Severance Agreement

A Severance Agreement in the United States sets out the rights, duties and consideration binding the parties to it.

The legal framework governing U.S. severance agreements spans multiple federal statutes. The Fair Labor Standards Act (FLSA), 29 U.S.C. § 201, does not require severance pay but governs the payment of any accrued wages, commissions, or bonuses owed at termination. Title VII of the Civil Rights Act of 1964, 42 U.S.C. § 2000e, the Americans with Disabilities Act (ADA), 42 U.S.C. § 12101, and the Age Discrimination in Employment Act (ADEA), 29 U.S.C. § 621, are the primary federal employment discrimination statutes whose claims a general release in a severance agreement purports to cover. The Family and Medical Leave Act (FMLA), 29 U.S.C. § 2601, permits waiver of retrospective FMLA claims in a severance agreement, though employees cannot prospectively waive future FMLA rights.

The Older Workers Benefit Protection Act (OWBPA) of 1990, 29 U.S.C. § 626(f), which amended the ADEA, imposes specific procedural requirements for valid waivers of ADEA age discrimination claims by employees age 40 or older: the waiver must be written in plain language; it must specifically reference the ADEA; the employee must be advised in writing to consult an attorney; the employee must have at least 21 days to consider the agreement (45 days for group layoffs); and the employee must have 7 days after signing to revoke. Non-compliance with any OWBPA requirement invalidates the ADEA waiver while leaving the rest of the severance agreement in effect.

The Worker Adjustment and Retraining Notification (WARN) Act, 29 U.S.C. § 2101, requires employers with 100 or more employees to provide 60 days' advance written notice before mass layoffs affecting 50 or more employees at a single site or plant closings. Employers who fail to provide WARN Act notice owe affected employees up to 60 days of back pay and benefits — obligations that interact with and may be addressed in severance agreements for large reduction-in-force events.

If a severance plan covers a class of employees and is maintained by an employer, it may constitute an employee welfare benefit plan subject to the Employee Retirement Income Security Act (ERISA), 29 U.S.C. § 1001 et seq. ERISA-governed severance plans are subject to ERISA's fiduciary duty requirements, reporting and disclosure rules, and claims and appeals procedures — making plan design and administration more complex than individual severance agreements.

A Severance Agreement is needed by U.S. employers whenever they terminate an employee and wish to obtain a legally enforceable release of claims in exchange for severance compensation.

Individual terminations — whether for performance, restructuring, or position elimination — are the most common context. An employer who terminates a sales executive, software engineer, or operations manager and offers two weeks of severance per year of service should document the arrangement in a written severance agreement that contains a general release of all employment-related claims. Without a signed release, the terminated employee retains the right to file an EEOC charge alleging discrimination, a state court lawsuit for wrongful termination, or a Department of Labor wage and hour complaint — regardless of whether the employer provided voluntary severance.

Reductions in force (RIFs) and mass layoffs present the most legally complex severance scenario. When an employer lays off 50 or more employees simultaneously, OWBPA requires group termination disclosures — a written notice to each affected employee describing the group of employees eligible for the program, the eligibility factors, the time limits of the program, the job titles and ages of all individuals eligible for or selected for the program, and the ages of all individuals in the same job classification or organizational unit who are not eligible or selected. EEOC enforcement guidance requires that these disclosure requirements be met exactly, and severance agreements for group terminations must allow 45 days for employee consideration and 7 days for revocation.

Executive separations — CEO transitions, C-suite restructurings, and involuntary departures of senior executives — typically involve severance agreements with substantially greater economic consideration than standard employment severance: multiple years of base salary continuation, continued vesting of equity awards, extended exercise periods for stock options, continuation of health benefits, and outplacement services. For public companies, executive severance may trigger disclosure obligations under SEC Form 8-K (material definitive agreement) if the departing executive is a named executive officer.

Settlements of existing employment disputes — discrimination charges pending at the EEOC, wage and hour claims, or threatened wrongful termination lawsuits — are frequently documented as severance agreements. The settlement structure includes a general release, mutual confidentiality obligations (preventing the employee from discussing the settlement terms), and a non-disparagement clause preventing the employee from making negative public statements about the employer.

Retirement incentive programs offered to older employees as an alternative to involuntary termination must be structured as voluntary programs with OWBPA-compliant disclosures and the required 45-day consideration and 7-day revocation periods. The EEOC has brought enforcement actions against employers who structured retirement incentive programs in a way that coerced older employees rather than offering genuinely voluntary participation.

A complete and enforceable Severance Agreement for U.S. employers must address the following provisions in a manner consistent with applicable federal and state law.

The parties identification section names the employer (full legal name, state of formation, principal place of business) and the employee (full legal name, last position, and last four digits of Social Security number for identification purposes). The agreement should identify the effective date of termination separately from the date of the agreement, as the consideration period and revocation period run from signing, not from the termination date.

The severance pay clause states the gross dollar amount of severance, the payment schedule (lump sum on the eighth day after the revocation period expires, or installment payments continuing through the employer's regular payroll), and the tax withholding treatment (severance is taxable as ordinary income subject to federal income tax, FICA, and applicable state income tax withholding). For employees age 40 or older, the first payment cannot occur until the seven-day revocation period has expired.

The benefits continuation section addresses: (1) the last day of employer-sponsored group health, dental, and vision insurance coverage; (2) the COBRA election period and the employee's right to continue coverage for up to 18 months under COBRA (29 U.S.C. § 1161 et seq.); and (3) whether the employer will subsidize COBRA premiums and for how long. For employees under 26 who are covered as dependents on a parent's plan, COBRA rights and obligations differ.

The equity and retirement plan section addresses: unvested stock options, RSUs, or other equity awards (whether any awards accelerate upon termination, the post-termination exercise window, and whether unvested awards are forfeited); 401(k) plan distribution options (rollover to IRA, distribution as taxable income, or continued deferral until plan rules require distribution); and any deferred compensation plan payments subject to Internal Revenue Code § 409A, which imposes a six-month delay on payments to 'specified employees' (certain highly compensated officers of public companies).

The general release of claims is the agreement's central provision. The release should cover: all federal employment discrimination claims under Title VII, the ADA, the ADEA (with OWBPA-compliant language for employees 40+), the FMLA, the FLSA, the Equal Pay Act, and all applicable state and local anti-discrimination laws; state common law claims including wrongful termination, breach of implied contract, breach of implied covenant of good faith and fair dealing, negligent supervision and retention, defamation, and intentional infliction of emotional distress; all wage and hour claims; and all claims arising from any equity plan, employment contract, or benefit plan. The release must preserve the employee's rights to file EEOC charges (the release waives monetary recovery, not the right to file), to receive ERISA plan benefits vested at termination, and to workers' compensation benefits.

The OWBPA-specific provisions for employees age 40 or older must include: explicit reference to the ADEA; the written advisement to consult an attorney; a statement that the consideration period is 21 days (or 45 days for group terminations) and that the employee may sign before the period expires but is not required to; and confirmation of the seven-day revocation right with instructions on how to exercise it.

The non-disparagement clause prohibits the employee from making false or disparaging statements about the employer, its officers, directors, employees, and products to the press, on social media, or to current or prospective business partners. A mutual non-disparagement clause also prohibits the employer from making disparaging statements about the employee, which is increasingly demanded by employees represented by counsel.

The confidentiality of agreement terms clause prohibits the employee from disclosing the severance amount and terms to third parties other than the employee's attorney, financial advisor, and immediate family. California Business and Professions Code § 16600.5, effective 2024, restricts confidentiality clauses that prevent employees from disclosing sexual harassment or assault, a limitation that applies to settlement agreements in California.

The return of company property clause requires the employee to return all company property — laptop, mobile devices, access credentials, confidential documents, and intellectual property — by a specified date, typically the last day of employment.