revocation windows, payment dates, and continuing obligations from slipping through the cracks. A copilot like PactAI can help a reviewer by extracting key terms, flagging missing carve-outs or conflicting clauses, and scoring risk so attention lands where it matters. It prepares the work, and your counsel makes the call. This is general legal information, not legal advice.