Severance Pay and Severance Agreements—What You Need to Know


If you are being laid off from employment, it’s important to understand what severance pay you may be entitled to and the issues around the severance agreement you will be presented with. This article reviews the most frequently asked questions about severance pay and severance agreements in connection with a termination of employment.

What is severance pay?

Severance pay is compensation given to an employee who has been laid off or terminated. The compensation is typically in the form of a lump sum payment (such as “three months’ salary”), or a continued payment of salary for a certain period, and/or continued payment of health or COBRA benefits for a period of time.

What is a severance

In order for an employee to get severance pay/benefits, the employer will typically require that the employee sign an agreement setting forth the terms of the benefits provided with a general release of any claims from the employee against the employer. A severance agreement is a contract negotiated between the employee and employer.

If I am terminated, is
my employer required to give me severance pay?

Most laws do not require employers to provide severance pay or severance packagers on termination of employment. But for certain companies, 60-day notice or pay under the WARN Act are necessary. And many employers have in their employee handbooks a severance pay policy of some kind. Many employers will give severance pay to show goodwill, to mitigate bad press, or to decrease potential litigation exposure.

How is severance pay
typically calculated?

Companies typically determine severance in one of the following ways:

  • A lump sum payment of one to four months (more for senior level executives); or
  • A formula based on length of employment (such as one or two weeks of severance pay for every year employed); and
  • Payment for COBRA benefits for three to six months (more for senior executives).

Are severance
agreements negotiable?

The form of severance agreement presented by an employer is typically one-sided in favor of the employer, and it may be best to have an employment lawyer review it. But a severance agreement is just a proposed contract, which is in fact, negotiable, assuming you have any leverage or the company is willing to negotiate.

Some companies that are laying off many employees will be reluctant to allow negotiations due to the administrative hassle and potential liability of treating employees differently.

What is typically included
in a severance agreement?

A severance agreement will typically include the following clauses:

  • The date of termination of employment.
  • Waiver and release of any claims by the employee against the employer, known or unknown, except for certain non-waivable claims (discussed below).
  • A covenant by the employee not to sue the employer on any released claim.
  • The amount of the severance.
  • Whether the employee is granted any continuing health or COBRA benefits.
  • How the employee’s stock options or other equity grants will be treated.
  • The scope of any expense reimbursements (such as for accrued but unused vacation pay, or business expenses previously unreimbursed).
  • Agreement by the employee to return all laptops, cell phones, and other company property (make sure you have deleted any personal information from these items).
  • An acknowledgement by the company that the employee will continue to keep all non-public information about the company confidential going forward (the employee already is likely subject to this anyway pursuant to a previously signed Confidentiality and Invention Assignment Agreement). This confidentiality obligation may also be extended to cover the terms of the severance agreement.
  • Dispute resolution clause (such as through litigation or arbitration in the event of a dispute over the severance agreement).

Sometimes, employers attempt to extract a non-compete covenant from the employee, preventing the employee from working with a competitor for a designated period of time. This is obviously problematic for the employee and must be narrowly drafted, or there should be adequate compensation for the non-compete.

Some states, such as California, prohibit outright such non-competes unless the non-compete is negotiated in connection with the sale of a business or involves confidential information. Even in states where a non-compete is legal, they are typically limited in duration to six months to one year and in geographic scope. If agreed upon, the employee will typically ask that the competitors be listed and limited to a few direct competitors.

Sometimes employers also try to insert a “non-disparagement” clause, preventing the employee from disparaging the employer. Attention to the wording here is important as the obligation may be too broad. Ideally, if you have to live with a non-disparagement obligation, you want the clause to be mutual.

Some severance agreements prohibit the employee from soliciting employees or customers of the employer. Typically a time limit is set forth such as six months or one year.

What is a waiver and
“release of claims” in a severance agreement?

The main consideration that an employer wants to get in a severance agreement is the employee’s waiver and release of any claims the employee may have against the employer. The release clause tends to include a whole litany of possible claims the employee may have, including:

  • Claims arising from employment with the company.
  • Claims arising from termination of employment.
  • Claims of breach of any employment agreement or other contract.
  • Claims for any breach of covenant of good faith and fair dealing.
  • Claims for wrongful termination or constructive discharge.
  • Claims for violation of public policy.
  • Claims as a whistleblower.
  • Claims of fraud or misrepresentation.
  • Claims for discrimination on the basis of race, sex, disability, marital status, and any other legally protected class.
  • Claims for sexual or other types of harassment.
  • Claims for violations by the company of any rules or laws.
  • Claims for failure to pay overtime, sick pay, vacation, bonuses, or commissions.
  • Claims for the foregoing whether known or unknown at the time of signing the severance agreement.

It will be difficult for the employee to negotiate on this form of release, but at least some items should be excluded from the release:

  • Rights to vested stock options and other equity grants or equity holdings
  • Vested rights under any retirement plans.
  • Rights under the severance agreement.
  • Right to be reimbursed legitimate accrued but unreimbursed business expenses.
  • Rights that officers or directors may have under the company’s charter, bylaws, D&O insurance, or indemnification agreements.
  • Rights that are not waivable as a matter of law (including workers’ comp laws).

What should I be
asking for in a severance agreement?

You need to pick your battles when you’re negotiating a severance agreement. Here are the top things to focus on:

  • A higher amount of severance pay than what was originally offered by your employer.
  • A preference for a lump sum severance payment rather than being paid in installments.
  • Payment of COBRA benefits for at least six months (this amount can add up for employees).
  • Accelerated vesting of any unvested stock options or equity grants such as RSUs (at least one year of acceleration).
  • An extended period in order to be able to exercise any stock options (many stock options require employees to exercise options within 90 days of termination); it is not unreasonable to ask for one year or more.
  • A right of “cashless” exercise for stock options, so you do not have to come up with cash when the options are, in fact, exercised.
  • A mutual release of claims (unlikely to be granted except to senior executives).
  • Payment of any partially accrued bonus or commission.
  • Payment by the company for career outplacement or counseling services.
  • A statement that you are eligible to be rehired in the future.
  • How reference checks from future employers will be handled (see below).
  • The possibility to continue working for the company as an independent contractor for a transition period.

Try and find out from workers who have been previously laid off as to what they were able to negotiate. Also, check out any Slack channels where ex-employees of the company hang out to get advice on other severance negotiations.

How can I deal with the
issue of reference checks in a severance agreement?

A key issue you will want to address is how the company will respond to any reference checks or recommendation requests from new potential employers. You could request a section of the severance agreement to state:

“Company acknowledges and agrees that Employee has performed admirably in his/her work with the Company, and Company will provide positive recommendations to any interested new employers of Employee.”

However, in many instances, employers will only confirm that you worked at the company and you were in good standing.

Alternatively, you could seek to obtain positive recommendation letters from supervisors and have those letters available for future interviews.

Can I get severance pay if I

Since severance pay is compensation for being terminated or laid off, the general answer is that you can’t get severance pay if you voluntarily quit.

Can I get unemployment
benefits if I am getting severance pay?

This will depend on your state’s laws and rules, but the general answer is yes. Just make sure to sign up for the unemployment benefits immediately upon termination as there is sometimes a delay in getting paid. If you have been laid off by the company, try to avoid a statement in the severance agreement that says you have “voluntarily resigned” as this could adversely affect your right to get unemployment benefits.

Is severance pay

According to the IRS, severance pay is taxable in the year that you receive it. Your employer will include this amount on your Form W-2 and will withhold appropriate state and federal taxes. See IRS Publication 4128.

When should I not sign a
severance agreement?

There are several reasons why it may not be in your best interest to sign a severance agreement. If you have been wrongfully terminated in violation of law, or a victim of employment discrimination or harassment, or have been improperly underpaid, you may be giving up valuable rights by signing a severance agreement containing a release of claims.

Also, if the obligations imposed on you are too burdensome (such as a non-compete), then you may decide it’s not worth the benefit of getting severance pay. It may be advisable to get advice from an employee side employment lawyer.

Related articles from

Copyright © by Richard Harroch. All Rights Reserved