It can be devastating to lose your job, and at first, an employer’s offer to provide severance may appear quite attractive. However, you should weigh many factors before you decide whether to accept the severance, as doing so requires you to give up important legal rights.

This article addresses frequently asked questions about severance agreements, including when to accept a severance offer and common red flags that you should avoid.

1. What is a severance agreement?

A severance agreement is a contract that an employer offers in connection with the termination of employment. Under the contract, the employer agrees to provide benefits—typically, monetary compensation or “severance” pay—in exchange for your release of legal claims. In other words, the company promises to provide additional compensation after your employment ends, if you give up your legal claims against the company.

Once signed, a severance agreement is a legally binding and enforceable contract that sets out the rights and responsibilities of both the employer and the employee. If one side violates the agreement, the other side may pursue a breach of contract claim to enforce its rights. Therefore, if your employer has provided you with a severance agreement, it is critical that you thoroughly review the agreement, understand your rights and responsibilities under the agreement, and negotiate any unfair provisions before you sign it.

2. Must my employer offer a severance agreement?

If you are an at-will employee, your employer generally has no obligation to provide you with a severance agreement or severance pay.

If you have an employment contract, the terms of the contract control, and they may require your employer to provide severance.

        a. At-will employment.

At-will employment is the default employment status in most states and the District of Columbia. If you do not have an employment contract that states the term of your employment or specifies the reasons for which you may be fired, you are employed at-will. At-will employees may be fired (or may quit) for any reason or no reason at all, with limited exceptions. If you are an at-will employee, your employer has no legal obligation to offer you severance.

In some instances, employers still may offer severance based on an internal policy or practice, or because it makes good business sense to offer severance in your particular situation.

        b. Employment contract.

If you have an employment contract, you may be entitled to severance, depending on the terms of your contract. You should review your contract carefully to determine if and when your employer must provide severance. Many employment agreements enable an employer to fire an employee “for cause” or “without cause” and define the circumstances that fall into each category. Employment agreements often state that an employee is entitled to severance when they are terminated without cause.

If your employer claims that you are not entitled to severance because you were fired “for cause,” you should review your agreement and independently determine whether your separation falls within the definition of a “for cause” termination. The contract, and not the label your employer applies to your separation, controls. Indeed, in some cases, employers mischaracterize an employee’s termination as “for cause” when it is “without cause,” to avoid paying severance. If your employer falsely labels your termination as “for cause” to avoid paying severance, you may have a claim for breach of contract.

3. Why has my employer offered me severance if it has no obligation to do so?

With few exceptions, employers do not offer severance out of the goodness of their hearts. They offer severance so that you will sign the agreement and waive your legal claims. From an employer’s standpoint, a release of claims may be very valuable because it significantly limits the employer’s legal liability. If your employer has offered you severance, it has decided that it is worth paying you for the release of claims and other benefits it will receive under the agreement.

4. Must I sign the severance agreement? 

No, you are not legally obligated to sign a severance agreement.

5. Should I sign the severance agreement?

As in any negotiation, it depends on whether you’ve been offered a fair deal.

In evaluating whether the severance agreement is fair, you should consider whether it adequately compensates you for the rights that you’re giving up.

In assessing whether the amount of the severance is fair, you should consider:

• The value of any legal claims you are releasing. Because a severance agreement requires you to release your legal claims against your employer, it is imperative that you understand whether you have any viable legal claims against your employer and the potential value of those claims. If you have extremely valuable legal claims and the severance agreement provides relatively little compensation, it may be in your best interest to pursue your legal claims instead of signing the agreement. On the other hand, if you have no legal claims and, therefore, give up relatively little for severance pay, it may make sense to sign the agreement;

• Whether the severance agreement limits your ability to obtain new employment. Some companies try to restrict employees from working for competitors by adding a non-compete clause to the severance agreement. If your severance agreement contains a non-compete provision, you should seriously consider the extent to which it will impede you from obtaining work in your area of expertise and in your geographical area. For example, if the non-compete would effectively prohibit you from working in your field for two years, but the agreement provides only six months’ compensation, the agreement may cause more financial hardship than it is worth;

• Whether the agreement imposes duties or penalties on you that it does not impose on your employer;
• The length of your tenure at the company;
• The reason for your separation;
• The compensation you earned; and
• The overall fairness of the agreement.

6. Can I negotiate the severance agreement?

Yes, severance agreements generally are negotiable.

An employer’s proposed severance package is an offer that you may accept, reject, or negotiate. The extent to which you can negotiate usually depends on whether you have leverage—that is, legal claims—to trade off for better terms. If you have strong legal claims, you give up more by waiving your claims, so the release is more valuable to your employer. On the other hand, if you have no viable legal claims and, therefore, little leverage, your employer may be less willing to negotiate. Of course, that’s not to say that you shouldn’t still try to negotiate.

7. What provisions should I look out for?

A company’s lawyers draft its severance agreements. Not surprisingly, severance agreements are usually one-sided and slant heavily in favor of employers. They typically include terms that are unfair to employees, and sometimes, they even include illegal terms.

Some of the most common problems with severance agreements include:

Payment Provision.

The agreement does not adequately compensate you for the rights that you give up, particularly when you have strong legal claims.

Non-Compete.

The agreement limits your ability to obtain new work and does not provide fair compensate for this restriction.

One-Sided Release of Claims.

The agreement requires you to release all legal claims against the company but does not require the company to release any legal claims it may have against you.

Confidentiality.

The agreement includes an overly broad confidentiality provision.

Generally, an employer may require you to keep confidential the financial terms of the agreement but must allow you to disclose the severance amount to your spouse/close family member, attorney, financial advisor, tax preparer, the government, and in response to a subpoena.

However, many employers request confidentiality that goes beyond the financial terms of a settlement. For example, severance agreements often state that you must maintain the confidentiality of the facts that led up to your separation, the fact that a severance agreement exists, and/or all terms of the agreement (instead of only the financial terms). Such broad confidentiality provisions are particularly problematic when an employer seeks to silence an employee from revealing information about her work conditions, such as the fact that she faced illegal discrimination or retaliation.

In light of these concerns, the National Labor Relations Board (NLRB) has prohibited some private employers from offering severance agreements with overly broad confidentiality clauses to employees in non-supervisory roles.

Non-disparagement.

The NLRB has also limited the circumstances under which a private employer may request a non-disparagement provision—that is, a provision that prohibits an employee from making disparaging statements about her employer.

A disparaging statement is any negative remark that could have a negative impact on the company’s reputation, regardless of whether the statement is true. Thus, a non-disparagement provision prohibits an employee from making true but negative statements about their employer.

If your employer requires you to refrain from disparaging it, it should also agree to refrain from disparaging you.

Employment Reference.

To ensure that your employer does not provide negative information about you to prospective employers, the agreement should address how your employer will handle reference requests. Some employers offer only neutral references, meaning they will disclose only your title, dates of employment, and salary to prospective employers. Your employer should not disclose the fact that you were terminated or the reason for your separation.

Omission of Other Necessary Terms.

Depending on your unique situation, you may require your employer to incorporate other terms into the agreement. For example, you may need your employer to waive your non-compete, cover your COBRA premium, provide outplacement services, address the vesting of restricted stock units, or characterize your departure as a voluntary resignation.

8. How long do I have to review the severance agreement?

If you are at least 40 years old, your employer must provide you with a minimum of 21 days to consider the agreement. If you are younger than 40, your employer may set a shorter deadline.

9. Should I voluntarily resign?

If you plan to negotiate a severance, you should NOT resign.

In extremely limited circumstances, you may be able to make out a claim for constructive discharge if you resign from your position. However, from a legal perspective, it is very difficult to establish a constructive discharge claim. Because you will seriously hurt your bargaining position if you resign, you should consult an experienced employment lawyer BEFORE you resign.

10. What happens if I don’t sign a severance agreement?

If you don’t sign a severance agreement, you may pursue your legal claims against your employer. The tradeoff is that you will not be entitled to severance pay. Your employer must, however, pay you for the time you actually worked. Depending on state law, your employer may also be required to pay you for any accrued, unused sick leave.

11. Do I need a lawyer to review my severance agreement?

You should strongly consider engaging an experienced employment attorney to review your severance agreement. Severance agreements are legally binding and enforceable contracts, and most of the time, they slant heavily in favor of employers. If you seek to even the playing field and protect your rights, you should engage an attorney to review the agreement.

A skilled employment attorney will help you identify and evaluate the strength of any legal claims you may have. Depending on your leverage, you may be able to negotiate more-favorable terms, including higher severance. An attorney who regularly reviews and negotiates severance agreements will also help you avoid pitfalls in the agreement.

Helpful Resources:

1. 1. McLaren Macomb, 372 NLRB No. 58 (Feb. 21, 2023).
   2. Memo from J. Abruzzo, General Counsel, re: “Guidance in Response to Inquiries about the McLaren Macomb Decision,” Mem. GC 23-05 (Mar. 22, 2023).
   3. Memo from R. Siegel, Associate General Counsel, re: “Non-Board Settlements,” Mem. OM 07-27 (Dec. 27, 2006). 

This blog post has been prepared for informational purposes only. This blog post is not intended, and should not be construed, as legal advice. The information contained in this blog post is not intended to create an attorney-client relationship, and the receipt of this information does not constitute attorney-client privileged legal advice.