What is a severance agreement, and what benefits does it give to employees leaving the company? By reading the article below, you can learn more about these agreements, including their definition, composition, and construction. You can also find answers to frequently asked questions regarding these documents.

What Is a Severance Agreement?

A severance agreement is a legal document detailing the responsibilities and rights of the employer and employee. It lays out all the offered benefits coming from the company, including pay and insurances, and guarantees that termination of the contract is valid and went through a just process. Several organizations also utilize the severance agreement to elaborate on non-compete concerns. The severance agreement and severance pay assure employees’ understanding of the terms and conditions regarding their termination. They recognize and agree that the end of the contract leads to changes in payment, insurance, and other benefits. In exchange for signing the document, an employer offers severance pay that aids employees in transitioning to the world outside the company. The severance pays works as a continuous salary for a defined period to help the employee in job hunting or allocate for a business.

According to a published article by SHRM in March 2018 regarding severance pays in the United States, almost all businesses, roughly 97 percent of companies, mention giving severance pay to their employees. However, only 55 percent of organizations present formal and written severance policies during 2017, with 52 percent setting minimum and maximum amounts.

Components of a Severance Agreement

Since severance agreements are complex and legal forms of document, they must detail the essential elements that explain the items, pay or other benefits an employee receives after agreeing to the separation terms set by the management. Aside from the termination terms, the agreement also influences employee behavior at their departure. It is safe to consider the statements and clauses that are present in the document. Below are the common elements that you can include in your severance agreement.

Reason for separation: Most severance agreements provides a clear outline of reasons or considerations resulting from an employee resignation or termination. The document explains that employer and employee communicate with each other to reach a fair and just agreement of parting ways officially and professionally. Agreed timeline: The severance agreement must define and explain an employee’s date of employment, termination date, and additional information regarding the allocated timeframe for the employee to accept or reject the contents of the severance agreement.Severance pay: This section is necessarily one of the most vital components of a severance agreement. It details the benefit an employee receives upon signing the document. Severance pay is a negotiated percentage of an employee’s monthly salary within a particular period. It is either given through regular payments or a lump sum.Paid time off: The agreed severance benefits can also include the compensation for available paid time off and vacation leaves. Some companies allow their employees to take their paid vacation and sick leaves before parting ways with the company or a conversion into a payout amounting to the remaining benefits while they were still employees.Health insurance: Employers can also choose to provide their employees with continued healthcare insurance as it helps provide stability to individuals while looking to be hired by a new employer who will continually pay for the medical compensations. Following the Consolidated Omnibus Budget Reconciliation Act or COBRA, all employees, under the law, continuously receive their healthcare insurance for up to a year and a half following termination.Stock options: Some companies give the stock option as a benefit, and if the company is one of them, a section details the process of changing vesting schedules. The method ensures that employees can cash out their stocks or shares of the company.Career placement: Several organizations provide employees with outplacement assistance and career coaching activities to assist them in landing a new job. This severance benefit gives employees a sense of reassurance of having a form of career stability. It also shows that the organization deeply cares for its workers and their wellness even outside the company.Liability release: As the severance agreement thoroughly explains the contents and benefits an employee receives in exchange for signing, it also explains additional conditions to gain the benefits. The severance agreement also contains a general liability waiver, wherein the employee agrees not to seek any legal claims or demands against the organization upon their termination. The liability release statement protects current employees, company shareholders, directors, subsidiaries, and affiliate partners. It also specifies critical events to protect the company from litigation, including wrongful termination, civil rights violations, Family and Medical Leave Act (FMLA) violations, and discrimination.Return of company equipment: If the employee holds equipment that is company property and still under their care, the severance agreement details the return process and schedule. Indicating this section guarantees a peaceful exit transition of the employee from the organization.Reference Check Procedure: The purpose of the reference check clause prevents the organization from writing up a negative reference to potential employers. Some severance agreement holds the clause that instead indicates that the company provides a positive reference as a part of the agreement. It can even give a copy of the reference letter for the employee to review and approve.ADEA information: All severance agreements given to employees over the age of forty (40) must include information regarding the Age Discrimination in Employment Act that familiarizes employees of their legal rights.Confidentiality details: The severance agreement also details a constructed list explaining what an employee can disclose to other individuals upon signing the agreement. Some companies also make the document in itself a confidential account. It means that the person must refrain from sharing information regarding the terms present in the severance agreement, including customer lists, trade secrets, and company processes.Non-compete clause: The company also incorporate a non-compete agreement into their severance agreement. The section guarantees the employee cannot enforce competition with the company using its resources. These non-compete clauses also have a closing date and implement within a particular location.Non-disparagement clause: A non-disparagement clause prevents an employee from creating negative remarks or commentaries about the organization within a specific period. In short, it keeps an employee from defaming the business.

How To Deliver a Severance Agreement to an Outgoing Employee

Once you have all the necessary components listed above in your severance agreement, with the help of a contract attorney, the next step is to deliver and present the document to an outgoing individual. Below are four easy and simple steps to follow when the time comes to communicate the agreement. The following steps ensure that you cover the necessary parts of the document, leaving nothing to chance.

Step 1: Provide Sufficient Time for Consideration

Most employees inquire about the amount of time they have to sign the document after receiving a severance agreement from the human resource department. Individuals ask about it because these documents are vital, and no one would think about rushing into signing them without reading the fine print. As consideration, employees must be given at least 21 days for a thorough review of the terms and conditions written on the agreement. It is also necessary to mention to the employee to implore the aid of an attorney during its review. Never pressure your employees to sign the document immediately, and their acceptance of the severance agreement must be voluntary. Upon signing, employees have a seven-day revocation period.

Step 2: Indicate a Precise Competitor List to Support the Non-Compete Agreement

If your severance agreement contains a non-compete clause, help your employees by providing a list of known competitors in the industry. It also ensures that the section holds up in court if and when there is a need. It is also critical to explain that the non-compete agreement isn’t always applied because it suggests they cannot work within a similar industry. It is highly impractical, especially if the employee dedicated their work-life within a particular business industry. It is best to consult with the organization’s legal services or the legal department on the inclusion and implementation of the non-compete.

Step 3: The Release of Waiver

This step of the process is the most crucial part of delivering the severance agreement. You cannot prohibit employees from filing a claim with the United States Equal Employment Opportunity Commission (EEOC). Meaning it is the employer’s responsibility to have a section of the agreement that covers your employees’ rights, especially their ability to contest their termination through filing a claim letter. It is also necessary to go through the incorporation of this section with the help of legal attorneys.

Step 4: Indicate and Understand the Special Rules and Regulations

Understand that if an employee is over 40 years old, some special inclusions and rules must be present in the severance agreement. For individuals within this scope, the employer must provide a longer period of time to review the terms and conditions, revoke prior decisions of signing, or change their minds after signing the agreement. It is also advantageous to advise these individuals to consult with an attorney when making their decisions. In such cases, you must modify the document’s content or save a severance agreement file for individuals over 40.


What is the purpose of providing severance agreements to employees?

Some employers provide severance pay to their terminated employees, whether voluntary or involuntary. The purpose of this is to soften the impact of involuntary terminations and avoid potential lawsuits by having the employee sign a release waiver in exchange for severance. The employer also provides support through various benefits, including salary continuation, insurance benefits, uncontested unemployment benefits, outplacement services, positive references, and other miscellaneous factors.

Can an employee sue a company if they sign the severance agreement?

When you sign a severance agreement, you understand and agree to the various clauses inclusive of the document. The terms within the agreement state that an individual accepts the severance pay and benefits in exchange for not taking legal actions against your employer. However, if you feel like you were unjustly terminated from your previous position but have signed the severance agreement that contains a release of liability waiver, you cannot pursue suing your previous company.

What happens if you break or breach a severance agreement as an employer?

Remember that severance agreements are legal documents and a contract, meaning the two parties agreed with mutual understanding. If an employee does not receive the severance benefits or pay the employer promised, it is considered a breach of contract. The breaches also involve reduced or withheld payment, without or limited access to medical benefits, failure to provide retirement benefits, or outplacement assistance. An employer must be accountable for upholding their end of the agreement as an employee held theirs.

Employers must show their concern and give importance to their employee’s services during their time in the company. They can show their support and assistance to terminated employees, whether voluntary or involuntary, through creating a well-written and communicated severance agreement. As an employer, you must give the best possible path for your previous employees to reach their dreams and land another job. Start creating a severance agreement for your company by using and downloading the multiple severance agreement samples available above.