What is a Severance Agreement Review?
A severance agreement review is a process of evaluating a contract between an employer and an employee that details the terms of their separation. If you've been offered a severance agreement, a review helps you understand exactly what you're giving up and whether the offer is fair before you sign. You need to make sure that your severance agreement is legally sound to protect your rights.
When you work for a company, you enter an employment contract, which includes terms like compensation and benefits, job description, termination, and working hours. When an employer terminates your employment, it must follow specific procedures to avoid liability under federal and state law and may offer you a severance agreement.
A severance agreement is one way employers can protect themselves from lawsuits by employees who feel they were wrongfully terminated.
Why is a Severance Agreement Review Important?
A severance agreement is a contract between an employer and an employee that provides terms for terminating the employment relationship.
For example, if your employer decides to lay off part of its workforce, it may offer severance packages to those being let go.
A severance agreement review is important for many reasons, some of which are below:
- Clarity on Terms. Getting your severance agreement reviewed by a lawyer will help you understand all of your rights and obligations regarding severance pay, benefits, etc.
- Identify Any Issues. Another benefit of having your agreement reviewed is the lawyer may be able to flag any issues. An example of this may be a non-compete agreement which may limit your ability to work in the future.
- Negotiation. A lawyer may be able to help you negotiate a better severance package with your employer after reviewing your agreement. They specialize in knowing common terms and can let you know where you may have leverage to negotiate a better deal.
Common Terms in a Severance Agreement
The terms of a severance agreement are typically similar. Below are some terms to know and look out for when looking at your severance agreement:
Severance Pay
Severance pay is a payment made to an employee upon termination of the employment relationship. It may be paid as a lump sum or can be in the form of regular payments over some time.
Benefits Package
Besides getting paid, employees often have questions about their benefits after they leave a job. A severance agreement can specify whether an employee will continue to receive medical coverage through COBRA or if they will be eligible for unemployment benefits. It might also include information about whether they can participate in their company's retirement plan after leaving their job.
Non-Compete Clause
A non-compete clause prohibits an employee from working for another company in the same industry for a certain period after leaving employment with their current employer. These clauses are often used as part of severance agreements because they protect intellectual property while allowing employees to move on to other opportunities quickly after leaving one job for another. There is no federal ban on non-competes, so whether this clause is enforceable depends on your state, and some states like California and Minnesota prohibit them outright.
Confidentiality Agreement
A confidentiality agreement is a contract that prohibits the parties from disclosing information. The purpose of such an agreement is to prevent the disclosure of information that may be detrimental to one party or another. The agreement can be used in almost any type of business. It can apply to any information relating to the company or any other parties involved in the operation of that company.
Covenant Not to Sue
A covenant not to sue is a promise that you won't take legal action against your employer after leaving. It may also be called a release or waiver. Employers include it because the severance payment is what they're offering in exchange for you giving up potential claims. Before agreeing, make sure you understand which claims you're releasing and whether the severance offered is fair compensation for them.
Covenants not to sue usually specify which types of claims are barred and how long the restriction lasts. For example, if the covenant bars claims related to your termination, a lawsuit you file over your dismissal would likely be dismissed because you waived that right when you signed.
Termination date
This is when the employee's employment will end, and the company will no longer employ them. The termination date cannot be changed once it is set unless there is a mutual agreement between the employer and the employee.
Reason for termination
The reason for terminating an employee's employment should be clearly stated in this agreement section. It is usually listed as "terminated for cause" or "terminated without cause." This distinction matters: it can affect your eligibility for unemployment benefits and, in some agreements, whether you receive the full severance amount. If the stated reason doesn't match what actually happened, raise it with a lawyer before signing.
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Legal Rights and Potential Risks
When reviewing a severance agreement, it’s crucial to understand your legal rights and the potential risks involved. Employers often draft these agreements to protect their interests, which may not always align with yours. By being aware of the terms and conditions that could impact you legally and financially, you can make informed decisions about whether to sign the agreement as presented or negotiate for better terms. Below are some key legal considerations and risks to watch for:
1. Discrimination and Retaliation Claims
One of the primary risks employees face is waiving the right to bring discrimination or retaliation claims against their employer. Severance agreements often include a “ release of claims ” clause where you agree not to pursue legal action related to discrimination, harassment, retaliation, or wrongful termination.
However, it’s important to understand that some claims cannot be legally waived. For example, you cannot waive the right to file a claim with the Equal Employment Opportunity Commission (EEOC) or participate in an EEOC investigation. Before signing, ensure the agreement respects your rights under federal laws like the Civil Rights Act, the Age Discrimination in Employment Act (ADEA), or the Americans with Disabilities Act (ADA).
2. Non-Compete and Non-Solicitation Clauses
Severance agreements frequently include non-compete or non-solicitation clauses. These clauses can significantly impact your ability to find new employment. A non-compete agreement may restrict you from working in the same industry or for a competitor within a certain geographic area for a specific period. A non-solicitation clause might prevent you from reaching out to former colleagues or clients if you start your own business.
These clauses can be enforceable if they are reasonable in scope, duration, and geographic area. However, if they are overly restrictive, you may have grounds to negotiate them. Consulting a lawyer to assess the enforceability and implications of these clauses is vital to protect your career prospects.
3. Confidentiality and Non-Disparagement Provisions
Severance agreements often require employees to maintain confidentiality and refrain from making negative comments about the company. These provisions are common, but their enforceable scope is narrower than many employers draft them. A confidentiality clause may prohibit you from discussing the terms of the agreement, your termination, or any information about the company’s business practices.
These clauses also have federal limits. The National Labor Relations Board has held that overly broad confidentiality and non-disparagement provisions in severance agreements can violate non-supervisory employees' rights under the National Labor Relations Act. If your agreement broadly bans you from discussing your wages, working conditions, or the agreement itself with former coworkers, that provision may not be enforceable, and it's worth having a lawyer assess it.
A non-disparagement clause may prevent you from making any statements—public or private—that could be perceived as damaging to the company’s reputation. Violating these clauses could result in legal consequences, including forfeiting your severance pay or facing a lawsuit. It’s wise to have these provisions reviewed by an attorney to determine if they are overly broad or unfairly restrictive.
Note that under the federal Speak Out Act, a confidentiality or non-disparagement clause cannot prevent you from speaking about sexual assault or sexual harassment disputes, regardless of what the agreement says.
4. Breach of Contract by the Employer
Although severance agreements are designed to protect both parties, there’s always a risk that an employer might breach the contract. For instance, the employer may fail to provide severance pay as agreed, or they may not uphold other terms like extending healthcare benefits or stock options.
Understanding the steps you can take if the employer breaches the agreement is crucial. The agreement should clearly outline what recourse you have, such as mediation, arbitration, or the ability to file a lawsuit. Consulting a lawyer can help ensure the agreement includes protections for you if the employer fails to honor its obligations.
5. Waiving Future Claims and Legal Rights
Severance agreements often ask employees to waive not only existing claims but also potential future claims. This can be risky if you’re unaware of your rights or potential claims that may arise after signing the agreement. For example, if you discover after signing that you were misclassified as exempt and are owed unpaid overtime wages, you might have already waived your right to seek compensation.
A lawyer can help identify whether you’re being asked to waive any future claims that you might not yet be aware of. Having a legal professional review your agreement ensures that you aren’t giving up more than necessary in exchange for the severance package.
Red Flags in a Severance Agreement
The most common red flags in a severance agreement are waivers of claims that can't legally be waived, pressure to sign immediately, and clauses that let the employer claw back your severance. Here's what to watch for:
- Waiver of unwaivable rights (you can't be asked to give up unemployment benefits, workers' comp claims, or the right to file an EEOC charge)
- Pressure to sign on the spot (legitimate offers give you time to review, and if you're 40 or older, federal law requires it)
- Clawback provisions (severance can be revoked for vague violations like "disparagement," defined however the employer likes)
- One-sided non-disparagement (you can't criticize them, but nothing stops them from criticizing you; ask for a mutual clause)
- New restrictive covenants (a non-compete or non-solicit appearing for the first time in your severance, not your original contract)
- Vague payment terms (no clear amount, schedule, or what happens to your bonus, commissions, or unvested equity)
- Release of unknown future claims (waiving claims you don't know about yet, like unpaid overtime you later discover)
If any of these appear in your agreement, have an employment lawyer review it before signing. Most of them are negotiable.
How Long Do I Have to Review a Severance Agreement?
If you are 40 or older, federal law gives you at least 21 days to consider a severance agreement that asks you to waive age discrimination claims, and 45 days if the severance is part of a group layoff. You also have 7 days after signing to revoke your acceptance. These timelines come from the Older Workers Benefit Protection Act (OWBPA), and an agreement that doesn't honor them may not validly waive your age discrimination rights.
If you are under 40, no federal law sets a minimum review period, but most employers give at least a week. Either way, don't let anyone pressure you into signing on the spot. A severance offer that expires the same day it's made is a red flag, and you can almost always ask for time to have a lawyer look at it.
Can I Negotiate My Severance Agreement?
Yes, severance agreements are negotiable, and employers often expect some back and forth. The most commonly negotiated terms are the severance amount, how long benefits continue, the scope of any non-compete, and making the non-disparagement clause mutual. Your leverage depends on the circumstances: potential legal claims, length of service, and how the termination was handled all matter. A lawyer who reviews severance agreements regularly will know which terms your employer is likely to move on.
Why Should You Consult a Lawyer for a Severance Agreement?
In general, if you're going to sign a severance agreement with your employer, you should consider consulting a lawyer first. This is because both parties need to understand what they agree to and their obligations upon signing the severance agreement.
It's possible that both sides could have different interpretations of the terms in a severance agreement, and those misunderstandings could lead to trouble down the road if they aren't resolved before signing the document.
You should consult a lawyer for a severance agreement because:
- You can get advice on the legal issues involved and ensure your rights are protected.
- A lawyer can explain to you what the law requires for your severance agreement to be valid.
- A lawyer can help draft your severance agreement to be legally binding and enforceable.
In some cases, an employer may offer you a severance package as part of an exit strategy from the company. If you leave the company, they will provide you with some benefits in exchange for not suing them for wrongful termination or other employment-related claims. Severance packages can include money, stock options or other significant compensation benefits.
How Much Does a Severance Agreement Review Cost?
According to ContractsCounsel’s pricing data, the average severance agreement review project costs $430 [1].
See Severance Agreement Pricing by State
- Alabama
- Alaska
- Arizona
- Arkansas
- California
- Colorado
- Connecticut
- Delaware
- District of Columbia
- Florida
- Georgia
- Hawaii
- Idaho
- Illinois
- Indiana
- Iowa
- Kansas
- Kentucky
- Louisiana
- Maine
- Maryland
- Massachusetts
- Michigan
- Minnesota
- Mississippi
- Missouri
- Montana
- Nebraska
- Nevada
- New Hampshire
- New Jersey
- New Mexico
- New York
- North Carolina
- North Dakota
- Ohio
- Oklahoma
- Oregon
- Pennsylvania
- Rhode Island
- South Carolina
- South Dakota
- Tennessee
- Texas
- Utah
- Vermont
- Virginia
- Washington
- West Virginia
- Wisconsin
- Wyoming
These amounts can fluctuate based on the following factors:
- Length and Complexity of the Agreement: Longer, more complex severance agreements that include multiple clauses, such as non-compete, confidentiality, or stock options, typically require more time to review and may increase the cost.
- Geographical Location: Legal services tend to be more expensive in metropolitan areas or regions with a higher cost of living. For instance, severance agreement reviews in cities like New York or San Francisco may cost more than in smaller towns or rural areas.
- Experience and Expertise of the Lawyer: More experienced lawyers or employment law specialists may charge higher fees, but they also offer the benefit of a more thorough review and detailed advice, which can be invaluable.
While upfront costs for a severance agreement review may seem high, investing in legal assistance can save you money in the long run. A lawyer can help you identify problematic clauses, negotiate better terms, or catch potential legal issues that could arise in the future. By preventing disputes or misunderstandings, a comprehensive legal review can protect you from costly litigation down the road, ensuring you receive fair compensation without unnecessary legal battles.
Conclusion
If you've been offered a severance agreement, it's crucial to understand exactly what you're agreeing to before you sign. Protect your rights and avoid potential legal issues by consulting with an experienced employment lawyer. Before you sign anything, safeguard your future by having a legal expert review your severance agreement.
That's why it's important to seek the advice of a lawyer experienced in employment law issues. At ContractsCounsel, we can review your severance agreement and give you an unbiased analysis of whether it contains any legal problems or issues.
