What Is a Severance Agreement? A Plain-English Guide for Employers

A severance agreement is a contract in which an employer provides pay or benefits to a departing employee in exchange for that employee's release of legal claims against the company. Both sides sign voluntarily. The document is governed mainly by ordinary contract law, plus a handful of federal statutes that set rules for how certain claims can be waived. In plain terms, it trades money for a signed release.

Last updated July 2026. This is general information, not legal advice. Employment law varies by state and by situation, so have an employment attorney review any agreement before you offer it.

What is a severance agreement?

A severance agreement is a written contract in which an employer offers a departing employee compensation, such as extra pay or continued benefits, and the employee agrees to release legal claims against the employer. It is also called a separation agreement or a severance and release of claims. Signing is voluntary on both sides.

For an employer, the point of the document is finality. You are paying for a clean break: the employee accepts a defined package, and in return you close the door on most lawsuits that could follow the termination. Without a signed release, the pay you hand out buys you nothing legally. With one, you convert an uncertain future risk into a known, one-time cost. That is why the release is the heart of the agreement, not the check.

What is included in a severance agreement?

A typical severance agreement includes the severance payment, the release of claims, and the terms that surround them: how and when pay is delivered, what happens to benefits, confidentiality, return of company property, and references. The release is the core clause, because it is what the employer is actually buying with the payment.

Many of these clauses overlap with obligations already spelled out in the person's employment contract or a standalone confidentiality agreement. If the departing employee signed a broad non-disclosure agreement at hire, reference it rather than rewriting it, and make sure the two documents do not contradict each other.

Do you have to sign a severance agreement?

No. Signing a severance agreement is voluntary for the employee, and offering one is voluntary for the employer. An employee who declines simply does not receive the severance package, and they keep the right to pursue any legal claims. As the employer, you cannot force a signature or condition earned final wages on it.

That last point matters. Wages and accrued benefits the employee has already earned are owed regardless of whether they sign. The severance must be something extra, real consideration on top of what you already owe, or the release will not hold up. If you dangle money the employee was legally entitled to anyway, you have not bought a valid waiver.

How long do you have to sign a severance agreement?

It depends on the employee's age. For workers under 40, federal law sets no fixed deadline, though the time offered should be reasonable. For employees 40 or older, the Older Workers Benefit Protection Act (OWBPA) requires at least 21 days to consider an individual agreement, or at least 45 days for a group layoff.

The OWBPA amends the federal Age Discrimination in Employment Act (ADEA) and governs how employees 40 and older waive age claims. To make that waiver valid, the agreement must be knowing and voluntary, the consideration period applies, and a 7-day revocation window follows the signature. During those seven days the employee can revoke, and the agreement does not become effective until the window closes. That revocation right cannot be shortened or waived. Miss any OWBPA requirement, and the age-claim waiver is void even if the employee signed.

If you make a material change to the offer during the consideration period, the clock generally restarts. For group terminations, the 45-day version also requires you to disclose the job titles and ages of everyone in the decisional unit who was and was not selected, which trips up many employers running their first reduction in force.

Can you negotiate a severance agreement?

Yes. A severance agreement is a contract, so its terms are negotiable until both parties sign. Employees commonly ask for more pay, a longer benefits bridge, a neutral reference, or narrower non-disparagement language. As the employer, you can accept, counter, or hold firm, but treat a counteroffer as a live negotiation, not a rejection.

From the employer side, decide before you extend the offer which terms are flexible and which are not. The release itself is usually non-negotiable in scope, but the dollar amount, the payment schedule, outplacement help, and reference wording are all fair game. Keep the exchange documented, and reissue a clean final version once terms settle so there is one unambiguous document to sign.

Is severance pay required by law?

Generally no. No federal law, including the Fair Labor Standards Act, requires employers to pay severance. It is a matter of contract or company policy. Severance becomes mandatory only when you promised it, such as in an offer letter, handbook, or plan, or when a mass layoff triggers obligations under the WARN Act.

The federal Worker Adjustment and Retraining Notification (WARN) Act does not require severance directly, but it requires covered employers to give 60 days' advance notice of certain plant closings and mass layoffs. Fail to give that notice, and you may owe back pay and benefits for the notice period, which functions much like mandated severance. Several states have their own "mini-WARN" laws with lower thresholds, so check state rules before a large reduction.

What claims can a severance release not waive?

A release is broad, but it cannot sign away everything. Some rights are protected by statute or public policy regardless of what the document says. Draft around these, because language that oversteps can invalidate the clause or draw a regulator's attention. Key carve-outs include:

• The right to file a charge with, or cooperate in an investigation by, the Equal Employment Opportunity Commission (you can generally still waive the right to recover money personally).
• Unemployment compensation benefits, which cannot be released.
• Vested retirement benefits under an ERISA-governed plan.
• Under the National Labor Relations Board's 2023 McLaren Macomb decision, overly broad confidentiality and non-disparagement terms that would tend to interfere with the Section 7 rights of non-supervisory employees to discuss wages and working conditions. Narrowly tailored versions can still be lawful.

These rules keep shifting, and enforcement priorities change with each administration, so this is an area to confirm with counsel rather than copy from an old template. A release that was standard a few years ago may now need trimming.

How to deliver a severance agreement for signature

Once the terms are set and an attorney has reviewed the document, the last step is execution. Send the final version to the employee, let the applicable consideration period run, and collect a dated signature. For workers 40 and older, keep clear records of when the agreement was delivered and signed so you can prove the OWBPA timing was honored if it is ever questioned.

You can sign a severance agreement online so the timestamps, delivery, and completed copy are captured automatically, which makes the consideration and revocation windows easy to document. When the deal also leaves the employee with ongoing duties, such as confidentiality or non-solicitation, put a system to track those continuing obligations in place so nothing slips after the file is closed. Ready to send one now? Start with SignSend and get every severance agreement signed and stored in one place.

This guide is general information and not legal advice. Severance and release requirements vary by state and by circumstance. Consult a qualified employment attorney about your specific situation.