Employers that terminate or mutually agree to part ways with an employee may negotiate, elect to enter, or be obligated by an existing employment agreement to enter into a severance agreement with the departing employee. A severance agreement is an arm’s length agreement between employer and departing employee that serves many purposes and is highly customizable, depending on various factors (the employee’s role, employment status, reason for termination, length of employment, whether the employer has a severance policy or plan, etc.).
Akin to other employment-related contracts, severance agreements are governed by applicable federal and state law. When drafting, negotiating, and enforcing a severance agreement, an employer must avoid various pitfalls, comply with federal and state statutes, and afford the departing employee certain rights. Not doing so may cause the severance agreement to be unenforceable, in whole or in part, and may subject an employer to wrongful termination claims or other redress.
This article solely addresses standard severance agreement terms from an employer’s perspective when employees are terminated and some case law that affects their enforceability. Topics concerning departure of executives, applicability of pre-negotiated terms in an existing employment contract, applicability of severance policies and plans, and state-specific guidance on key terms aren’t within the scope of this article.
General Employment Separations and Severance Agreements
Based on the most recent statistics from the U.S. Bureau of Labor Statistics (BLS), there were over five million separations in the United States private sector in January 2026 (the most recently compiled month), and over one million of those separations were attributable to employers in states the BLS classifies as Midwest (which includes all states covered by Great Lakes Employment Law Letter).
Given these statistics, separations from employment are frequent and take many forms: retirement, firings (with or without cause), layoffs, quitting, fulfillment of an employment agreement, and many others. A traditional way to address separations in a manner that protects the employer—especially when an employment agreement wasn’t previously entered between an employer and employee—is by executing a severance agreement. Severance agreements are optional (unless required by a previous employment agreement or existing severance policy) and offer benefits to both parties.
Severance agreements are contracts between an employer and departing employee that define the terms of the relationship between the parties upon and after the departing employee’s termination or separation date. For an employer, a severance agreement can offer a defense to subsequent wrongful termination or related employment claims, a release of employer’s liability, noncompetition and nonsolicitation restrictions, and confidentiality provisions in exchange for providing postemployment benefits to the employee. Meanwhile, for an employee, a severance agreement can provide postemployment benefits, such as compensation, other benefits (recruiter services, health insurance, etc.), and protection against certain employer-lobbied claims in exchange for releases and additional covenants.
To ensure enforceability of severance agreements, an employer must establish, at a minimum, that:
- The terms are negotiated;
- Certain rights are afforded to the employee before execution (reasonable review period, ability to comment, and the absence of fraud or duress);
- Legal requirements of a contract (offer, acceptance, and consideration) are performed;
- Adequate consideration is given; and
- The release of claims doesn’t waive or bar certain nonwaivable employee claims.
Standard Severance Agreement Terms and Explanation
(1) Standard severance agreement terms. At the highest level, a severance agreement should include provisions that state or address the following:
- The departing employee’s last day of employment (“separation date”);
- Amounts earned and owed to the departing employee before the separation date;
- Benefits earned and owed to the departing employee before the separation date;
- Severance benefits to be paid to the departing employee;
- Release of employment law claims by the departing employee;
- Process for the departing employee to review, comment, and accept the agreement;
- Return, assign, and/or destroy employer property;
- Covenants of the employer and the departing employee after the separation date; and
- General contract terms specific to severance agreements.
(2) Amounts earned and owed to departing employee. The amounts earned and owed to a departing employee are those amounts they are entitled to from their employment before and on the separation date. These amounts would include any salary, wages, approved reimbursements, bonuses, and/or commissions earned by the departing employee through the separation date under the employer’s employment and compensation policies. The severance agreement should state how and when these amounts are to be paid to the departing employee. The amounts are already earned and owed to the departing employee, so they wouldn’t be considered severance benefits or count toward consideration for release in the severance agreement.
(3) Benefits earned and owed to departing employee. These provisions should state the end date of the departing employee’s benefits earned before or in the month of the separation date. These benefits typically include, but aren’t limited to, healthcare insurance, health and flexible spending plans, retirement plans, and pensions. You should also include the rights of the departing employee to these benefits after the separation date, if any. To preserve these rights and avoid liability, you must be prudent to provide any required notices, disclosures, and documents to the departing employee and any plan administrators that are required under the plan terms, employer policies, and applicable law. For example, an employer, when eligible, must also offer Consolidated Omnibus Budget Reconciliation Act (COBRA) rights and disclosures to departing employees within the timeline required under COBRA.
(4) Severance benefits to be paid to departing employee. The severance benefits to be included under these provisions are separate and in excess of or in addition to any employee benefits (subsection 3, above) and any income amounts earned before the separation date (subsection 2, above). A departing employee will be most concerned with and likely to negotiate these provisions because they define what the departing employee will receive after termination and serve as the consideration in exchange for the release of claims provisions. These severance benefits can include regular or lump sum payments in certain amounts, existing benefit plan payments, contributions, continued coverage, and/or other privileges (recruiter services, company discounts, company vehicle transfer, non-voting shares, waiver of previous contracts between the parties, etc.).
For the severance agreement to be enforceable, these severance benefits must be adequate when compared to the release of claims provisions and the covenants of the departing employee and must be separate and independent from the amounts earned by and owed to departing employee before the separation date. When determining whether the severance benefits are adequate, an employer may consider the departing employee’s position, education, financial needs, and tenure as employee as well as the employer’s financial condition, risk tolerance, potential for employment-related claims, and past severance package practices or existing severance plans.
(5) Release of employment law claims by departing employee. These provisions are the most important provisions for the employer and are often the reason the severance agreement is offered to begin with. The release of claims provisions serve to protect an employer against many federal and state employment law claims that a departing employee may file based on conduct of the employer or its employees from the commencement of the departing employee’s employment until the date the severance agreement is executed.
Although an employer’s goal with these provisions is to address any and all potential claims against it, there are some claims under statute that cannot be waived or released by a departing employee at all or without adhering to specific protocol. For example, wrongful termination claims under federal employment laws, such as the Age Discrimination in Employment Act (ADEA), the National Labor Relations Act (NLRA), and the Fair Labor Standards Act (FLSA), cannot be waived at all or can be waived in part only by adhering to specific execution requirements and qualifying language. Further, rights to assist a federal agency claim against a former employer under a whistleblower statute cannot be barred by private agreement.
At the state level, each state has its own employee protection statutes, which may or may not allow the rights of a departing employee to be released. As an example, in Wisconsin, claims under the Wisconsin Unemployment Compensation Act and the Employees’ Right to Know Law cannot be released. Before tailoring any release language in a severance agreement, you should consult an attorney practicing employment law to ensure the release provisions don’t expressly release, waive, or bar any rights of a departing employee that are non-waivable or cannot be released or barred under any federal and state statutes. A severance agreement that purports to release, waive, or bar an unwaivable employment provision may make the agreement unenforceable and subject you to claims and damages.
(6) Process for departing employee to review, comment, and accept agreement. For a severance agreement to be effective and binding on an employer and a departing employee, the severance agreement must follow the general legal requirements of a private agreement (offer, acceptance, and consideration). In addition, for the waivers and releases of many employment-related legal claims to be effective, the severance agreement must be entered into knowingly and voluntarily by the departing employee. The most stringent standard of “knowing and voluntary” is codified in the ADEA.
To adhere to the “knowing and voluntary” standard in the ADEA, these provisions or the other provisions of the severance agreement should:
- Be written in plain language;
- Specifically reference the claims being released or waived (especially the ADEA);
- Not waive or release claims arising after the date the severance agreement is signed;
- Include consideration to the departing employee that they wouldn’t otherwise be entitled to receive;
- Advise the departing employee to speak with an attorney about the severance agreement;
- Provide at least 21 days for the departing employee to review the severance agreement before signing (45 days if the agreement is given to more than one employee at the same time); and
- Afford the departing employee seven days to revoke the severance agreement after signing.
(7) Return, assign, and/or destroy employer property. You would be prudent to require the departing employee to return and assign any employer property to you and destroy any and all employer-related materials in their possession promptly after the separation date. Further, you should require a departing employee—especially if they are in an engineering, design, or product-related role—to acknowledge that they have no rights of ownership in and to any and all employer property. Including these requirements and acknowledgements protects your intellectual property rights, avoids improper disclosure of sensitive information, and avoids a breach under contracts between you and other third parties for improper disclosure.
(8) Covenants of employer and departing employee. Additional covenants between an employer and a departing employee that may be prudent and common are confidentiality, nondisclosure, noncompetition, nonsolicitation, and nondisparagement provisions. These provisions vary from state to state regarding enforceability and effect. However, they offer you protection against the departing employee disclosing information to a direct competitor, competing directly with you, poaching your other employees, or making damaging comments about you in the market. Further, these provisions can allow you to cease providing severance payments and/or severance benefits to a departing employee when they breach any of these provisions.
(9) General contract terms specific to severance agreements. As with many contracts, there are provisions at the end of the agreement that are often glanced over despite playing a key role in the agreement’s operation. For severance agreements, you can benefit from including an invalidity or severance provision, whereby the parties agree that if a term or provision is contrary to or violates a right afforded by law, that provision may be struck (with the rest of the agreement being enforceable) or amended to reflect the term as allowed by law. Also, you should include a provision stating that the severance agreement terms are the entire agreement and that there are no other oral or other representations or warranties other than those as written in the severance agreement. Including this provision can prevent the employee from filing any misrepresentation claims or citing terms from other previous agreements between the parties in a dispute.
Additionally, you would be prudent to include dispute resolution provisions to state the agreement’s governing law, venue for litigation, and process for settling disputes (e.g., mediation, arbitration, or court). Lastly, you may want to allow the agreement to be amended by the consent of both parties and/or assignable to an entity wholly owned by an employer in the event of a corporate reorganization.
Challenges to Severance Agreement Enforceability
Historically, the attempts of a departing or former employee to invalidate a release in a severance agreement with their former employer have been unsuccessful. However, to avoid an unfavorable outcome, some cases within the past 30 years have provided some helpful guidance to employers entering a severance agreement.
One potential case that offers important considerations for employers entering severance agreements is the 1998 U.S. Supreme Court decision Oubre v. Entergy Operations, Inc. Oubre, a former employee of Entergy Operations, Inc. in Louisiana, challenged the release of her claims for wrongful termination under the ADEA on the grounds that she didn’t knowingly and voluntarily enter into the severance agreement. Further, Entergy asked the court to dismiss the complaint on the grounds that she didn’t tender back the money she received as severance benefits under the severance agreement.
The court ruled that the severance agreement was unenforceable only with respect to the ADEA claim because the provisions of the severance agreement didn’t comply with the ADEA statutes regarding disclosure and waiting periods and Oubre’s failure to tender back the severance benefits had no bearing on an invalid release. Here, if Entergy had followed the ADEA requirements, her challenge to the severance agreement would have been unsuccessful. Thus, you must ensure that the claims being waived are appropriate and that the employee has ample time to review and consult legal guidance with respect to a severance agreement.
Another potential concept that can invalidate a severance agreement based on recent case law is whether consideration tendered by an employer was adequate for the release of claims and covenants included in the severance agreement. One specific Eastern District of Wisconsin case concerning the adequacy of consideration in a severance agreement and the burden of proof in court proceedings is the 2014 case Lawson v. J.C. Penney Company Inc. Here, former J.C. Penney employee Lawson lost her job because of a corporate restructure, signed a severance release, received severance payments, and filed a claim against J.C. Penney with the Equal Employment Opportunity Commission (EEOC) under Title VII of the Civil Rights Act of 1964.
The court granted summary judgment (dismissal without a trial) in favor of J.C. Penney on the grounds that the severance release was enforceable and the consideration paid to Lawson was adequate. In doing so, the court opined that the employer bears the burden of establishing that its release addressed the claim at issue and that the employee received adequate consideration. Meanwhile, the employee carries the burden of establishing whether the release was knowingly and voluntarily signed. Thus, you should establish a basis and reasoning for the amount and type of severance benefits given to the departing employee in the event the releases in a severance agreement are challenged in court.
Bottom Line
Severance agreements are an effective tool for you to protect yourself against employment law claims from a departing employee. To ensure that a severance agreement is enforceable and not subject to potential challenges from the departing employee, you should confirm you have taken all the necessary steps discussed above.
Although there have been few successful challenges by an employee to invalidate or void a severance agreement, it’s important for you to consult an attorney with respect to release of claims provisions, provide an adequate amount of severance benefits as consideration, and afford the departing employee ample time to review, comment, accept, and revoke a severance agreement.
Jim Lenahan is an attorney with Axley LLP in Waukesha, Wisconsin. He can be reached at 262-409-2705 or jlenahan@axley.com.