Understanding Your Severance Agreement: A Clause-by-Clause Guide

Introduction

A severance agreement is a legally binding contract between you and your employer. Before you sign it, you need to understand every clause, because once you sign, you are locked in. This guide walks through each section of a typical severance agreement, explains what it means in plain English, and tells you which terms are negotiable.

The Structure of a Severance Agreement

Most severance agreements follow a standard structure. While the specific language varies, nearly all agreements contain these sections:

1. Recitals (background facts)
2. Severance payment terms
3. Benefits continuation
4. Release of claims
5. Confidentiality provisions
6. Non-disparagement clause
7. Non-compete and non-solicitation
8. Return of company property
9. Cooperation clause
10. Governing law and dispute resolution

Let's examine each one.

Section 1: Recitals

The recitals section states the basic facts: your name, your position, your start date, your termination date, and the reason for the separation. This section matters because it establishes the factual basis for the agreement.

What to check: Make sure the facts are accurate. An incorrect start date could affect your severance calculation. An incorrect reason for termination could affect your unemployment benefits or future employment.

Negotiable? Yes. Factual corrections are always appropriate. You can also negotiate the stated reason for separation (e.g., "mutual separation" instead of "terminated").

Section 2: Severance Payment Terms

This section specifies the amount of severance pay, how it will be paid (lump sum or installments), and when payments begin.

Lump Sum vs. Installments

| Payment Method | Pros | Cons | |---------------|------|------| | Lump sum | One payment and no continuing-payment exposure to the employer | Concentrates cash flow and taxable wage income on one payment date | | Installments | Staged cash flow and possible benefit continuation if the agreement provides it | Continuing-payment risk; payment dates and state benefit rules may matter |

Whether the amount, timing, or structure can change depends on the offer and employer. Payment dates can change tax-year and benefit facts but do not guarantee tax savings. See the complete negotiation guide for a comparison framework.

Section 3: Benefits Continuation

This section covers health insurance, retirement plans, and other benefits.

Health Insurance

Your employer may offer to pay for COBRA continuation coverage for a specified period. COBRA allows you to keep your employer's health plan for up to 18 months, but it is expensive: you pay the full premium plus a 2% administrative fee.

What to check: How many months of COBRA will the employer pay? Is it the full premium or a partial subsidy? What happens if you find a new job with insurance before the COBRA period ends?

Retirement Plans

Your vested 401(k) balance is always yours. The severance agreement may address:

• Whether you can continue contributing during the severance period
• How unvested employer matching contributions are treated
• Whether severance pay counts as compensation for 401(k) purposes

Read more about how severance affects your retirement savings.

Equity Compensation

If you hold stock options or RSUs, this section specifies what happens to your equity upon termination. Key terms to look for:

• Post-termination exercise period for vested options
• Treatment of unvested equity (forfeiture vs. acceleration)
• Any restrictions on selling vested shares

Negotiable? Yes. Benefits continuation is one of the most commonly negotiated areas.

Section 4: Release of Claims

This is the most important section of the agreement. The release is the reason the company is offering you severance in the first place. By signing, you waive your right to bring legal claims against the company.

What You're Giving Up

A typical broad release covers:

• Discrimination claims under federal and state law
• Retaliation claims
• Wrongful termination claims
• Breach of contract claims
• Wage and hour claims
• Claims under ERISA (retirement benefits)
• Any other claims arising from your employment

What Cannot Be Released

Even a broad release cannot waive:

• Workers' compensation claims (in most states)
• Unemployment insurance benefits
• Rights under COBRA
• Vested pension benefits
• The right to file a charge with the EEOC (though you can waive the right to recover damages)
• Claims that arise after you sign the agreement

Special Rules for Workers Over 40

If you are 40 or older, the Older Workers Benefit Protection Act (OWBPA) imposes specific requirements for the release to be valid:

• The agreement must specifically reference your rights under the ADEA
• You must be given at least 21 days to consider (40 days in a group layoff)
• You must have 7 days to revoke after signing
• You must be advised in writing to consult an attorney
• In a group layoff, the employer must disclose the ages and job titles of those selected and not selected

Negotiable? The scope of the release is negotiable. You may be able to carve out specific claims or make the release mutual.

Section 5: Confidentiality Provisions

Confidentiality clauses typically cover two things:

1. Confidentiality of the agreement itself: You cannot disclose the terms of your severance (including the amount) to anyone except your spouse, attorney, and tax advisor.
2. Confidentiality of company information: You must continue to protect trade secrets and proprietary information after you leave.

What to check: How broad is the restriction? Can you discuss the agreement with your financial advisor? Can you acknowledge that you received a severance package without disclosing the amount?

Negotiable? The scope of confidentiality is negotiable. You can request exceptions for specific people or situations.

Section 6: Non-Disparagement

A non-disparagement clause prohibits you from making negative statements about the company, its management, products, or services.

What to check:

• Is the obligation mutual? If not, request that the company also agree not to disparage you.
• What constitutes "disparagement"? Is truthful criticism included?
• Does it apply to social media posts, Glassdoor reviews, and private conversations?
• What are the consequences of a violation?

Negotiable? Yes. Always push for mutual non-disparagement and reasonable scope.

Section 7: Non-Compete and Non-Solicitation

Non-Compete Clauses

A non-compete clause restricts your ability to work for competitors for a specified period and within a geographic area.

What to check:

• Duration: Typical range is 6 to 24 months
• Geographic scope: Local, national, or global?
• Industry scope: How broadly is "competitor" defined?
• Enforceability: Many states limit or ban non-competes. California, for example, generally will not enforce them.

Non-Solicitation Clauses

Non-solicitation clauses prevent you from recruiting the company's employees or soliciting its customers after you leave. These are generally more enforceable than non-competes.

Negotiable? Highly negotiable. If the company wants you to sign a non-compete, that restriction has real value. You should be compensated proportionally, either through additional severance or by narrowing the scope.

Section 8: Return of Company Property

This section requires you to return all company property: laptop, phone, badges, keys, documents, and files. It typically also requires you to delete company data from personal devices.

What to check: Can you keep your laptop if the company is decommissioning it? What about personal files stored on company devices?

Negotiable? Sometimes. Companies often agree to let departing employees keep their laptop after IT wipes company data.

Section 9: Cooperation Clause

A cooperation clause requires you to assist the company with ongoing matters after you leave, such as litigation, regulatory investigations, or transitioning your responsibilities.

What to check:

• How long does the cooperation obligation last?
• Will you be compensated for your time? At what rate?
• Are travel expenses covered?
• Is there a minimum notice period before you are required to assist?

Negotiable? Yes. At minimum, ensure you will be compensated for your time at a reasonable hourly rate.

Section 10: Governing Law and Dispute Resolution

This section specifies which state's law governs the agreement and how disputes will be resolved (court vs. arbitration).

What to check: Arbitration clauses can limit your rights. Understand whether you are waiving your right to a jury trial and whether the arbitration process favors the employer.

Negotiable? Sometimes, but companies often have strong preferences here.

Red Flags to Watch For

Overly Broad Release

A release that waives "any and all claims of any nature" without exception may be too broad. Make sure the release is limited to claims arising from your employment and does not cover future claims.

One-Sided Obligations

If the agreement imposes obligations on you (confidentiality, non-disparagement, non-compete) without corresponding obligations on the company, push for mutuality.

Clawback Provisions

Some agreements include clauses that allow the company to recover the severance payment if you violate any term of the agreement. These can be disproportionate: a minor confidentiality breach should not cost you your entire severance.

Waiver of Unknown Claims

In California, some agreements include a waiver of Civil Code Section 1542, which protects claims you do not know about at the time of signing. Understand what this means before agreeing.

Unreasonable Deadlines

Pressure to sign quickly is a red flag. If the company gives you less than the legally required review period (21 days for workers 40 or older), the release may be invalid.

Use the AI Agreement Analyzer to scan your severance agreement for these and other potential issues.

Next Steps

1. Calculate your expected severance to establish a baseline
2. Review your agreement against this guide
3. Consider consulting a licensed employment attorney in your state if you need professional review
4. Read the complete negotiation guide for strategies to improve your offer

Related Deep-Dives

Articles below go deeper on specific agreement-clause subtopics.

Red flags + agreement scrutiny

• Severance agreement red flags: the clauses to scrutinise before signing
• Severance package checklist: every item to verify

Restrictive covenants

• Non-compete clauses in severance agreements: enforceability + how to narrow
• Non-disparagement clauses: what they actually prohibit
• Garden leave + severance: paid waiting periods vs traditional severance

Equity, bonuses, and one-time payments

• Stock options + equity in severance: vesting, acceleration, and clawbacks
• Stock options + severance: the basics of equity treatment at separation
• Signing bonus clawbacks + severance: when employers can recoup
• PTO payout + severance: when unused PTO must be paid

Payment structure

• Lump sum vs installments: tax + unemployment + cash-flow tradeoffs