What Is a Severance Agreement?

A severance agreement outlines the terms of the end of an employer-employee relationship. It allows an employer to let go of an employee without being further liable for them.

For a severance agreement to be valid, it must offer the employee consideration, or something of value. It may be severance pay, which is an extra payment to an employee via a lump sum or periodic payments. Something of value may also include extended health insurance or additional stock. Whatever the employer offers, the employee can agree to it if they promise not to bring legal action against the employer for their termination.

Consideration in a severance agreement may not be something that the employer already owes the employee. For example, it cannot be payment for earned wages or stock promised in the original employment contract.

What to Include in a Severance Agreement

A well-written severance agreement (or “separation agreement”) reduces liability for the employer and gives an employee clarity on the next steps. Learn what to include in a severance agreement below:

Employer’s details. Provide the name of the employer and the location of their business.
Employee’s information. Write the employee’s name and supervisor.
Termination date. Record the date on which the employee’s employment will end.
Severance payment. List the amount of severance pay the employee will receive, if any. Describe how it will be paid out.
Benefits. Specify if the employee will receive continued or extra benefits. For example, they may receive a grant of company stock or continued health insurance. Nontraditional benefits include access to outplacement services or a letter of recommendation.
Release of claims. The employee should agree to release the employer from all claims. These claims may be related to wrongful termination, discrimination, or breach of contract.
Statement of confidentiality. The employee should agree to maintain confidentiality and not disclose trade secrets.
Statement of non-disparagement. The employee should agree not to speak negatively about the employer.
Severability. Include a statement explaining that if one part of the contract is invalid, the rest of the document will remain in effect.
Governing law. Identify the state whose laws will govern the contract.

A non-compete clause in a separation may be difficult or impossible to enforce, especially if local or state bans are in place. The FTC attempted to ban most non-competes on a nationwide level, but the ruling is currently on pause.

Sample Severance Agreement

View an example of a severance agreement to see how to organize your end-of-employment terms. When you’re ready, you can create your separation agreement using Legal Templates’s guided form. Add your customized conditions based on company policy and negotiations with the employee. Then, download a final copy as a PDF or Word document to send to your employee.

This is a document preview. Your customized version will be created after you answer a few quick questions.

Severance Agreement

Severance Package Example

Here’s an example of the severance package an employee could receive, including continued pay and benefits:

Employer and Employee agree that Employer must pay upon Employee’s termination. The Employer agrees to pay the Employee:

In installments. $3,000 in each installment every two weeks, continuing until January 1, 2026. This payment is subject to applicable state and Federal taxes and withholdings.

The Employee’s benefits, including but not limited to health, dental, and vision benefits, will continue for two months following the termination date. During this period, the employee will be responsible for paying any costs associated with these benefits.

Legal Considerations When Writing a Severance Agreement

When writing a severance agreement, it’s essential to consider key legal elements to protect your company from liability. With proper consideration accepted, an employee cannot sue for issues covered in a signed severance contract. The employee trades their right to sue for payment or benefits.

However, exceptions may exist for unpaid wages, future claims, and claims not properly waived (like workers’ compensation claims). The employee may also still be able to sue if they were coerced into signing the severance contract, or if the contract attempts to cover up illegal conduct on the part of the employer.

Here are some other important considerations when writing a severance agreement:

1. Severance Agreements for Employees Over 40

If a severance agreement for an employee over 40 waives age-related discrimination claims, it must comply with the Older Workers Benefit Protection Act (OWBPA). Under this act, the severance agreement must:

Refer to the Age Discrimination in Employment Act (ADEA)
Contain clear language
Advise the employee to consult an attorney
Provide a review period for the contract (21 days for individuals, 45 days for group layoffs)
Allow for a seven-day period to revoke the contract

2. Employees’ Right to Reject a Severance Agreement

An employee is not required to sign a severance letter. There may be terms, such as a non-compete clause, that the employee is uncomfortable signing. In doing so, the employee forfeits their right to severance pay and a continuation of benefits but will retain their right to bring any legal claims they have related to their termination.

Generally, it is in the employer’s and employee’s best interest to agree to the contract.

3. Administration of COBRA Health Insurance Continuation

As an employer, you can’t maintain the employee’s insurance indefinitely. However, you can extend their coverage for a specific period while they search for a new job. You may do so by keeping them on your insurance plan or using the Consolidated Omnibus Budget Reconciliation Act (COBRA).

This severance benefit is particularly beneficial for long-term employees who depend on this insurance for their families.

4. Adherence to the Employee Retirement Income Security Act (ERISA)

When writing severance agreements, you must abide by the Employee Retirement Income Security Act (ERISA). This act sets minimum standards for many private-sector employee benefit plans.

ERISA matters because if a severance agreement includes continued benefits, such as health insurance or retirement benefits, federal rules apply. These rules can limit what an employee can give up and how the employer must handle these benefits.

For example, suppose a severance agreement promises continued health coverage for three months through an employer-sponsored plan. ERISA may dictate how it’s administered, so the severance contract must align with ERISA’s rules.