A separation or severance agreement is a special agreement locking in the terms for ending a job contract. Whether an employee resigns voluntarily, is laid off, or fired for poor performance, severance agreements provide legal clarity on what both parties must do after employment ends.
But hold on here, why do employers or employees even feel the need to sign a contract once a job contract is over? Let me explain.
For employers: Severance agreements help minimize the threat of litigation from departing employees, while protecting them against loss of clients, confidential data, or goodwill.
For Employees: They present an opportunity to negotiate a good severance package before they leave. This may include money and continued healthcare, as well as non-economic incentives such as a reference letter to assist in future employment.
Key Takeaways
- Severance contracts may involve permanent or temporary employees (say, freelancers or independent contractors)
- Employers in the U.S. are not legally required to provide severance pay or packages
- Amount of severance pay can vary based on the length of employment and the reason for separation
- Enforceable just like any other contract, as long as it doesn’t violate federal or state laws
- Not required every time an employee leaves a company, but may be required under certain contractual terms, company policies, or statutes applying to specific circumstances
- Typically involves some kind of payment in exchange for a waiver and release of claims.
- Covers claims that are “known or ”unknown”—meaning, even claims that are not apparent until after the agreement is executed (so long as the conduct underlying the claim occurred before execution)
- Some claims (such as unemployment benefits) usually cannot be waived
What’s Included?
Every severance agreement is unique. Having said that, most agreements contain similar clauses to protect both parties from legal disputes or confusion arising later on.
A typical Severance Agreement includes:
- Date & location of the agreement
- Last working day or ‘termination date’
- Identity and contact details of both parties
- Details of the severance packages
- The Release of Claims
- Non-Compete Clause
- Non-Disclosure Clause
- Non-Solicitation Clause
- Non-Disparagement Clause
- The Revocation Clause
- Litigation Waiver
- Dispute Resolution Mechanism
- Dated signatures of both parties
A separation agreement is also known as:
- Separation and Release Agreement
- Severance and Release Agreement
- Release of Claims Agreement
- Severance Package Agreement
- Mutual Separation Agreement
- Employment Termination Agreement
When To Negotiate One?
So, when exactly is the best time to negotiate a severance package for employees?
When signing the employment contract…
While severance is not always a part of an employment contract, a competitive severance policy can help attract top talent by offering financial protection in the event of an unexpected employment termination. So, even though it may seem counterintuitive, one of the best times to mention severance benefits is in the employment contract, at the start of the employment period.
During the termination meeting…
When a company lays off employees or restructures its workforce, it is common for the manager or a senior company representative to hold a termination meeting with the departing employees. This is a good moment to negotiate a severance package to ensure a smooth transition without disputes, such as returning company property or helping with the handover.
What you can negotiate
- Extra pay or additional weeks of severance
- Payout for unused benefits, bonuses, and commissions
- Continued health coverage continuation
- Positive reference letter
- Outplacement or career support services.
Leverage and legal limits in severance negotiation
Employees with a viable claim against the employer (say, discrimination) and a willingness to pursue that claim in arbitration or litigation may have greater leverage to negotiate a higher severance payment. It is also common for both parties (especially wrongfully terminated employees) to hire a lawyer to assess potential legal claims and risks—including the cost of pursuing or defending such claims and the disruption to their business or career.
That being said, a severance package is not required by U.S. law (unless specified in a contract or company policy) and is often determined based on the circumstances of the dismissal.
What We Offer
A well-crafted employee separation agreement is beneficial to both parties. Lucky for you, our team of legal experts came up with a pre-made contract containing standard legal terms, so you don’t have to do the research yourself. Simply fill in the required information, check the boxes relevant to you, and have the document signed by both parties.
Let’s see what each section of our template covers and how to fill it out.
Change in Employment Status
This clause is arguably the heart of the template, as it clarifies the change in the legal status of the employee. It is important for employers to know the status of each employee and the potential benefits that are associated with each classification.
In our template, you need to furnish the following two dates to ensure that all benefits or payables are calculated accurately:
- Separation date: When an employee officially stops working for the company, meaning their last working day, even if they don’t leave immediately (for example, if they have to work a notice period).
- Final compensation date: When the company pays the employee their last paycheck or any remaining benefits. In most cases, this falls after the separation date, as the company might need time to calculate things like unused vacation days, severance pay, or other benefits.
The Severance Clause
This section lets you confirm whether the employee will receive severance or not. Check the first box if the employee will not receive any additional pay or benefits beyond what they’ve already earned. Check the second box if severance will be paid. Then choose one of the following:
- Installments: Regular payments on the normal payroll schedule until the stated end date
- Lump Sum: One-time payment within a set number of business days
- Other: Describe any alternative payment arrangement
Are my severance payments subject to S.409A?
Generally speaking, yes, since severance payments are essentially paid after employment ends. The IRS may treat severance as deferred compensation because you’re receiving it later, not when you earned it. But there are exceptions; for example, if severance is paid within a short window (usually within 2 1⁄2 months after the year of separation) or the payment amount is too small.
Continuation of Health Benefits
If checked, this section confirms that the employer will continue the employee’s group health insurance under COBRA. The employer will pay the premiums until the date specified, after which the employee may keep coverage but must pay for it themselves under COBRA rules.
What is COBRA?
COBRA is a federal law, short for Consolidated Omnibus Budget Reconciliation Act (COBRA) that allows certain terminated employees to keep their healthcare insurance for up to 18 months.
Additional Severance Benefits
This section seeks to declare whether there are any extra severance benefits being offered or not. If they are, utilize the space below to list these extra perks (e.g., outplacement services, bonus payments, equipment allowance).
Return of Property
Use this section to confirm whether the employee has any company property to return.
- No Obligation to Return Property: Check this box if the employee has nothing belonging to the employer and therefore doesn’t need to return anything.
- Obligation to Return Property: Check this if the employee still has company-owned items (like laptops, phones, keys, and documents). List each item and specify the deadline for return. Leaving employees must ensure that the items are returned in good condition, except for normal wear and tear.
This section further confirms that any failure to return property may be treated as a breach of the agreement and could lead to legal action.
Feel free to use our Employee Equipment Agreement to ensure proper care & responsible use of company assets.
Release of Claims
Through this section, the employee officially agrees to give up any legal claims—past, present, or future—against the employer and its affiliates related to their job or termination. This includes lawsuits, demands, or damages of any kind, whether known at the time or discovered later.
The release usually covers claims under employment laws like discrimination, wrongful termination, or wage disputes. Learn more about HR-critical laws such as FLSA (governing wage limits & durations) and FMLA (concerning allowed grounds for leave) here!
Non-waivable rights
Be aware that a release clause does not waive rights that cannot be waived in the first place, such as unemployment benefits or certain whistleblower protections. Below, I briefly go over each non-waivable right and related law for your guidance:
- EEOC Filing Rights: Right to file a discrimination charge with the Equal Employment Opportunity Commission, report misconduct, or assist in EEOC investigations.
- Pension Rights under ERISA: Right to vested pension benefits under the Employee Retirement Income Security Act (ERISA)—such as funds vested in a qualified plan (like a 401(k)
- WARN Act Rights: Right to a 60-day notice before mass layoffs, as required under the Worker Adjustment and Retaining Notification Act.
- Workers’ Compensation Benefits: Right to benefits such as medical care & rehabilitation for employees who are injured or become ill due to work, as stipulated under State Workers’ Compensation Acts.
- Unemployment Insurance: Right to receive unemployment insurance if the employee otherwise qualifies. This right is protected and administered under the Federal Unemployment Tax Act.
- Older Workers’ Rights: Under the Older Workers Benefit Protection Act (OWBPA), if an employee is 40 years old or above, federal law gives them a 21-day window period to consider and review the severance agreement (45 days for group layoffs). Even after signing, they still have 7 days to change their mind if they end up feeling differently about the agreement.
Who is getting released, and who is doing the releasing?
Broadly defined, the person getting released is the employer, but also their affiliates, predecessors, directors, officers, employees, and agents. The party doing the releasing is the employee, but it could also be their heirs, representatives, or agents operating on their behalf.
What Are Restrictive Clauses?
Separation agreements are often designed to limit the actions of the departing employee to protect the business interests of the employer. This is done by incorporating certain ‘restrictive’ clauses.
In our template, such clauses have been carefully worded and included as Clauses V, VI, VII, and VIII, respectively. For non-compete and non-solicitation clauses, you must also specify the duration and/or geographical zone within which the restriction holds.
- Non-Compete Clause: Stops former employees from joining competitors for a particular duration and specific area. The goal here is to protect the employer’s business interests and market share.
Our premade contract gives you two options to choose from:
- Select the first checkbox if you don’t wish to include any restriction on the departing employee, affirming their freedom to seek or accept employment for one of your competitors.
- Select the second checkbox if you wish to restrict the employee from owning, managing, operating or working for a business that directly competes with the Employer. Make sure you specify a duration for which this restriction shall hold.
What does the law say?
Most non-competes around the world are valid for up to 6 months or a year. As of early 2025, there is no federal law in the U.S. that categorically defines an upper limit for how long an employment-based non-compete agreement can stay valid. In fact, over the past decade or so, the general momentum (at the federal level) has been directed against non-compete agreements (or clauses) as they limit worker mobility & stifle economic growth.
Geographical scope
In addition to a specific duration, you will also use this clause to nail down a geographic zone within which the employee must abide by the agreement. Simply calculate this in miles, and check the relevant checkbox to confirm if the geographic scope of the restriction is:
- State-wide (across one individual State like Texas or New York)
- Nationwide (across the US)
- International
- Non-Solicitation Clause: A non-solicitation clause is used by companies to stop former employees from reaching out or ‘soliciting’ your clients, customers, or business partners.
Our templates give you two options:
- No such restriction to be placed on the employee, who shall be free to contract, engage, or do business with the Employer’s current employees/clients or vendors, etc.
- A legal restriction to be placed on the employee, forbidding them from soliciting the employer’s clients or employees. Any such restriction must come with a specific duration (to be specified by the user in the blank space provided).
Note that a non-solicitation clause protects the Employer from any interference by the departing employee that may disrupt the Employer’s relationship with its:
- Employees: Protect the employer from any attempt by the employee to cajole your workers to leave the company and join them instead, and
- Business partners: Protects the employer’s relationships with existing vendors, contractors, or business associates.
- Non-Disclosure Clause (NDA): Prohibits sharing of confidential information, trade secrets, business strategies, and intellectual property after employment ends.
As the saying goes, knowledge is power. This is why businesses use NDAs to prevent the disclosure or misuse of confidential or proprietary information exchanged in a professional setting. But what exactly does an NDA protect when it comes to vital business information?
- Trade Secrets—formulas, processes, recipes, manufacturing methods, and algorithms.
- Financials—budgets, forecasts, revenue data, and pricing models.
- Technical Info.—product designs, prototypes, source code, research data.
- Sales /Marketing Plans—campaigns, launch dates, and target audience data.
- Customer Lists—contact details, buying patterns, contract terms.
- Employee Details—salaries, internal policies, HR strategies.
- Legal Info—contracts, settlements, compliance documents.
Intellectual Property – pending patents, unpublished research. - Confidential Communications—internal memos, emails, meeting notes.
Is the confidentiality duty absolute?
No. As spelled out in our standardized clause, the confidentiality or non-disclosure restriction may be forfeited in certain cases, such as:
- During communications with immediate family members
- During communications with legal counsel, tax, or financial advisors
- As required for the enforcement of rights under Section 7 of the NLRA
- As required by law in any other way
- To report possible violations to any government agency
- To participate in any government investigation or proceeding
To learn more about the law on ensuring confidentiality in professional contracts, feel free to check out our detailed post on non-disclosure agreements!
- Non-Disparagement Clause: Stops employees from saying bad things about the company, thus protecting its reputation or business from harm.
With this clause, the Employee agrees not to make any false, harmful, or negative statements about the Employer or even its affiliates, including any officers, directors, employees, or business practices, in any form whatsoever (oral, written, etc.). The test for the court here is seeing if those statements have the potential to damage the Employer’s reputation or business. In return, the Employer agrees that its officers and directors will also avoid making harmful statements about the Employee that could taint their personal or professional reputation.
That said, this section does not limit the Employee’s legal rights, including their right to engage in activities protected by the National Labor Relations Act (NLRA), such as filing or participating in labor investigations. It also allows the disclosure of information as required by law or government authorities, but only to the extent necessary.
How a Non-Disparagement Clause Works In Practice
Let’s say John leaves a company and badmouths his former employer online despite having signed a non-disparagement clause. This means the employer can now take legal action for breach of contract. Conversely, if the employer, XYZ Corp, publicly criticizes John’s performance or spreads false rumors, he could seek legal remedy too. Thanks to a disparagement clause, both parties are protected from any potential damage to their reputation. That said, they are also free to act within their legal rights, such as participating in labor investigations.
Litigation Waiver and Limitations
This part of the agreement means that the employee agrees not to file any lawsuits or legal claims against the employer for any incidents that happened prior to the agreement being signed. This could relate to any issue, such as:
- Disputes over job performance
- Salary disagreements
- Workplace conditions
- Wrongful termination
- Disciplinary actions
- Harassment claims
In essence, the employee waives the right to pursue any legal action for anything that happened during their period of employment.
That said, the employee can still file a complaint with government agencies like the Equal Employment Opportunity Commission or the National Labor Relations Board, but they waive the right to receive money or personal relief from those complaints. Essentially, the employee gives up the right to sue the employer for past events but can report issues to authorities without expecting financial compensation.
No Other Promises
If the stakes are high, a company might place undue pressure on an employee to sign or make false promises of material rewards to get the employee to sign quickly, often without fully understanding the terms or the long-term implications. This can lead to legal disputes if the employee later realizes they were coerced or misled into agreeing to unfavorable conditions.
Use this clause to very clearly establish that this agreement represents the full and final understanding of the severance terms. Still not sure why this may be necessary or desirable in certain practical scenarios? Let me clarify using an example:
Why You Should Put Everything In Writing
Let’s say Sarah, who works for a retail company, is asked to sign a separation agreement after her company downsizes. Her severance package includes $1,000 and certain health benefits. In a meeting with her employer, she is further assured that she will be considered for future job opportunities within the company, but this promise is not included in the written agreement.
However, when Sarah reviews the Employment Separation Agreement, it clearly states that the only compensation she will receive is what is explicitly mentioned in the document—severance pay, healthcare continuation, and a reference letter. There is no mention of future job opportunities or any verbal promises made during the meeting.
By signing the agreement, Sarah acknowledges that she is NOT relying on any statement or promise that isn’t written in the document. She is, therefore, not legally entitled to a job offer, as this was not a promise included in the contract.
Review & Revocation Clause
This section states that the departing employee shall be given 21 calendar days to review and consider the Employment Separation Agreement, as required by the Older Workers Benefit Protection Act (OWBPA). By entering into the agreement, they acknowledge that they understand the agreement, have had the chance to consult legal counsel, and are signing voluntarily.
Moreover, after signing, the employee shall have 7 calendar days to revoke or cancel the agreement. Revocation must be in writing and delivered to the employer within this period. If revoked, the employee must promptly return any severance pay or other benefits received under the agreement.
Breach and Remedies
This section clearly states that if the employee materially violates any part of the Agreement, it shall be considered a breach of legal duty. Keep in mind that a breach could cause serious and irreparable harm to the employer, including damage to business interests, reputation, and confidential information.
Moreover, in case of an actual, alleged, or threatened breach, the employer has the right to seek injunctive relief or other equitable remedies.
Now, what happens when an employee openly violates the terms of the separation agreement or threatens to do so as a way to intimidate the employer? Luckily for employees, there are multiple legal avenues they can explore.
Our clause encapsulates the following legal options for the employee to choose from:
- Apply for an injunction order from a competent court
- Seek specific performance, such as honoring non-disclosure complete clauses
- Seek any other equitable remedy by a competent
- Recover reasonable attorney’s fees & costs
Here’s an example for your guidance:
Imagine one of your employees, Elissa, violates her non-compete clause by starting a similar business immediately after leaving. The company, concerned about the breach, applies for an injunction to stop her from continuing his business. The court orders Elisa to cease operations and compensate the company for legal fees incurred during the process. Additionally, she may also be required to honor the terms of the separation agreement or face further legal action.
The Severability Clause
What if one of the clauses in the Separation Agreement is found to violate local labor laws or consumer protection rules? Does this mean the entire agreement is no good?
Well, no. A special provision called the severability clause can be used to protect the rest of the agreement in case one of the clauses is found to be legally invalid.
For instance, if a court decides that a non-compete clause is invalid, a severability clause ensures that the remaining parts of the contract, like compensation or confidentiality terms, still remain intact. Without this clause, an invalid provision could potentially void the entire contract, but the severability clause makes sure that the rest of the agreement remains enforceable.
Want to Modify the Agreement?
This clause specifies the process for making any changes to the agreement after it’s signed. Modifications must:
- Be documented in writing
- Be agreed upon and signed by both parties
Need to Add Additional Provisions?
If there are terms or conditions you feel were overlooked or need to be included, this section allows you to add them. Blank space is provided so you can clearly outline any extra clauses or stipulations you wish to include alongside the existing ones.
Governing Law in case of Disputes
It is standard for employment contracts to include a section clarifying which state’s laws will apply if a dispute arises over the agreement.
Use this section to specify the court or location where any legal proceedings must take place. This section ensures that both parties agree to use only those courts.
Signature
As with every formal contract, you need the dated signatures of both parties to make the agreement valid, authentic, and admissible as evidence during a disciplinary hearing or in a court of law.
By signing the agreement, the parties further agree that the current written terms constitute the full and final understanding of the terms of severance. This rules out the possibility of either party relying on any promises or inducements made outside the contract, say, orally or electronically.
Customizability is Key!
This document is fully editable and can be customized to meet specific needs and requirements, making it ideal for organizations and individuals alike.
Use the editable version to customize the text of headings, add or remove Terms & Conditions, or place clauses in a different order. In terms of formatting, you can easily change the fonts, colors, and backgrounds as per your preferences.
Whether you integrate this form into your HR system or use it standalone, one thing is for sure – you save hours in research, design, and formatting work!
Target Users
- Employers looking to offboard individual employees
- HR professionals managing employee offboarding
- Employees who are leaving a company
- Legal advisors assisting either party in drafting or reviewing separation terms
You Might Also Be Interested In…
- Employment Contract
- Employee Equipment Agreement
- Non-Compete Agreement
- Non-Disclosure Agreement
- Exit Interview Form
- Temporary Employment Contract
Wrap Up
A well-crafted employee separation agreement is beneficial for both parties. Whether the termination is voluntary or involuntary, it’s still in everyone’s best interest to carefully draft a separation agreement. Once you are done, make sure to consult a lawyer, ensure the terms comply with local regulations and federal laws.
Download our pre-made, fully customizable Employment Separation Agreement to ensure a smooth offboarding process for both employees and employers!
Summary
Employment Separation Agreement (also called a severance agreement) is a legal document outlining the terms under which an employee and employer agree to end their working relationship. It typically includes final compensation, severance, return of property, confidentiality, and release of claims. This template provides a structured and legally compliant format for ending an employment relationship. It minimizes business risks such as competition or solicitation from departing employees, and helps both parties avoid misunderstandings in the future.
