How do severance agreements work?

How do severance agreements work?

On Behalf of | Apr 12, 2022 | Severance Agreements

Things happen quickly when an employee loses their job. Often, quick decisions must be made concerning the terms of severance during a stressful time.

Severance agreements

Severance agreements contain the conditions for job termination. The terms of these agreements also contain pay and benefits offered to the employee.

Employers are not required to offer severance agreements and employees do not have to sign them. Typically, employers offer benefits in return for the employee’s agreement to forego a lawsuit.

Employees may elect to negotiate for better terms. Or employees can reject the agreement if they intend to sue their former employer.


An effective agreement contains specific information about the employee’s separation:

  • Effective termination date which often affects eligibility for many benefits.
  • Severance pay or continuation of salary terms which should address the total amount of compensation, payment of unused leave and whether compensation will be paid bi-weekly, as a lump sum or other method.
  • Tax withholding.
  • Partial or prorated bonus pay.
  • Eligibility for unemployment compensation and whether the employer will contest it.
  • Continuation of employer provided health care insurance.
  • Explanation of the continuation of current medical, dental, prescription and vision coverage payable by the employee under COBRA.
  • Impact of termination on an employee’s pension.
  • Continuation of other benefits such as a profit sharing or paid sabbaticals.
  • A release where the employee agrees not to file a lawsuit or take other legal action against their former employer in exchange for the severance package.
  • Non-competition agreement where the employee agrees not to work for a competitor in a specified geographic area for a specific time.
  • Definition of confidential or proprietary information and agreements prohibiting disclosure of this information.
  • Return of company property such as computers, I-phones, corporate credit cards, keys, and identification.

When to sign

Employees do not have to sign these agreements immediately. They may need to make important decisions on whether they elect to accept the severance package or negotiate terms. Employees may also have to decide whether they will reject the agreement if they have a valid claim of discrimination or other employment law violation.

Employees should carefully consider their options. Attorneys can help advise employees of their rights and options and review their agreements.