What Is Severance Agreement?

Severance agreements are offered when an employee is laid off, terminated without cause, or sometimes during mutual separation. The core exchange is: the employer provides severance pay (typically 1–4 weeks per year of service), continued health benefits (COBRA subsidy), and sometimes outplacement services; the employee signs a general release of claims waiving the right to sue the employer. Key provisions typically include: non-disparagement (neither party publicly criticizes the other), confidentiality (the terms remain private), non-solicitation (the employee won't recruit former colleagues), return of company property, and cooperation (the employee assists with transition). For employees over 40, the Older Workers Benefit Protection Act (OWBPA) requires specific language: the agreement must reference the Age Discrimination in Employment Act by name, advise the employee to consult an attorney, provide 21 days to consider (45 days in group layoffs), and allow 7 days to revoke after signing. Failure to include these provisions makes the age discrimination waiver unenforceable. Severance pay is taxable as ordinary income and subject to withholding. Companies are not legally required to offer severance (unless an employment contract or company policy mandates it), which makes the negotiation leverage asymmetric.

A severance agreement is one of the few moments where an employee has significant negotiating leverage — the employer wants a clean release of claims, and the employee holds that leverage until they sign. Most people sign the first offer without negotiation, leaving substantial value on the table. An employment attorney can review the agreement, identify terms that are overly restrictive, negotiate higher pay or extended benefits, and ensure you understand exactly what rights you're waiving.