Overview
A severance agreement is simultaneously one of the most legally technical and most human documents in employment law. It marks the end of an employment relationship, typically involves a meaningful financial payment, and in exchange asks the departing employee to release legal claims against the company. Getting it right matters enormously — for the company (a defective release is unenforceable, leaving full litigation exposure), for the employee (they're often signing away real legal rights in exchange for money they need), and for the broader employment relationship (how a company treats departing employees defines its culture as much as how it treats current ones).
Severance agreements serve several distinct purposes. They provide financial support to departing employees, particularly those terminated involuntarily. They secure a release of employment-related claims — discrimination, harassment, wage and hour violations, wrongful termination — that the company may be exposed to. They typically include ongoing obligations: confidentiality, non-disparagement, cooperation with litigation, and sometimes non-solicitation. For senior executives, they may include complex compensation provisions covering equity vesting, bonus proration, and benefit continuation.
The legal complexity of severance agreements stems primarily from the Age Discrimination in Employment Act (ADEA) and its amendment by the Older Workers Benefit Protection Act (OWBPA). To obtain an enforceable release of age discrimination claims from employees 40 and over, the agreement must meet strict formal requirements: 21 days to consider (45 days for group terminations), 7-day revocation period, specific statutory language referencing ADEA rights, and a knowing and voluntary standard. Miss any of these requirements and the age discrimination release is void — even if the employee signed and cashed the check.
Beyond ADEA compliance, the National Labor Relations Board has taken an increasingly active role in scrutinizing non-disparagement and confidentiality provisions in severance agreements, finding that broad restrictions can violate employees' Section 7 rights to engage in protected concerted activity. Post-2023, any severance agreement with broad non-disparagement or confidentiality clauses needs to include explicit NLRA carve-outs.
Key Clauses to Review
Severance Payment Amount and Structure
Defines the cash severance payment: amount, calculation methodology, and payment timing. Common formulas: one to two weeks per year of service (standard), one month per year of service (more generous, common for executives), or a fixed multiple of base salary. Payment structure matters: lump sum is simpler and provides immediate certainty; installment payments preserve some leverage but create ongoing administrative burden. For executives, severance may be structured as salary continuation to avoid Section 409A deferred compensation issues. Must specify whether payment is in addition to accrued PTO and final wages (it should be — those are legally owed regardless).
Severance conditioned on the employee's execution of the agreement without adequate time to review — legally problematic for ADEA-covered employees and potentially unconscionable for others. Payment structured as "in lieu of" wages or PTO rather than separately — final wages and accrued PTO are legally owed regardless of severance. Installment payment structures without acceleration upon company default. Clawback provisions that effectively allow the company to recover severance for vague "cause" discovered after termination. Missing specificity about what happens to prorated bonus, commission, or equity upon termination.
Release of Claims
The core of any severance agreement — the employee's waiver of legal claims against the company in exchange for the severance payment. A comprehensive release covers: Title VII discrimination claims, ADEA age discrimination claims (with OWBPA-compliant language for employees 40+), ADA disability claims, FMLA claims, state law equivalents of all federal claims, wage and hour claims, wrongful termination claims, and breach of contract claims. The release must be specific enough to be enforceable but should not attempt to release claims that cannot legally be released (NLRB charges, EEOC charges, workers' compensation claims, ERISA benefits, claims arising after the agreement date).
Release attempting to waive EEOC or NLRB charge-filing rights — employees cannot legally release the right to file charges with government agencies (they can release the right to monetary recovery, but not the right to file). Release of claims that haven't yet arisen — overbroad future claims releases are unenforceable. Missing OWBPA-compliant language for employees 40 and over. Release of workers' compensation claims — typically prohibited by state law. No carve-out for vested retirement benefits and ERISA rights.
ADEA / OWBPA Compliance (Employees 40+)
For any employee aged 40 or older, the Older Workers Benefit Protection Act imposes mandatory requirements for an enforceable ADEA release: (1) the waiver must specifically reference ADEA rights; (2) the employee must receive at least 21 days to consider the agreement (45 days for group/RIF terminations); (3) the employee has 7 days after signing to revoke; (4) the waiver must be in plain language; (5) the employee must be advised to consult an attorney; and (6) the waiver must be "knowing and voluntary." For group terminations, additional disclosure requirements apply including the class of employees covered and the selection criteria used.
Missing 21-day consideration period for employees 40+. No 7-day revocation period language. Failing to advise the employee in writing to consult an attorney. Missing explicit reference to ADEA rights being waived. For group terminations: missing group disclosure notice identifying all affected and retained employees with their ages and job titles. Pressure tactics to sign before the 21-day period expires — this doesn't void the agreement but creates evidence of involuntariness.
Confidentiality Provisions
Restricts the employee from disclosing the terms of the severance agreement and typically from disclosing confidential company information going forward. Post-2023 NLRB guidance significantly constrains how broad these provisions can be. Confidentiality provisions must include explicit carve-outs for: (1) disclosures to immediate family members; (2) disclosures to the employee's attorney and financial advisor; (3) disclosures required by law or legal process; (4) disclosures to government agencies; and (5) exercising NLRA Section 7 rights. Overly broad confidentiality provisions without these carve-outs have been found to violate the NLRA.
No carve-out for disclosures to government agencies — employees cannot be prohibited from reporting violations to the EEOC, NLRB, OSHA, or SEC. Confidentiality clause that would prevent an employee from testifying under subpoena. Provisions attempting to prohibit the employee from discussing the fact of their termination at all. Broad "all company information" confidentiality without limitation to genuinely confidential matters — employees can discuss their working conditions under the NLRA. Penalties for confidentiality breach that are disproportionate or act as penalties rather than liquidated damages.
Non-Disparagement
Restricts both parties (ideally mutual) from making disparaging statements about each other after termination. Post-2023, the NLRB has found that broad non-disparagement clauses in severance agreements can unlawfully restrict employees' Section 7 rights to discuss workplace conditions with coworkers and the public. Non-disparagement provisions must be narrowly drafted to cover genuinely disparaging false statements while preserving the right to: make truthful statements about the employment, file charges with government agencies, participate in government investigations, and engage in protected concerted activity.
One-sided non-disparagement restricting only the employee — mutual provisions are significantly more defensible and equitable. Provisions prohibiting "any negative statement" about the company — this is overbroad and likely violates the NLRA. No carve-out for truthful statements, government agency communications, or legal proceedings. Non-disparagement with liquidated damages provisions that effectively penalize any negative statement regardless of truth or context. Missing NLRA carve-out language explicitly preserving Section 7 rights.
Benefits Continuation and COBRA
Specifies continuation of employer-provided benefits after termination. Typically covers: health insurance continuation (COBRA election rights and potentially employer-subsidized COBRA for a defined period), life insurance conversion rights, and treatment of retirement plan contributions. For executives, may include continuation of supplemental benefits — deferred compensation, car allowances, executive health programs. Must comply with COBRA notice requirements (14 days from qualifying event). Companies that agree to subsidize COBRA premiums should specify the exact period and dollar amount.
Failure to provide COBRA election notice — creates independent liability regardless of severance agreement. COBRA subsidy promises without specifying the period and mechanism for payment. Benefits continuation provisions that conflict with plan documents — the plan document governs, and promises in the severance agreement that contradict it may be unenforceable. Missing treatment of equity — what happens to unvested options or restricted stock upon termination is often the most economically significant benefit question for tech employees.
Risk Assessment
OWBPA non-compliance is the dominant risk in severance agreements and it is entirely avoidable. A release of ADEA claims that doesn't meet OWBPA's technical requirements is simply void — the company paid severance, the employee signed, and if the employee later brings an age discrimination claim, the release doesn't bar it. Courts are unsympathetic to employers who cut corners on mandatory statutory requirements. For any employee 40 or older, OWBPA compliance is non-negotiable and should be treated as a checklist requirement.
The NLRB's 2023 McLaren Macomb decision significantly expanded the risk profile of standard severance agreement confidentiality and non-disparagement provisions. The NLRB found that these clauses, presented to employees as a condition of severance, could constitute unfair labor practices under the NLRA — even for at-will employees in non-union workplaces. Companies that haven't updated their standard severance templates post-2023 are operating with potentially unlawful agreements. The fix is relatively straightforward — adding explicit NLRA carve-outs — but requires action.
Wage and hour settlement risk in severance agreements is often overlooked. In states with strong wage and hour laws (California, New York, Massachusetts), departing employees frequently have colorable unpaid overtime, expense reimbursement, or final paycheck timing claims. A broad release that covers these claims provides real value to the company but also means the company is implicitly acknowledging some exposure. Companies should assess the specific wage and hour risk profile before finalizing severance amounts.
Equity treatment upon termination is among the most contentious severance issues for technology company employees. Option exercise windows, accelerated vesting triggers, and treatment of unvested RSUs upon involuntary termination are often poorly documented in employment agreements and plan documents. Severance agreements that don't address equity treatment explicitly leave both parties uncertain about the most economically significant element of total compensation for many tech workers.
Best Practices
Build a severance matrix before you need it. Determine your company's standard severance formula — weeks per year of service, minimum, maximum — as a policy matter before facing any specific termination. Having a consistent formula reduces discrimination risk, provides predictability for planning, and prevents ad hoc negotiations that create precedents. Document the formula and apply it consistently, departing from it only with documented business justification.
Use a compliance checklist for every severance agreement. At minimum verify: OWBPA requirements for employees 40+ (21-day period, 7-day revocation, attorney advisement, ADEA reference); NLRA carve-outs in confidentiality and non-disparagement (post-McLaren Macomb); proper COBRA notice (14 days from qualifying event); state-specific requirements (California requires different final pay timing and specific wage statement provisions); and equity treatment specified in writing.
Treat the consideration period seriously — don't pressure employees to sign early. For employees 40+, the 21-day consideration period is legally required and pressuring early signature creates evidence of involuntariness. For younger employees, best practice is to provide at least 5-7 business days even when not legally required. Rushing the signing of a severance agreement creates litigation risk and is simply poor practice — the employee is making a significant legal decision about their rights.
Include a cooperation clause for ongoing legal matters, but make it reasonable. Companies frequently need cooperation from departed employees in litigation, regulatory investigations, or business transactions. A cooperation clause requiring reasonable assistance (with reimbursement for out-of-pocket costs) is standard and appropriate. Cooperation obligations without reimbursement for significant time or expenses are unfair and create resentment. Cap cooperation obligations at a reasonable time commitment — 10-20 hours per year is typical.
Frequently Asked Questions
Am I required to sign a severance agreement to receive severance?
Yes — companies can condition severance pay (above and beyond any legally required final wages) on signing a release. Severance is not legally required in the US (absent a written employment contract or company policy requiring it), so companies offering it in exchange for a release is permissible. However, your final paycheck, accrued vacation payout (in states requiring it), and vested benefits cannot be conditioned on signing a severance agreement — those are owed regardless.
What is the 21-day rule in severance agreements?
Under the Older Workers Benefit Protection Act (OWBPA), employees aged 40 or older must be given at least 21 days to consider a severance agreement before signing. For group terminations (reductions in force), the period extends to 45 days. The purpose is to ensure that releases of age discrimination claims are knowing and voluntary. An employer cannot validly obtain a release of ADEA claims without providing this consideration period. After signing, there's also a 7-day revocation period during which the employee can rescind.
Can a severance agreement prevent me from suing my employer?
A valid severance agreement with a properly executed release can prevent you from bringing most employment-related lawsuits — discrimination, wrongful termination, harassment, wage and hour claims. However, it cannot prevent you from filing charges with the EEOC or NLRB (though it can release your right to receive monetary damages from those proceedings), testifying under subpoena, claiming vested retirement benefits, filing workers' compensation claims, or making truthful statements in legal proceedings. These rights cannot be waived regardless of what the agreement says.
What should I negotiate in a severance agreement?
Key negotiating points: (1) the severance amount itself — the formula is often a starting point, not a ceiling; (2) equity treatment — accelerated vesting or extended exercise windows if applicable; (3) reference letter terms — what will the company say and to whom; (4) non-disparagement — push for mutual provisions restricting the company equally; (5) COBRA subsidy — employer-paid COBRA for 3-6 months has real economic value; (6) outplacement services; and (7) any disputed wages, commissions, or bonuses owed. Always have an employment attorney review before signing for amounts above $10,000.
Can my employer claw back severance?
Only if the agreement includes a clawback provision and you trigger it. Common clawback triggers: violating the non-disparagement or confidentiality clause, joining a competitor in breach of a non-compete, or "cause" for termination discovered after payment. Courts scrutinize clawback provisions carefully — overly broad clawbacks that attempt to recover severance for any future competitive activity or any negative statement have been struck down. Any clawback provision should be specific about what triggers it, how much is clawable, and should not attempt to claw back amounts that represent settlement of legal claims.