What is a severance agreement?

A severance agreement is a contract in which an employer pays a departing employee more than they are already owed, and the employee gives something back, usually a release of legal claims. Take a software company that cuts 30 sales roles. It offers a 47-year-old account manager ten weeks of pay and three months of health premiums, but only after the manager signs a release. Because this is a group layoff and the manager is over 40, the manager needs at least 45 days to consider a release of federal age claims [2].

This guide covers severance agreements under United States (US) federal law, including the Age Discrimination in Employment Act (ADEA) waiver rules, with a short comparison to statutory redundancy pay in the United Kingdom (UK). It is general information, not legal advice. State law can add its own rules, so check the law of the state where the employee works.

You will also see the document called a separation agreement, a severance and release agreement, or a separation agreement and general release. In US employment practice these names usually describe the same instrument: payment or benefits in exchange for a release [4]. A severance plan or policy is different. It is the employer's standing promise of what departing employees will get, while the agreement is the signed deal with one person.

Severance agreement: purpose and uses

US federal law does not require severance pay. The US Department of Labor states that the Fair Labor Standards Act (FLSA) has no severance requirement and that severance is "a matter of agreement between an employer and an employee" [1]. That makes the agreement the main source of any severance right in the US, together with any employment contract or severance plan that already promises it.

This is the clearest difference from countries with statutory dismissal pay. In the UK, an employee with two or more years of service is normally entitled to statutory redundancy pay, calculated by age band and length of service, with service capped at 20 years [8]. A UK severance deal sits on top of that legal floor. A US severance agreement usually has no federal floor beneath it.

Employers use severance agreements for three main reasons:

• Closing off risk. The release of claims is what the employer buys. A clean release lowers the chance of a later lawsuit over the termination.
• Making a layoff orderly. Paid notice, health coverage, and an agreed reference make a reduction in force easier for the people affected.
• Protecting the business after exit. Agreements often restate confidentiality duties, ask for return of company property, and sometimes add or reaffirm restrictive covenants.

For the departing employee, the agreement turns an uncertain exit into a defined payment and a defined end date. It also fixes what they give up in return, which is why the release deserves a careful read. Contracko's free severance agreement review tool highlights the pay, the release, benefits, and surviving obligations in an uploaded agreement.

Severance agreement: parties

A severance agreement normally has two parties.

Party	Main responsibilities
Employer	Pays the agreed severance and benefits on schedule, gives any legally required notices and time periods, and keeps its own promises such as an agreed reference
Departing employee	Signs the release, returns company property, keeps confidentiality and any surviving covenants, and cooperates as agreed

Others often play a role without signing. A parent company or affiliated companies may be named as "released parties", so the release covers them too. A benefits administrator runs continued health coverage. The employee's lawyer reviews the draft. For a valid release of age claims, the ADEA requires that the employee is advised in writing to consult a lawyer before signing [2].

Federal age rules only apply to some employers and employees. The ADEA protects individuals who are at least 40 years old [2]. It covers private employers with 20 or more employees for each working day in 20 or more calendar weeks in the current or preceding calendar year, plus state and local government employers [2].

Severance agreement: key clauses

Every clause in a severance agreement is part of the trade. These are the ones that carry the most weight.

Severance pay. The amount, the formula, and the payment method. Severance is usually based on length of employment [1], for example a set number of weeks of pay per year worked. Payment comes as a lump sum or as salary continuation on normal payroll dates. Under US federal tax rules, severance payments are wages. They are subject to Social Security and Medicare taxes, federal income tax withholding, and Federal Unemployment Tax Act (FUTA) tax [5]. The Internal Revenue Service (IRS) also lists severance pay among supplemental wages, which affects how withholding is calculated [5].

Consideration. Under the ADEA, a release of age claims is valid only if the employee receives something "in addition to anything of value to which the individual already is entitled" [2]. The Equal Employment Opportunity Commission (EEOC) says a pension benefit, or payment for earned vacation or sick leave the employee is already entitled to, does not count [4]. Severance that is already promised in an employment contract or plan raises the same question, so the agreement should offer something more.

Release of claims. The employee gives up the right to sue over past events. Under the ADEA, a waiver of age claims must specifically refer to rights or claims under the ADEA. It cannot waive claims that arise after the employee signs [2]. A release also cannot stop the employee from filing a charge with the EEOC or taking part in an EEOC investigation. The EEOC treats clauses that try to do so as unenforceable [4].

Benefits continuation. Many agreements pay or subsidize health premiums for a set period. The federal Consolidated Omnibus Budget Reconciliation Act (COBRA) rules sit in the Employee Retirement Income Security Act (ERISA). Under them, a group health plan must offer continuation coverage to a covered employee who loses coverage because employment ends [6]. Termination for gross misconduct is excluded [6]. That rule does not apply to a plan whose employers normally employed fewer than 20 employees in the preceding calendar year [6]. The agreement decides who pays the premiums. COBRA decides whether coverage is available at all.

Confidentiality and non-disparagement. These clauses limit what the employee may say about the agreement and the employer. Draft them with the EEOC carve-out above in mind [4]. Keep any mutual promise, such as the employer instructing named managers not to disparage the employee, specific enough to track.

Restrictive covenants. Some agreements reaffirm or add a non-compete or non-solicitation covenant. Their enforceability depends heavily on state law. Treat them as separate obligations with their own end dates.

Return of property and cooperation. A deadline to return laptops, documents, and access cards, and sometimes a duty to help with handover or future litigation.

Reference and announcement. Agreed wording for references and for how the departure is announced internally.

Revocation and effective date. For releases of age claims, the agreement must give the employee at least seven days after signing to revoke. It cannot become effective or enforceable until that period ends [2]. Under the EEOC regulation, the parties cannot shorten the seven days [3].

Some agreements also use a compliance or clawback term that lets the employer stop payments after a breach. If you use one, link it to a specific obligation. See the compliance clause entry for how these terms are usually framed.

Dates and lifecycle events

A severance agreement looks like a one-off document, but it runs on a timetable. Most of its value depends on dates that are easy to miss.

1. Offer date. Under the ADEA, the consideration period runs from the employer's final offer. The EEOC regulation says material changes to the final offer restart the period, while immaterial changes do not. The parties may agree that changes, material or not, will not restart it [3].

2. Consideration period. For a release of age claims, the employee gets at least 21 days to consider the agreement. If the offer is part of an exit incentive or other termination program offered to a group or class of employees, the minimum is 45 days [2]. In that group case, the employee must also receive a written disclosure at the start of the period. It covers the class, unit, or group covered, eligibility factors, and time limits. It also lists the job titles and ages of everyone eligible or selected, and the ages of those in the same job classification or unit who were not [2]. Under the EEOC regulation, an employee may sign early if that choice is knowing and voluntary. The employer must not induce early signing through fraud, misrepresentation, a threat to withdraw or change the offer before the period ends, or better terms for early signers [3].

3. Signing date. Signing starts the revocation period.

4. Revocation deadline. At least seven days after signing for ADEA releases [2]. Track the exact date and the method the agreement allows for revocation.

5. Effective date. The day after the revocation period ends without revocation. Payment terms usually key off this date.

6. Payment dates. The lump-sum date or each salary continuation date, plus any final instalment.

7. Benefits deadlines. Under COBRA, the election period lasts at least 60 days. It ends no earlier than 60 days after the later of coverage loss or, where a notice is required, the date of that notice [6]. A premium subsidy in the agreement has its own end date.

8. Covenant end dates. Confidentiality may be open-ended. Non-solicitation and non-compete periods usually end on a fixed date after termination.

9. Return-of-property deadline. Often tied to the last working day.

Layoffs bring one more date. Where the Worker Adjustment and Retraining Notification (WARN) Act applies, an employer may not order a plant closing or mass layoff until 60 days after giving written notice, subject to the Act's exceptions [7]. The Act applies to employers with 100 or more employees, counted under its own rules [7]. An employer that breaches the US WARN notice duty owes back pay and benefits for each day of violation. That liability runs for up to 60 days, but never for more than half the number of days the employee was employed [7]. That liability is reduced by payments that are "voluntary and unconditional" and not legally required [7]. Severance that depends on signing a release does not obviously fit that wording, so get advice before treating it as a WARN offset.

The Contracko guide to contract dates shows how start, end, and notice dates are stored and reminded. For the wider pattern of how an agreement moves from draft to closeout, see the contract lifecycle entry.

Risks and common mistakes

Most severance disputes start with a drafting gap or a missed date. These are the common ones.

• Invalid age waiver. Under the ADEA, a waiver that misses any of the statutory minimums is not knowing and voluntary [2]. The EEOC says an employer cannot cure a defective waiver by sending the missing information later in a separate letter [4].
• No real consideration. Under US federal law, offering only what the employee is already owed, such as earned wages, does not support a release of age claims [2] [4].
• Wrong review period. Using 21 days for what is really a group termination program, where the ADEA minimum is 45 days plus the written disclosure [2].
• Restarting the clock by accident. Under the EEOC regulation, a material change to the final offer restarts the 21 or 45 day period unless the parties agreed otherwise [3].
• Paying before the release is effective. Paying during the revocation period leaves the employer exposed if the employee revokes.
• Overbroad gag clauses. A clause that bars filing an EEOC charge or cooperating with an EEOC investigation is unenforceable [4].
• Tender-back demands. Under the EEOC regulation, an employee challenging an ADEA waiver does not have to return the severance before filing a lawsuit or EEOC charge [3].
• Tax treatment surprises. Severance is wages for federal employment tax purposes [5]. Treating it as a non-wage payment creates withholding errors.
• Lost obligations. Covenant end dates, premium subsidy end dates, and clawback triggers end up in a signed file that nobody revisits.

Treating these as contract risk management items, with an owner and a date each, prevents most of them. If a former employee's conduct later matters, the employer needs to show which promise applied, when it ended, and whether the employer kept its own side. That is a contract compliance question, and it is much easier with the signed file and its dates in one place.

Contract-management checklist

Use this list for each signed severance agreement.

Capture

1. Parties, including every released affiliate and any guarantor of payment.
2. Severance amount, formula, payment method, and payment schedule.
3. Benefits terms: which benefits continue, who pays, and when the subsidy ends.
4. Release scope and any carve-outs, including the EEOC charge carve-out.
5. Surviving obligations: confidentiality, non-disparagement, non-solicitation, non-compete, cooperation, and return of property.
6. Agreed reference wording and the internal announcement.
7. Clawback or stop-payment terms and what triggers them.
8. Signed copy, the offer letter, and for group programs, the written ADEA disclosure.

Diarise

9. Final offer date and the end of the 21 or 45 day consideration period.
10. Signing date and the revocation deadline.
11. Effective date and every payment date.
12. COBRA election deadline and the end of any premium subsidy.
13. End date of each restrictive covenant.
14. Return-of-property deadline.

Review on a cadence

15. Before each payment run: confirm the agreement is effective and no stop-payment trigger applies.
16. Quarterly: open severance obligations, upcoming covenant end dates, and subsidies ending soon.
17. Before reusing a template: check it against current federal rules and the law of each state where it will be used.

Keep severance agreements with the rest of your signed contracts in one contract repository with restricted access. Contracko stores signed contracts, uses AI to pull out dates and terms, and sends reminders before notice, renewal, and end dates. You can set several reminders per contract and sync dates to Google Calendar, Apple Calendar, or Outlook. For a quick read of a single agreement, the free business contract review tool flags dates, obligations, and unusual clauses. You can try the full product with a free trial.

Sources

[1] US Department of Labor. Severance pay is not required by the FLSA and is a matter of agreement. dol.gov/general/topic/benefits-other/severancepay

[2] US Code, 29 U.S.C. 626(f), 630(b) and 631(a) (ADEA waiver requirements, employer coverage, age 40 threshold). govinfo.gov/app/details/USCODE-2024-title29/USCODE-2024-title29-chap14

[3] Electronic Code of Federal Regulations, 29 CFR 1625.22 and 1625.23 (timing of the review and revocation periods, tender back). ecfr.gov/current/title-29/part-1625

[4] US Equal Employment Opportunity Commission, Q&A: Understanding waivers of discrimination claims in employee severance agreements. eeoc.gov/laws/guidance/qa-understanding-waivers-discrimination-claims-employee-severance-agreements

[5] Internal Revenue Service, Publication 15 (Circular E), Employer's Tax Guide (severance payments as wages and supplemental wages). irs.gov/publications/p15

[6] US Code, 29 U.S.C. 1161, 1163 and 1165 (COBRA coverage, qualifying events, election period). govinfo.gov/app/details/USCODE-2024-title29/USCODE-2024-title29-chap18-subchapI-subtitleB-part6

[7] US Code, 29 U.S.C. 2101, 2102 and 2104 (WARN Act definitions, 60-day notice, liability). govinfo.gov/app/details/USCODE-2024-title29/USCODE-2024-title29-chap23

[8] GOV.UK, Redundancy: your rights, statutory redundancy pay. gov.uk/redundant-your-rights/redundancy-pay

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