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A severance agreement is a contract in which a departing employee receives pay or benefits beyond what is otherwise owed, usually in exchange for a release of legal claims against the employer. It commonly also addresses confidentiality, non-disparagement, references, and the return of company property.
A severance agreement documents the terms of an employee's separation. The employer offers consideration the employee is not already entitled to, typically a lump sum or salary continuation, sometimes a COBRA premium subsidy or outplacement, and in exchange the employee releases claims arising from the employment relationship. Severance is generally not required by federal law; the obligation arises from a contract, a policy, an ERISA severance plan, or the agreement itself.
Several legal requirements shape the document. To release age discrimination claims, the Older Workers Benefit Protection Act requires specific language, at least 21 days to consider the agreement, and 7 days to revoke after signing; a group termination program extends the consideration period to 45 days and requires disclosure of the job titles and ages of those selected and not selected. Certain claims cannot be waived at all, including the right to file a charge with the EEOC or NLRB, unemployment benefits, workers' compensation claims in most states, and vested retirement benefits. The NLRB has also limited broad confidentiality and non-disparagement clauses for non-supervisory employees.
Severance pay is wages subject to income tax withholding and FICA and is reported on Form W-2. Payment timing deserves attention because Section 409A can apply if payments stretch beyond the short-term deferral window or if the employee's signature date controls the payment year. Many employers fix the payment date to remove that discretion.
To obtain a valid release of age discrimination claims, an individual employee must be given at least 21 days to consider the agreement and 7 days to revoke it after signing. In a group termination program the consideration period extends to 45 days and the employer must disclose job titles and ages of those selected and not selected.
An employee cannot waive the right to file a charge with a federal agency, and generally cannot waive unemployment benefits, workers' compensation claims in most states, or vested retirement benefits. Broad confidentiality and non-disparagement clauses have also been limited for non-supervisory employees, so review that language before reusing an old template.
Yes. Severance is wages subject to federal income tax withholding and Social Security and Medicare tax, and it is reported on Form W-2 rather than on a contractor form. Because it is wage income, the payment date matters for deferred compensation timing rules, which is why many employers fix the date in the agreement.