Employers may offer a separation or severance agreement upon your termination, often to get you to waive all of your potential legal claims against the company. Eleven typical terms in a severance package are:
- a release of claims,
- severance pay,
- non-compete clause,
- confidentiality clause,
- non-disclosure agreement,
- non-disparagement clause,
- non-solicitation agreement,
- health insurance,
- job training,
- unemployment insurance, and
- a job recommendation.
1. Release of legal claims
The most common item in a severance package is a release of claims provision. This waives many of your legal rights against your employer. While your employer can specify which rights you waive in the agreement, some common ones are claims for:
- discrimination,
- wrongful termination,
- defamation,
- healthcare coverage under the Consolidated Omnibus Budget Reconciliation Act (COBRA),
- Family and Medical Leave Act (FMLA) claims, and
- retirement benefits under the Employee Retirement Income Security Act (ERISA).
Once you sign the release, you cannot invoke these rights later on.
The release of legal claims is often the entire point of the severance package. Employers generally only offer severance in order to get you to waive your legal rights against them. Only rarely do employers offer a severance package solely to reward long-time employees.
Importantly, though, there are some rights that you cannot waive in a separation agreement. Those are listed below.
2. Severance pay
Separation agreements generally also include severance pay. This is often compensation to induce you to sign the release of legal claims. That compensation can come in the form of:
- a lump sum severance payment,
- ongoing payments of all or a portion of your salary for several months after termination,
- company stock options,
- unemployment benefits,
- continued health insurance coverage,
- retirement benefits,
- life insurance,
- pension,
- garden leave, and/or
- financial compensation for unused vacation time.
A common severance policy is to provide an amount of severance equal to 2 weeks of pay for each year of service.
These payments are generally taxable.
3. A non-competition clause
Non-competition clauses, also known as “non-competes,” are common in severance packages as well.
These provisions forbid you from doing anything that would compete with your former employer. A few examples of conduct that could violate a non-compete agreement included in a severance package are:
- opening a business in your former employer’s field or industry,
- selling products that your former employer sells, or
- soliciting your former employer’s clients.
Some states, such as Massachusetts, limit when they can be used.[1] Other states, like California, ban them in nearly all circumstances.[2] Even where they are banned by state law, many employers still include them in severance packages in the hope that you are unaware that they cannot be enforced.
Talking with a lawyer from a reputable law firm can help you understand your rights.
4. Confidentiality agreement
Confidentiality provisions are also common in separation agreements. They are particularly common if you were a high-level employee or had access to sensitive information about your former employer, such as:
- trade secrets,
- client lists,
- passwords,
- financial information, or
- future business plans.
By signing the confidentiality agreement, you promise to keep this information to yourself. Divulging it to someone else can lead to penalties. Those penalties are often described in the agreement.
5. Non-disclosure agreement
Similarly, a non-disclosure agreement, or NDA, prohibits you from disclosing certain details about your employment. In a typical severance package, there is an NDA.
The terms of the NDA are very important. They state what, exactly, you cannot disclose after termination. Having an employment lawyer with you to negotiate those terms can protect your future rights and prevent a lawsuit that claims you broke the agreement.
6. Non-disparagement clause
Many employers include non-disparagement clauses in severance packages. These provisions forbid you from talking badly about your former employer.
7. Non-solicitation provisions
Many severance packages also include a non-solicitation provision. While this covers many of the same types of conduct that are prohibited by non-compete agreements, it is often more explicit. It prohibits you from soliciting anyone involved with your former employer. This includes:
- trying to get your former coworkers to leave your former employer or to join in your new venture,
- reaching out to your former employer’s clients, or
- asking former coworkers to provide information about your former employer.
8. Continued health insurance
Some severance packages include a period of employer-provided health insurance. This can be especially helpful if you have a medical condition that requires ongoing care.
9. Job training or transitional services
Occasionally, a severance package will include:
- job training,
- career coaching, or
- outplacement services or assistance.
These transitional services may even be required under the terms of a collective bargaining agreement, especially if the agreement covers workers in an industry that is shrinking. They are also more common in mass layoffs.
10. Unemployment benefits
In some severance packages, your employer agrees not to contest your claim for unemployment benefits.
State and federal employment law provide unemployment benefits to eligible workers. To be eligible, though, you must not be responsible for losing your job. This means you would be ineligible for unemployment benefits if you:
- quit, or
- got fired for misconduct.
If your former employer agrees not to contest your filing for unemployment, though, you may still be able to get these benefits.
11. A recommendation letter
In some severance packages, employers agree to provide a recommendation letter or other similar help for your professional future. This is especially important if you are being terminated for misconduct or for some other reason that would reflect badly on you.
Employers can also offer other, similar benefits in a severance package, such as:
- agreeing to provide a good reference when contacted by your potential employer,
- recommending you to specific companies, or
- promising not to disparage you if they are contacted.
Getting this perk as a part of your severance benefits can help you land a new job. It can also make your job search much easier.
Why do employers offer a severance package?
Employers generally offer a severance package to induce you into signing a release of claims. In this way, the severance agreement is a way of settling your potential claims against your employer out-of-court. Your employer gives you certain benefits in exchange for a waiver of your legal rights.
Occasionally, though, employers use severance payments to reward exceptional service to the company. They do this to:
- improve worker morale,
- build company loyalty,
- incite better productivity,
- decrease turnover, and
- convince current workers that they will be taken care of when they leave.
In some cases, it is company policy to provide severance. If it is, the details will generally be included in your employee handbook or your employment contract.
However, employers are not legally required to provide severance. It is not an obligation under the federal Fair Labor Standards Act (FLSA).
Are there any rights I cannot waive with a severance agreement?
The release of rights is central to most separation agreements and severance packages. However, some legal rights cannot be waived. These include your rights to:
- unpaid wages that you have already earned,
- unemployment benefits that you are eligible to receive, and
- workers’ compensation
If your release of rights included a waiver that covered filing a wage and hour lawsuit, for example, that provision cannot be enforced in court.
Additionally, a waiver of your right to file an age discrimination claim under the Age Discrimination in Employment Act (ADEA) is only enforceable if it was done knowingly and voluntarily.[3]
[1] Massachusetts General Law Chapter 149 Section 24L.
[2] California Business and Professions Code 16600 BPC.
[3] 29 USC 626(f)(1).
