What is a severance agreement?
A severance agreement is a contract between an employer and a departing employee that provides severance pay or benefits in exchange for the employee's agreement to certain terms, most importantly a release of claims, in which the employee agrees not to sue the employer over the employment or its end. It gives the employee a financial cushion and the employer certainty and closure.
Beyond pay and the release, these agreements often include confidentiality, non-disparagement, and sometimes non-compete or non-solicitation terms. For employees 40 or older, the federal Older Workers Benefit Protection Act (OWBPA) imposes specific requirements for a release of age claims to be valid, including a 21-day period to consider it and 7 days to revoke, which the agreement must follow.
When do you need one?
Laying off or terminating an employee with a severance package
A negotiated, mutual separation
An executive exit with a defined package
Reducing the risk of a wrongful-termination or discrimination claim
Setting confidentiality and non-disparagement terms on departure
Providing a departing employee financial support and closure
What it should include
Parties & last day: the employer, employee, and separation date
Severance pay: the amount and how it's paid (lump sum or over time)
Benefits: continued health coverage (COBRA) or other benefits
Release of claims: the employee's waiver of claims against the employer
OWBPA terms: for employees 40+, the consideration and revocation periods
Confidentiality & non-disparagement: post-employment conduct terms
Restrictive covenants: non-compete or non-solicitation, where used and enforceable
Signatures: both parties', after any required review period
OWBPA: the age-40 rules
If the employee is 40 or older and you want a valid release of age-discrimination (ADEA) claims, federal law requires specific steps: at least 21 days to consider the agreement (45 days for a group termination, with disclosure of who's affected), a 7-day revocation period after signing, and advice to consult an attorney. Miss these and the release of age claims is unenforceable, even though the employee kept the severance.
What a release can and can't waive
A release can waive most claims arising from the employment and its end, but it generally can't waive certain rights, like the right to file a charge with the EEOC, claims for vested benefits, unemployment, or workers' comp, or future claims. A well-drafted release is specific about what's waived and preserves what can't be.
Common mistakes to avoid
Skipping the OWBPA 21/7-day periods for employees 40 or older
Pressuring the employee to sign immediately
A vague or overbroad release that a court won't enforce
Trying to waive non-waivable rights (EEOC charges, unemployment)
Forgetting confidentiality or non-disparagement where you need them
Including a non-compete that isn't enforceable in the employee's state