A severance agreement is a trade at the end of employment: the employer provides severance pay and benefits it does not otherwise owe, and the employee releases legal claims arising from the employment and its termination.
The release is only as strong as its compliance. For employees 40 and older, federal law (the ADEA, via the Older Workers Benefit Protection Act) requires 21 days to consider the offer and 7 days to revoke after signing; this template builds those periods in.
How much severance is standard?
There is no legal minimum: severance is contractual unless promised by policy or an employment agreement. The common market benchmark is one to two weeks of pay per year of service, more for executives and in negotiated departures. Employer-paid COBRA premiums for a few months are a frequent and highly valued addition, which this template offers as an option.
| Component | Typical range |
|---|---|
| Severance pay | 1 to 2 weeks per year of service |
| COBRA contribution | 0 to 6 months of premiums |
| Payment form | Lump sum or payroll installments |
| References | Neutral confirmation of dates and title |
The 21/7 day rule for employees 40 and older
A release of age discrimination claims is invalid unless the agreement gives the employee at least 21 days to consider it (45 days in group layoffs, which also require extra disclosures), advises consulting an attorney, and allows 7 days to revoke after signing. Severance must not be paid until the revocation window closes. Skipping these steps does not just void the age release: it hands the departing employee leverage.
Group layoffs need more
When two or more employees are terminated in a group program, the ADEA requires 45 days of consideration plus a written disclosure of the job titles and ages of those selected and not selected. Use attorney-drafted documents for group reductions.
What a release cannot cover
- The right to file a charge with the EEOC or cooperate with government investigations
- Unemployment insurance and workers' compensation claims
- Vested 401(k) and pension benefits
- Claims that arise after the agreement is signed
- In several states, claims the legislature has made non-waivable
This template carves those out explicitly. A release that tries to cover everything reads as overreaching and invites a court to strike it entirely. The EEOC's guidance, Understanding Waivers of Discrimination Claims in Employee Severance Agreements, is the reference both sides should read: it explains when a waiver is knowing and voluntary, what the OWBPA requires for workers 40 and older, and confirms that no severance agreement can lawfully bar an employee from filing an EEOC charge.
COBRA, benefits, and the last paycheck
Three money streams end or change at termination, and the agreement should address each. First, final wages: every state requires payment of earned wages by a deadline that ranges from the same day (California, for involuntary terminations) to the next regular payday, and severance can never be conditioned on receiving them. Second, health coverage: under federal COBRA rules administered by the Department of Labor, employees of covered employers (generally 20 or more workers) can continue group health coverage for up to 18 months at their own cost. A common severance enhancement is the employer paying some months of COBRA premiums, which this template supports.
Third, taxes: severance is supplemental wages under IRS Publication 15, subject to income tax withholding (often at the flat supplemental rate for lump sums), Social Security, and Medicare, and reported on the W-2, not a 1099. Structuring severance as a consulting fee to avoid payroll taxes is a misclassification risk for the employer and a tax problem for the employee.
Unemployment benefits usually survive
Signing a severance agreement does not waive unemployment insurance; that right cannot be released. Severance pay can delay or reduce weekly benefits in some states depending on how it is characterized and paid, so employees should check their state's offset rules before choosing lump sum versus installments.
The clauses beyond money: confidentiality, non-disparagement, references
Most severance agreements carry obligations that outlast the payment. Confidentiality clauses restate the employee's duty to protect trade secrets and may keep the agreement's terms private, though recent federal labor rulings limit how broadly employers can gag rank-and-file employees. Non-disparagement clauses increasingly must be mutual to be palatable, and several states now restrict clauses that would prevent discussing unlawful conduct. A neutral reference clause, confirming dates and title only, is cheap for the employer and valuable for the employee. If the employer wants new restrictions such as a non-compete or a fresh non-disclosure agreement, those are separate promises that need their own consideration and face growing state-law limits.
Return of property deserves a checklist, not a vague sentence: laptop, badge, cardkeys, customer lists, repositories, and accounts. Tie the first severance payment to completed return of property and you avoid the most common post-termination dispute.
How to run a clean severance process
- Decide the package: weeks of pay, COBRA months, payment schedule, and reference terms
- Check the employee's age: 40 or older triggers the OWBPA's 21-day consideration and 7-day revocation periods
- For group terminations, switch to attorney-drafted documents with the 45-day period and required disclosures
- Deliver the agreement in writing with the termination letter, and advise consulting an attorney
- Pay final wages by the state deadline regardless of whether the agreement is signed
- Let the full consideration period run; do not pressure an early signature
- Count the 7-day revocation period after signing (age 40+) before treating the deal as final
- Pay severance on the schedule promised, and keep the signed agreement with payroll records
Severance cannot buy silence about everything
Clauses that forbid filing an EEOC or NLRB charge, reporting to the SEC, or testifying under subpoena are unenforceable and can taint the whole agreement. Keep the release focused on money damages for past claims.
When severance is already owed before any agreement
Sometimes the employer is not offering a gift but paying a debt. An employment contract or offer letter may promise severance on termination without cause; an employee handbook can create a binding policy in some states; and executives often have change-of-control provisions. In a plant closing or mass layoff, the federal WARN Act requires 60 days' advance notice from covered employers (generally 100 or more employees), and pay in lieu of that notice is a liability, not severance. Before negotiating, both sides should tally what is already owed, because a release signed in exchange for money the employee was entitled to anyway may fail for lack of consideration. The severance package must add something new: extra pay, benefits, or terms the employee had no right to demand.
Common severance agreement mistakes
- Skipping the 21-day and 7-day OWBPA periods for an employee 40 or older, which voids the age release
- Paying severance before the revocation window closes
- Conditioning final wages on signing the release, which violates state wage laws
- Using an individual-termination template for a group layoff that requires 45 days and disclosures
- Drafting a release so broad it purports to waive non-waivable rights
- Forgetting the effective-date mechanics, so no one can say when payment was actually due
- Treating severance as 1099 income instead of W-2 wages
Frequently asked questions
Is severance pay required by law?
No federal or state law requires severance for ordinary terminations. It becomes owed only through a contract, a policy, or an agreement like this one. What is always owed: final wages and, in some states, accrued vacation.
Why would an employer pay severance voluntarily?
To buy certainty. The release extinguishes most potential claims from the employment, avoids litigation costs, and closes the relationship on defined terms. For the employee, it converts an uncertain claim into immediate compensation.
Can the employee negotiate the severance offer?
Yes, and it happens routinely: amount, payment schedule, COBRA contribution, and the reference clause are all negotiable. Under the ADEA rules, negotiated changes do not restart the 21-day consideration period.
Is severance pay taxed?
Yes. Severance is wages: it is subject to income tax withholding and payroll taxes, and is reported on the W-2. The agreement states gross amounts with required withholdings deducted.
When should the severance actually be paid?
After the agreement is effective: immediately upon signing for employees under 40, and only after the 7-day revocation period expires for employees 40 and older. Paying earlier undermines the release.
Does signing a severance agreement affect unemployment benefits?
The right to claim unemployment cannot be waived. However, severance payments can delay or reduce weekly benefits in some states depending on how the payment is allocated, so check your state's rules before choosing lump sum versus installments.
Can an employee still file an EEOC charge after signing?
Yes. No agreement can waive the right to file a charge or cooperate with an EEOC investigation. What the employee gives up is the right to recover personal money damages on the released claims.
What happens if the employee revokes within the 7 days?
The agreement never becomes effective: no severance is owed and no claims are released. Employers should calendar the revocation deadline and pay only after it passes without a revocation.
Does an employee under 40 get the 21-day period?
Not by federal law; the 21/7 rule protects age claims of workers 40 and older. But every release must still be knowing and voluntary, so giving any employee a reasonable review period, this template's approach, strengthens enforceability.
Can severance be paid in installments instead of a lump sum?
Yes, and installments are common: they spread the employer's cash impact and keep leverage for compliance with ongoing obligations. State wage timing laws apply to final wages, not to the severance schedule the parties agree on.