Severance agreements: A complete guide for employers and employees

When an employee exits your organization due to a layoff or workforce reduction, a severance agreement helps protect your organization legally while setting clear expectations for the employee.

While most employers use severance agreements, there’s no one-size-fits-all approach. What works for one company may not work for another. This guide offers a concise, practical overview of severance agreements and how to implement them effectively.

A quick note: This article is for informational purposes only. Always work closely with your legal counsel to ensure compliance with local, state, and federal laws.

A severance agreement is a legal document outlining the terms of an employee’s separation from the company. It defines both parties’ rights and responsibilities.

In exchange for signing the agreement and waiving their right to pursue legal claims, the employee receives compensation, commonly referred to as severance pay. This pay is designed to ease the transition while the employee searches for their next role and provide an incentive for the employee to sign the agreement.

Click below to download our free Careerminds severance pay calculator and step-by-step guidance to help you determine consistent, compliant severance packages that will support your employees through transition.

The main purpose of a severance agreement is to make sure that the exiting employee will not file a wrongful termination lawsuit against the employer. By having a legally binding contract, the employee cannot take the employer to court.

Providing severance pay to an employee can also be seen as a gesture that the employer cares about the future success of the employee. By providing pay and a contract, you can ease tensions and make sure that your organization is being upfront about changes to health insurance and benefits when someone is let go.

We also highly recommend adding outplacement services as a benefit in your severance agreements. Your employee can work with a coach and specially-crafted job search tools that will help them get back to work faster than searching on their own.

Legally, severance agreements are not required. There is no law mandating that employers provide severance pay or agreements when terminating employment.

However, severance agreements are strongly recommended in higher-risk situations, such as when:

• The employee is part of a protected class
• The employee recently engaged in protected activity (e.g., FMLA leave, whistleblowing, harassment complaints)
• The termination circumstances are complex or sensitive

In these cases, a severance agreement offers peace of mind by reducing the risk of litigation. Many organizations choose to use severance agreements consistently to ensure fairness and reduce ambiguity.

A severance agreement typically includes several key elements that outline both what the employee receives and what they agree to in return:

• Severance pay: Lump-sum or salary continuation based on company policy, role, or tenure
• Benefits continuation: Details on the continuation or termination of health insurance, COBRA support, and any other applicable benefits
• Final compensation: Payment of final wages, bonuses, commissions, and unused PTO (if applicable)
• Release of claims: The employee agrees not to bring certain legal claims, such as wrongful termination, against the employer related to their employment or termination
• Confidentiality provisions: Rules around sharing proprietary or sensitive company information
• Noncompete clause: Restrictions on whether and when the employee can work for/as a competitor (if necessary and applicable given the situation and state law)
• Non-disparagement clause: Limits on making harmful statements about the company (which must be carefully drafted to comply with applicable law)
• Return of company property: Requirements for returning devices, documents, and other company assets
• Rehire eligibility: Whether the employee is eligible for future employment with the organization
• References or employment verification terms: How the employer will respond to reference checks
• Career transition support: Outplacement services or career coaching (optional but extremely valuable)

There’s no legal requirement for severance pay in most cases, so there isn’t a single “standard” amount. However, a common benchmark is one to two weeks of pay per year of service, often with a minimum payout for shorter-tenured employees.

The actual amount can vary widely based on factors like company policy, employee level, length of employment, and the reason for separation (such as layoffs or restructuring). Senior or executive roles may receive more generous packages, while some employers may offer less or none at all depending on circumstances and internal practices.

Since severance is not federally mandated in most situations, it is ultimately set by company policy or negotiated on a case-by-case basis.

Proper planning is essential to ensure that a severance agreement works as intended. Without it, organizations risk employee mistrust and potential legal exposure. Once planning is complete and you have a severance agreement template prepared, the next step is implementation. 

Severance agreements are typically introduced during the layoff notification meeting with HR. These meetings should be direct and focused. While empathy is important, unnecessary small talk can increase stress. Clearly explain the reason for the separation, then allow the employee space to respond.

After addressing the separation, confirm the employee’s final day of employment and introduce the severance agreement. An HR representative should walk through the document at a high level, explain what’s included, and answer questions. Always provide a copy for the employee to review with legal counsel, and clearly communicate any deadlines or review periods.

During the discussion, explain the benefits offered in exchange for signing, including severance pay, continued benefits, and career transition support. Be sure to clarify how healthcare, retirement, and other benefits will change after separation. Employee reactions will vary; some will have many questions while others will want to exit quickly. Both responses are normal. 

For larger layoffs, offering immediate access to outplacement support can help employees begin their job search right away and improve reemployment outcomes. Click below to download our comprehensive Careerminds report on how career transition services help organizations maintain culture, safeguard their brand, and support employees during layoffs.

An OWBPA disclosure is information employers may be required to provide under the Older Workers Benefit Protection Act (OWBPA), which is part of the federal Age Discrimination in Employment Act (ADEA). These disclosures are typically required when an employer asks employees age 40 or older to sign a severance agreement that includes a waiver of age discrimination claims as part of a group layoff, reduction in force (RIF), or exit incentive program.

The OWBPA disclosure is designed to help employees understand whether older workers may have been disproportionately impacted by the layoff. In many cases, employers must provide information such as:

• The job titles and ages of employees selected for termination
• The job titles and ages of employees in the same group or decisional unit who were not selected
• The eligibility factors and time limits tied to the program

Under federal law, employees over 40 are also generally entitled to:

• At least 21 days to review an individual severance agreement
• 45 days to review agreements tied to a group layoff or reduction in force
• 7 days to revoke their signature after signing

You can learn more about OWBPA requirements directly from the US Equal Employment Opportunity Commission (EEOC), which provides guidance on severance agreements, waivers, and age discrimination protections. Additional legal text is also available through the US Department of Labor (DOL) age discrimination resources. 

While severance agreements provide clear benefits for both employers and employees, they are not without potential drawbacks. Understanding these risks can help organizations plan carefully and avoid unintended consequences.

Severance pay can be a significant expense, especially for long-tenured employees or large-scale layoffs. Organizations must balance the need to provide fair compensation with the impact on budgets, particularly during downsizing or financial restructuring.

If a severance agreement is poorly drafted or not legally compliant, it may fail to protect the company from lawsuits. Common pitfalls include unclear language, improper release clauses, or failure to follow federal, state, or local regulations (such as providing the required review period for employees over 40 under the ADEA).

Some employees may perceive severance offers as insufficient, unfair, or inconsistent across the organization. This can impact morale among remaining staff and potentially damage the employer brand if word spreads externally.

Severance agreements often include provisions beyond pay, such as continued benefits or outplacement services. Mismanaging these obligations (e.g., payment delays, miscommunication about healthcare, incomplete outplacement support) can create dissatisfaction or legal exposure.

Generous severance packages may inadvertently encourage voluntary resignations, especially among employees who see an opportunity for financial support while leaving the organization. This can create workforce planning challenges if not carefully considered.

Some employees may attempt to negotiate severance terms, which can complicate HR processes and create precedent-setting situations. Without clear policies and guidance, negotiations can lead to inequity or legal disputes.

When implemented correctly and carefully, your severance agreement should negate the possibility of your organization getting sued over a termination. This should be a living document that you continuously revisit and revise. As laws change—which they do quite often—you need to make sure that you’re always compliant and up to date.

Here are the key takeaways:

• Severance agreements outline separation terms for employees from their employers, and typically include details on pay, benefits, release of claims, and clauses for confidentiality, noncompete, and non-disparagement.
• The primary purpose of severance agreements is risk mitigation, reducing the chance of wrongful termination and other legal disputes.
• Severance pay serves dual purposes: supporting employees financially and incentivizing agreement acceptance.
• Severance agreements are not legally required, but are strongly recommended for high-risk situations or sensitive terminations.
• Implementation matters: Present the agreement during the layoff meeting, explain all benefits clearly, answer questions, and provide a copy for the employee’s review.
• Severance agreements must comply with evolving federal and state laws, including protections under the ADEA, OWBPA, and NLRA.
• Employees may have additional statutory protections depending on age and circumstances, including extended review periods and revocation rights for workers over 40.
• Potential challenges include financial cost, legal compliance risks, employee perception issues, and complex negotiations—all of which require careful planning.
• Outplacement services improve outcomes, helping employees find new roles faster while protecting the employer brand.

Enhance your severance packages with career transition support from Careerminds. Click below to connect with our experts and learn how you can provide your outgoing employees with expert coaching, job search resources, and faster paths to reemployment while preserving your company brand and morale.

While the terms are often used interchangeably, there is a slight difference between a separation agreement vs. severance agreement. A severance agreement typically focuses on what an employee will receive when leaving a company, such as severance pay, benefits, or PTO payouts. A separation agreement is broader and outlines the overall terms of the employee’s departure, which may also include confidentiality clauses, return of company property, and legal protections for both parties.

In practice, many employees do try to negotiate severance agreements, especially in cases of layoffs, senior roles, or longer tenure. Given this, employers may choose to view severance offers as potentially flexible rather than purely fixed.

That said, whether a negotiation is common or successful depends on the company policies, reason for separation, and employee’s position. Some organizations hold firm on standardized packages, while others are more open to adjustments to reach closure quickly and reduce risk. Either way, negotiation is common enough that employers should be prepared for it.

Under federal law, employees over 40 are entitled to an OWBPA disclosure when signing a severance agreement that waives their age discrimination rights. This disclosure includes information on whether older workers may have been disproportionately impacted by the layoff, reduction in force, or exit incentive program.

In addition, employees over 40 are also generally entitled to:

• At least 21 days to review an individual severance agreement
• 45 days to review agreements tied to a group layoff or reduction in force
• 7 days to revoke their signature after signing

It can, but it depends on how the severance is structured and the applicable state laws. Signing the agreement itself usually does not disqualify someone from unemployment, but the payment terms can affect when benefits start.

In many states, severance is treated as “wages in lieu of notice” if it replaces regular pay for a set period of time. In these cases, unemployment benefits may be delayed until that severance period is concluded. For example, if an employee receives severance equal to eight weeks of pay, the state may delay unemployment eligibility during that eight-week period.

If severance is paid as a lump sum, some states still delay benefits, while others do not. It depends how the payment is classified under state unemployment law, which varies significantly by state. Importantly, employees are generally still required to report severance payments when filing for unemployment, even if they are unsure whether it will affect eligibility.

Yes, employers can use severance agreement non-disparagement clauses, but they must be carefully drafted. These clauses are generally intended to prevent either party from making harmful statements about the other after employment ends.

That said, under current National Labor Relations Board (NLRB) guidance and the 2023 McLaren Macomb decision, overly broad non-disparagement or confidentiality clauses may violate federal labor law when applied to non-supervisory employees. They can be interpreted as restricting employees from discussing workplace conditions or engaging in protected “concerted activity” under the National Labor Relations Act. This 2023 McLaren Macomb decision is still in effect, even though the NLRB updated its enforcement guidance in 2025. 

Given this, employers should not assume that older, broad confidentiality or non-disparagement clauses are automatically safe to use. Instead, these provisions need to be carefully limited so that they don’t prevent employees from discussing legally protected topics like wages, working conditions, or workplace concerns, or from speaking with government agencies. Overly broad language can still create legal risk under federal labor law.

Since interpretations in this area continue to evolve, it’s important for employers to regularly review and update severance templates with legal counsel to ensure compliance.

If an employer breaks a severance agreement, the employee can usually take legal action because these agreements are treated as contracts. A violation might include failure to pay the agreed severance amount, withholding benefits, or failing to follow other terms in the agreement.

In these cases, the employee may be able to recover the money owed, seek additional financial damages, or in some situations recover legal fees depending on the agreement and state law. Some severance agreements also require disputes to go through arbitration instead of court, which affects how the claim is handled.

In some cases, yes, but it depends on the legal requirements that apply to the agreement. For employees aged 40 or older, federal law under the Older Workers Benefit Protection Act (OWBPA) generally requires that severance agreements include a 7-day revocation period after signing, during which the employee can change their mind and withdraw from the agreement.

This revocation right typically applies when the agreement includes a waiver of age discrimination claims under the Age Discrimination in Employment Act (ADEA). For other types of severance agreements or employees under 40, revocation rights are not always required and are usually determined by the contract terms or state law. Once the revocation period has passed (if applicable), the agreement is usually considered final and enforceable.