Employment Termination Guide
Severance Agreements: What to Know Before You Sign
A severance agreement is the contract an employer offers when ending an employment relationship — typically in exchange for a payment and benefits continuation. The terms can include broad releases of claims, non-disparagement clauses, non-competes, and confidentiality obligations. Whether you are an employer drafting one or an employee reviewing one, knowing what to look for can save significant money and legal exposure.
Last updated: July 11, 2026 · Reading time: 8 min read
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What a Severance Agreement Typically Includes
- Severance payment — cash payment, usually based on years of service (commonly 1 to 4 weeks of pay per year of service)
- Benefits continuation — continued health insurance coverage (often COBRA premium coverage), life insurance, or outplacement services
- Release of claims — broad waiver of the employee's right to sue the employer for any claims arising from employment (age, sex, race, wage, etc.)
- Non-disparagement clause — agreement not to make negative statements about the employer, often mutual
- Confidentiality obligation — continued obligation to keep proprietary information confidential after termination
- Non-compete or non-solicitation — restriction on working for competitors or soliciting clients and employees
- Return of company property — equipment, documents, devices, and access credentials
- Cooperation clause — agreement to assist with litigation or investigations after termination
Severance Is Not Required by Law (in Most Cases)
Federal law does not require employers to offer severance. The only major exception is the federal WARN Act, which requires 60 days of pay and benefits for mass layoffs and plant closings. A few states and cities have additional requirements, and some employment contracts or union agreements specify severance terms. Outside of those situations, severance is voluntary — and the release of claims is what makes it valuable to the employer.
Read the release carefully: The release of claims is the most important part of the agreement. It typically waives claims under federal anti-discrimination laws (Title VII, ADA, ADEA), wage-and-hour laws (FLSA), and state employment laws. Some claims cannot be waived (unemployment insurance, whistleblower retaliation in some states) and the agreement should carve those out.
How to Negotiate a Severance Agreement
- Ask for the agreement in advance and review it Do not sign at the meeting. Take the agreement home, review it with an employment attorney if the dollar amount is meaningful, and prepare specific responses.
- Identify the most restrictive clauses Non-competes and broad releases are the most negotiable items. Ask to narrow the scope, shorten the duration, or increase the severance in exchange.
- Carve out protected claims The release should explicitly preserve your right to file charges with the EEOC, NLRB, or state agencies (though you typically waive the right to recover damages for those claims).
- Ask about the 21-day consideration and 7-day revocation periods For releases of age discrimination claims under the OWBPA, you are entitled to at least 21 days to consider the agreement and 7 days to revoke after signing. Make sure the agreement complies.
- Confirm continuing benefits and references Get clear commitments on continuation of health insurance, neutral reference policy, and any outplacement services. These can be worth as much as the cash severance.
Frequently Asked Questions
Is severance pay taxable?
Yes. Severance pay is treated as wages and is subject to federal and state income tax, Social Security, and Medicare. Federal income tax is withheld at the supplemental wage rate (22% for amounts under $1 million). You may be able to reduce the tax by contributing to a 401(k) or other retirement plan if the timing allows.
Can I refuse to sign a severance agreement and still get severance?
Generally no. Severance is conditional on signing the release. If you refuse to sign, you typically receive only your final paycheck, accrued PTO, and any contractual obligations. In some cases, unemployment benefits may also be available. Whether to sign depends on the value of the severance versus the rights being released.
Should I have a lawyer review a severance agreement?
For any severance payment above a few months' pay, yes. The release of claims can waive significant legal rights (age, sex, race, wage discrimination) that may be worth far more than the cash severance. An employment attorney can often negotiate better terms or narrower releases for a few hundred dollars in legal fees.
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