Severance agreements explained: what to check before you sign

What a severance agreement is

A severance agreement is a legally binding contract between you and your employer. Usually your employer pays you a sum of money and, in return, you agree not to bring certain legal claims against them. It often comes up when a job is ending, but it can also settle a dispute while you’re still employed.

An offer of a severance agreement doesn’t mean you’ve done anything wrong. Employers use them because they give certainty: both sides know where they stand, and nobody spends months on a dispute.

Why your own advice matters

Most severance agreements are valid without an attorney’s review, but if you’re 40 or older, a release of federal age claims generally must advise you in writing to talk to an attorney, give you at least 21 days to consider it (45 in a group layoff) and 7 days to change your mind.

Employers don’t have to pay for that advice, but many will contribute toward your legal fees if you ask. When they do, it’s usually written into the agreement itself, often as “up to $1,000.”

If a contribution covers the attorney’s fee, the advice costs you nothing, and you can still choose your own attorney.

The money

Check that the agreement spells out each payment separately. Typically you’ll see some or all of these:

• Salary up to your last day, paid as normal.
• Notice pay, if your contract or company policy promises it.
• Accrued vacation pay for vacation you’ve built up but not taken, if your employer’s policy pays it out.
• Severance pay, the main sum, often based on your length of service.
• A compensation payment: the extra sum for settling any claims.

Some of these are things you’d be owed anyway. It’s worth checking how much of the total is genuinely extra.

Tax

Most of what you’re paid is taxable. As a general rule, salary, notice pay, vacation pay and severance are treated as wages, with tax withheld in the usual way. Some parts of a settlement, such as attorney’s fees or emotional distress payments, may be reported differently, so the agreement should say how each payment will be treated.

Most agreements also say that if the IRS later decides more tax was due, you’ll pay it. That’s one reason the tax treatment should be checked before you sign, not after.

The claims you give up

The agreement will list the claims you’re waiving. It usually includes claims like wrongful termination, discrimination and breach of contract, whether or not you were thinking of bringing them.

Some rights can’t be signed away, such as workers’ compensation and unemployment benefits, vested retirement benefits or your right to file a charge with the EEOC. A good attorney will check that what you’re giving up is reasonable for what you’re being paid.

References and confidentiality

The clauses that matter most to people a year later are often not about money at all:

1. The reference. Ask for the wording to be agreed and attached to the agreement.
2. The announcement. How will your colleagues and clients be told you’re leaving?
3. Confidentiality. These clauses generally can’t stop you reporting wrongdoing, or talking to the police, a government agency or your doctor.
4. Restrictive covenants. Check whether any non-compete restrictions from your contract still apply.

Can you negotiate?

Often, yes. The first offer is not always the final one. Whether it’s worth negotiating depends on the strength of any claims you’d be giving up, your length of service and what your employer would gain from settling.

Negotiation is usually marked as a confidential settlement discussion, meaning the conversations can’t normally be used as evidence later if talks fail. That gives both sides room to be frank.

What happens next

If you’ve been sent an agreement, a sensible order is:

1. Don’t sign anything, and don’t resign.
2. Note the deadline. If it’s tight, it’s reasonable to ask for more time to take advice.
3. Send the agreement, your contract and recent pay stubs to an attorney.
4. Talk it through, decide what (if anything) to ask for, and sign once you’re happy.

If you’d like me to review yours, my fixed fee is $750, and your employer may agree to contribute. Book a severance agreement appointment or use the fee estimator first.