Summary. A severance agreement has one job — making claims go away — and a surprising number fail at it. This guide covers consideration, which must be something the employee is not already owed, and the knowing and voluntary standard; the OWBPA requirements for waiving age claims including the group disclosure most employers get wrong; the claims that cannot be released and those requiring special handling; the restrictive provisions that federal labor law, the Speak Out Act, and state statutes now constrain; the operational provisions; tax treatment including § 409A; and a clause-by-clause drafting walkthrough.

A company terminates a 54-year-old regional director and offers twelve weeks of severance in exchange for a release. The agreement is three pages, adapted from one the CFO found online.

It gives the employee seven days to sign. It contains a broad confidentiality clause prohibiting disclosure of "the terms of this Agreement or the circumstances of Employee's separation." It contains a non-disparagement clause with no carve-outs. It releases "any and all claims of any kind whatsoever." And the twelve weeks of severance is described as being "in lieu of" the notice period in the employee's offer letter.

Every one of those is a defect.

Seven days does not satisfy the OWBPA's 21-day consideration period, and there is no seven-day revocation period at all — so the ADEA waiver is invalid, and the employee may sue for age discrimination while keeping the severance.

The confidentiality and non-disparagement clauses, as drafted, restrict the employee from discussing the circumstances of separation — which the National Labor Relations Board has held unlawfully restrains Section 7 rights for a non-supervisory employee, and which several state statutes prohibit where discrimination or harassment claims are involved.

The "any and all claims" release purports to waive claims that cannot be waived, and contains no carve-out preserving the right to file a charge or communicate with government agencies, which risks an SEC enforcement action under Rule 21F-17 and invites an argument that the entire release is overbroad.

And the severance is not additional consideration — it replaces a contractual notice payment the employee was already owed, which means the release may be unsupported entirely.

The company paid twelve weeks of salary and bought nothing.

What makes a release enforceable

Consideration. The employee must receive something of value beyond what they are already entitled to — by contract, policy, or law. Payments that fail this test:

  • Accrued but unpaid wages and vacation where state law treats it as earned.
  • Amounts owed under an existing severance plan or policy with no discretion.
  • Contractual notice or severance under an employment agreement.
  • Earned commissions or bonuses.
  • COBRA continuation, which is a statutory right the employee has regardless.

The agreement should recite that the consideration is in addition to anything the employee is otherwise entitled to receive, and — more importantly — that recital should be true.

Knowing and voluntary. Courts assess the totality of circumstances: the clarity of the agreement, the employee's education and business experience, the time to consider it, the opportunity to consult counsel, the role the employee played in negotiating, whether the consideration exceeds what was owed, and whether the employee was aware of their rights. Several circuits apply a version of this test to all releases; others apply ordinary contract principles with an eye to duress and unconscionability.

Drafting for the standard: plain language, a conspicuous statement of the claims being released, an express advisory to consult an attorney, a genuine consideration period, and a signature line acknowledging that the employee read and understood the agreement and signed voluntarily.

Duress and coercion. A release signed under threat, without time, or without the ability to consult anyone invites a challenge. A five-minute meeting ending with "sign this now" is the fact pattern that produces litigation over enforceability.

The OWBPA: waiving age claims

The Older Workers Benefit Protection Act, 29 U.S.C. § 626(f), imposes specific requirements for waiving claims under the ADEA by employees 40 and over. A waiver is valid only if it is knowing and voluntary, which requires at minimum that it:

  1. Be written in a manner calculated to be understood by the individual, or by the average individual eligible to participate.
  2. Specifically refer to rights or claims arising under the ADEA. A general release that does not mention the ADEA does not waive ADEA claims.
  3. Not waive rights or claims arising after the date the waiver is executed.
  4. Be in exchange for consideration in addition to anything of value to which the individual is already entitled.
  5. Advise the individual in writing to consult with an attorney prior to executing the agreement.
  6. Provide a period of at least 21 days to consider the agreement — or at least 45 days where the waiver is requested in connection with an exit incentive or other employment termination program offered to a group or class of employees.
  7. Provide that for at least seven days following execution, the individual may revoke the agreement, and that it shall not become effective or enforceable until the revocation period has expired.

Points that recur:

  • The 21 or 45 days is a minimum the employee may use, not a waiting period the employer must enforce. The employee may sign earlier — but the employer should not pressure them to, and the agreement should state that any earlier signature is knowing and voluntary. A material change to the offer restarts the period unless the parties agree otherwise.
  • The seven-day revocation is not waivable. No agreement, no matter how sophisticated the employee, can shorten or eliminate it.
  • Do not pay before the revocation period expires. The agreement is not enforceable until it does.
  • A settlement of a charge or lawsuit filed with an agency or a court is subject to a different standard, § 626(f)(2), requiring reasonable time rather than the fixed periods.

The group disclosure, § 626(f)(1)(H), applies to a group program and must inform each individual in writing, in a manner calculated to be understood:

  • Any class, unit, or group of individuals covered by the program, any eligibility factors, and any time limits applicable;
  • The job titles and ages of all individuals eligible or selected for the program; and
  • The ages of all individuals in the same job classification or organizational unit who are not eligible or selected.

Defining the decisional unit determines the scope of that disclosure and should be done as part of the selection process, honestly, before the offers go out.

The consequence of a defect. Oubre v. Entergy Operations, Inc., 522 U.S. 422 (1998): an employee who signs a non-compliant ADEA release may sue without tendering back the consideration. The employer keeps nothing and pays twice. Note that the defect invalidates only the ADEA waiver — the release of other claims generally survives, which is small comfort in an age case.

What cannot be released

A release purporting to waive these is either ineffective as to them or, if drafted badly, evidence of overreaching.

The right to file a charge or participate in an investigation. An employee cannot waive the right to file a charge with the EEOC, a state or local fair employment agency, the NLRB, OSHA, the SEC, or comparable bodies, or to participate in an investigation or proceeding. The employer may obtain a waiver of the right to recover monetary relief from such a charge — subject to the whistleblower award exception below. Every release should contain an express carve-out saying so, because a release that appears to bar agency filings is itself a violation in the eyes of several agencies.

Whistleblower awards. The SEC has enforced Rule 21F-17(a), which prohibits impeding an individual from communicating with the Commission, against employers whose severance agreements required notice before contacting regulators, required a representation that no complaint had been filed, or waived the right to an award. Include an express carve-out preserving the right to report, to communicate with agencies, to participate, and to receive an award.

FLSA claims. Wage and hour claims under the FLSA generally cannot be released privately; most circuits require DOL supervision or court approval. A bona fide dispute settled with court approval is enforceable; a routine severance release of unpaid overtime typically is not. Where wage claims are genuinely at issue, structure the resolution accordingly and allocate the payment between wages and other claims.

Workers' compensation claims, which in most states require agency or court approval to compromise.

Unemployment benefits. The right cannot be waived, and an agreement purporting to require the employee not to apply is unenforceable and, in several states, unlawful. The employer may agree not to contest a claim, which is a common and appropriate term.

Vested benefits under a retirement plan, and COBRA continuation rights.

Claims arising after execution. A release covers only claims existing as of the signature date, and the OWBPA expressly forbids waiving future ADEA claims.

Rights under the Speak Out Act, 42 U.S.C. §§ 19401-19404, which voids predispute nondisclosure and non-disparagement clauses relating to sexual assault and sexual harassment disputes. A post-dispute settlement of an existing claim is outside the Act, but a prospective clause in a severance agreement covering conduct that has not been the subject of a dispute is within it.

Arbitration of sexual assault and harassment disputes. Under 9 U.S.C. §§ 401-402, a person alleging such a dispute may elect to void a predispute arbitration agreement.

Certain state-law claims by statute — several states prohibit releases of specified claims, or require particular language or a specified consideration period.

The restrictive provisions, and why they are now the hardest part

Confidentiality, non-disparagement, and related provisions were boilerplate for decades. They are now the most regulated part of the document.

The NLRA. In McLaren Macomb, 372 NLRB No. 58 (2023), the National Labor Relations Board held that offering a severance agreement with broad confidentiality and non-disparagement provisions itself violates Section 8(a)(1) as to employees covered by Section 7 — that is, non-supervisory employees, union or not — because the provisions have a reasonable tendency to interfere with the exercise of Section 7 rights. The Board's General Counsel subsequently issued guidance indicating that narrowly tailored provisions may be lawful and that a savings clause does not cure an otherwise unlawful provision, though it may be relevant.

Practical drafting response:

  • Confidentiality limited to the amount of the severance payment, not to the circumstances of separation, the terms of employment, or the existence of the agreement.
  • Non-disparagement limited to maliciously false statements, rather than any statement that could be characterized as negative.
  • Express carve-outs for: discussing wages, hours, and working conditions with coworkers; engaging in protected concerted activity; filing charges and communicating with the NLRB, EEOC, SEC, OSHA, and other agencies; testifying truthfully; and complying with legal process.
  • Mutual non-disparagement, which is both fair and easier to defend.
  • Note that the provision is unlawful as to supervisors only in narrow circumstances, since supervisors are outside Section 7 — but drafting one agreement for everyone is simpler than maintaining two.

State statutes. A growing number of states restrict confidentiality and non-disparagement provisions covering discrimination, harassment, or retaliation claims — some prohibiting them outright, some permitting them only at the employee's request, some requiring specific disclosure language, and some voiding provisions that prevent an employee from disclosing factual information about the claim. Several apply to agreements with employees, independent contractors, or both. Check the applicable state before using a national template.

Tax consequence. Section 162(q) of the Internal Revenue Code denies a deduction for settlement payments and related attorney's fees related to sexual harassment or sexual abuse if subject to a nondisclosure agreement. For an agreement resolving such a claim, confidentiality has a price.

The DTSA immunity notice. Under 18 U.S.C. § 1833(b), an employer must provide notice of the immunity for confidential disclosure of a trade secret to a government official or attorney solely for the purpose of reporting a suspected violation of law, in any contract or agreement governing the use of trade secrets or confidential information — including a severance agreement's confidentiality clause. Failure to include it forfeits exemplary damages and attorney's fees against that individual in a later trade secret action. It is one paragraph and it is frequently omitted.

Restrictive covenants. A severance agreement may reaffirm existing non-compete and non-solicit obligations or impose new ones in exchange for the severance. Two cautions:

  • Enforceability varies dramatically. Several states void non-competes outright, several void them below a wage threshold, and several void them for employees terminated without cause — which describes most severance recipients.
  • A new covenant requires its own consideration in most states, and severance can supply it — but the agreement should say so expressly.
  • Non-solicit of employees is generally more enforceable than a non-compete, and a confidentiality obligation is enforceable nearly everywhere.

The operational provisions

Payment terms. The amount, the form (lump sum or salary continuation), the timing, and the payroll treatment. Specify that payment is contingent on the agreement becoming effective — meaning after the revocation period — and on return of company property.

Salary continuation versus lump sum. Continuation preserves the employer's leverage if the employee breaches, and in some states affects unemployment eligibility. A lump sum is cleaner and is generally preferred by employees.

Benefits. The last day of coverage, COBRA information and any subsidy (and, if subsidized, whether it is paid directly or reimbursed, and the tax treatment), conversion rights, and the treatment of retirement plan contributions and vesting.

Equity. What happens to vested and unvested awards, the post-termination exercise period, and whether any acceleration applies. This is frequently the most valuable term in the agreement and is frequently addressed in a sentence.

Accrued amounts. State expressly that accrued wages and any accrued vacation required to be paid by state law are being paid regardless of whether the employee signs — because they are, and describing them as consideration undermines the release.

Return of property, with a list, including data on personal devices, and a certification.

Cooperation. An obligation to cooperate in litigation, investigations, and transitions, with reimbursement of expenses and, where the obligation is substantial, an hourly rate. Draft carefully: an obligation to cooperate must not require the employee to testify in a particular way, which would be improper.

Neutral reference. A commitment to provide dates of employment and title, with a designated contact. Employers frequently promise this and then fail to communicate it to the managers who receive reference calls.

No admission of liability, and a statement that the agreement is not evidence of wrongdoing.

No-rehire. Common, and increasingly restricted — some states prohibit no-rehire provisions in settlements of discrimination and harassment claims, and California restricts them broadly in settlement agreements. Consider limiting it to the specific business unit or omitting it.

Non-admission of unpaid wages. A representation that the employee has been paid all wages owed and has reported all hours worked, which is useful evidence though not a release of FLSA claims.

Representations that the employee has not filed any claim, has reported any known violations of law, has returned all property, and is not aware of any injury requiring a workers' compensation claim.

Severability, and — importantly — a provision that if the ADEA waiver is found invalid, the remainder of the release survives.

Entire agreement, amendment in writing, governing law, and a dispute resolution provision.

Signature and acknowledgment block reciting that the employee had the full consideration period, was advised to consult counsel, read and understood the agreement, and signed voluntarily. Have the employee date the signature; the revocation period runs from it.

Tax treatment

Wage versus non-wage. Severance paid on account of the employment relationship is wages subject to income tax withholding and FICA, reported on Form W-2 — including payments for lost wages in a settlement. United States v. Quality Stores, Inc., 572 U.S. 141 (2014), confirmed that severance payments are wages for FICA purposes.

Non-wage components reported on Form 1099-MISC: payments for emotional distress not attributable to physical injury; liquidated damages; and, in a settlement, amounts genuinely allocated to non-wage claims.

Attorney's fees paid directly to counsel are generally reported to both the claimant and the attorney, and the claimant's ability to deduct them is limited — with an above-the-line deduction available under 26 U.S.C. § 62(a)(20) for fees in unlawful discrimination claims, which is why the allocation matters to the employee.

Physical injury. Damages received on account of personal physical injuries or physical sickness are excluded from income under § 104(a)(2). Emotional distress is not a physical injury for this purpose except to the extent of amounts paid for medical care. Allocating a settlement to emotional distress does not make it tax-free.

Allocation. In a settlement of actual claims, a reasonable, documented allocation among wage and non-wage components is respected if it reflects the claims' substance. In an ordinary severance with no claim asserted, the entire amount is generally wages.

Section 409A. Severance can be nonqualified deferred compensation subject to § 409A, with the recipient facing immediate income inclusion, a 20 percent additional tax, and interest for a violation. Three exemptions matter:

  • Short-term deferral — paid by the 15th day of the third month after the end of the year in which the right vests (generally, the year of separation).
  • Separation pay exception — involuntary separation pay not exceeding two times the lesser of the employee's annualized compensation for the prior year or the § 401(a)(17) compensation limit, paid by the end of the second calendar year following separation.
  • Certain reimbursements and in-kind benefits.

The release-timing trap. If severance is conditioned on signing a release, and the employee could — by choosing when to sign — determine the calendar year of payment, the arrangement violates § 409A. The standard fix: specify that payment will be made on a fixed date following separation (for example, the 60th day), regardless of when the release is signed, provided it has become effective — and, where the period spans two calendar years, that payment will be made in the later year.

Specified employees. For a public company, a six-month delay applies to payments to specified employees on separation from service, § 409A(a)(2)(B)(i).

Health coverage subsidies can create their own issues under the ACA's nondiscrimination provisions and under § 105(h) for self-insured plans, and reimbursing COBRA premiums in cash is generally taxable wages.

A clause-by-clause walkthrough

A working structure for an individual severance agreement:

  1. Parties and effective date, with the effective date defined as the eighth day after execution absent revocation.
  2. Separation date and confirmation of the last day worked.
  3. Accrued amounts — final wages and accrued vacation, paid regardless of signature, on the state-required schedule.
  4. Severance consideration — the amount, form, timing (a fixed date), and express statement that it exceeds anything otherwise owed and is contingent on the agreement becoming effective.
  5. Benefits — coverage end date, COBRA and any subsidy, equity treatment, retirement plan treatment.
  6. Release of claims — a specific, enumerated list of statutes including the ADEA by name, plus common law claims, "to the fullest extent permitted by law," and expressly limited to claims arising on or before the execution date.
  7. Carve-outs — claims that cannot be released; the right to file charges and communicate with, participate in proceedings of, and receive awards from government agencies; vested benefits; unemployment; workers' compensation; indemnification and D&O coverage rights; and claims arising from the agreement itself.
  8. ADEA provisions — the consultation advisory, the 21 or 45 day period, the seven-day revocation with the mechanics for exercising it, and (for a group program) reference to the attached disclosure.
  9. Group disclosure exhibit, where applicable.
  10. Confidentiality — limited to the amount, with carve-outs.
  11. Non-disparagement — mutual, limited to maliciously false statements, with carve-outs.
  12. DTSA immunity notice.
  13. Continuing obligations — confidentiality of trade secrets, reaffirmation of any enforceable restrictive covenants, and return of property.
  14. Cooperation, with expense reimbursement.
  15. Neutral reference and the designated contact.
  16. Employee representations — no filed claims, all wages reported and paid, no known injury, property returned.
  17. No admission, no-rehire (if used and lawful), § 409A compliance language, and tax treatment and reporting.
  18. Miscellaneous — severability with the ADEA carve-out, entire agreement, amendment, governing law, counterparts, and electronic signature.
  19. Acknowledgment and signature block with a dated signature.

Common failures

  1. No additional consideration — the payment was already owed.
  2. The wrong OWBPA period — 21 instead of 45 in a group program, or a shortened period.
  3. No revocation period, or paying before it expires.
  4. No specific reference to the ADEA.
  5. A missing or defective group disclosure, or a decisional unit defined circularly.
  6. Overbroad confidentiality and non-disparagement clauses that violate the NLRA or state statutes.
  7. No agency carve-out, risking SEC enforcement and inviting an overbreadth challenge.
  8. No DTSA immunity notice, forfeiting exemplary damages and fees.
  9. Purporting to release FLSA claims in an ordinary severance.
  10. Requiring the employee not to apply for unemployment.
  11. A § 409A defect created by release-signing timing that spans two calendar years.
  12. Reaffirming an unenforceable non-compete, which achieves nothing and may make the whole document look coercive.
  13. A national template used in a state with specific statutory requirements.
  14. No dated signature, so the revocation period cannot be computed.

A worked example

Ardsley Manufacturing terminates a 57-year-old plant manager as part of a five-person restructuring.

Analysis first. Five separations across two departments constitutes an exit incentive or other employment termination program offered to a group, so the 45-day period and the group disclosure apply. Counsel defines the decisional unit as the two affected departments — 34 employees — and prepares the disclosure listing job titles and ages of those selected and the ages of those in the same classifications not selected. Before doing so, counsel runs an adverse impact analysis under privilege; the average age of those selected is 51 against a unit average of 44, and the analysis prompts a review of the criteria, one change, and documentation of the basis for the remaining selections.

Consideration. Twelve weeks of severance. The company confirms there is no severance plan, no contractual notice obligation, and no policy creating an entitlement — so the payment is genuinely additional. Accrued vacation is paid separately and the agreement says so.

The agreement. Forty-five days to consider, seven to revoke, ADEA named specifically, written advisory to consult counsel, the group disclosure attached as an exhibit. Confidentiality limited to the payment amount. Mutual non-disparagement limited to maliciously false statements. Full agency carve-out including the right to receive awards. DTSA immunity notice included. The existing non-solicit is reaffirmed; the non-compete is not, because the state voids non-competes for employees terminated without cause and reaffirming it would be pointless and coercive-looking.

Section 409A. Separation occurs on November 12. Because the 45-plus-7-day period could allow the employee to determine whether payment falls in the current or following calendar year, the agreement specifies payment on the 60th day following separation regardless of when the release is signed — which falls in January, in the later year, and satisfies the requirement.

Execution. The employee takes 31 days, consults counsel, negotiates an additional four weeks and an extended COBRA subsidy, and signs. Payment issues on the specified date after the revocation period expires.

Result. An enforceable release, including as to age claims, for a cost the company had already budgeted.

Frequently asked questions

Do we have to give severance? Not unless a contract, plan, policy, or statute requires it. It is offered to buy a release.

Is 21 days or 45 days required? 21 for an individual separation; 45 where the release is requested in connection with an exit incentive or other termination program offered to a group or class — which can be as few as two employees depending on the circumstances.

Can the employee sign early? Yes. The period is a minimum available to the employee, not a mandatory waiting period. Do not pressure, and recite that any earlier signature is knowing and voluntary.

Can we shorten the seven-day revocation? No. It is not waivable.

What if we made a mistake in the release? A defective ADEA waiver is invalid as to age claims, and the employee need not return the money. The rest of the release generally survives.

Can we prohibit the employee from talking about the separation? Increasingly, no. Limit confidentiality to the payment amount, limit non-disparagement to maliciously false statements, and include carve-outs. Several states prohibit such clauses entirely where discrimination or harassment claims are involved.

Can we require them not to apply for unemployment? No. You may agree not to contest the claim.

Can we release wage and hour claims? Generally not privately. Most circuits require DOL supervision or court approval for an FLSA release.

Does the employee have to return the money to sue? Not for an ADEA claim under a defective release, per Oubre. For other claims, a tender-back requirement may apply depending on the jurisdiction and the agreement's terms.

Conclusion

A severance agreement is a purchase. The employer pays money and receives, in exchange, the elimination of claims. The transaction fails when the consideration was already owed, when the statutory formalities for age claims were not observed, when the restrictive provisions overreach into territory the NLRB and state legislatures have now marked off, or when the release purports to waive things it cannot.

Three habits prevent nearly all of it. Confirm the consideration is genuinely additional before drafting. Count the days — 21 or 45, plus seven, with payment on a fixed date. And draft the confidentiality and non-disparagement clauses narrowly, with carve-outs, because that is the part of the document the agencies are currently looking at.

An agreement that gets those three right will hold. One that gets any of them wrong will have purchased a receipt.

Advising the employee

Most writing on severance agreements addresses employers. The person receiving one has a different set of questions, and a lawyer reviewing an agreement for an employee should work through the following.

Is there room to negotiate? Usually more than the employee assumes, and almost always on terms other than the headline number. Employers resist increasing severance across a group because consistency matters; they are far more flexible on the extension of health coverage, the post-termination equity exercise window, the characterization of the separation, a neutral or agreed reference, the release of a restrictive covenant, outplacement, and the timing of the separation date.

What is actually being given up? Identify whether any live claim exists — a pending complaint, an accommodation request that was denied, unpaid commissions, an unreimbursed expense, unpaid overtime for a misclassified position, or a pattern suggesting age or another protected characteristic drove the decision. A release is a settlement, and a claim worth more than the severance should not be released for it.

Is the consideration real? If the payment merely replaces contractual notice or an existing severance policy entitlement, the employee is giving up claims for nothing. Say so, and ask for more.

Check the equity. The post-termination exercise period is frequently 90 days, and for an employee holding options with a meaningful spread and no liquidity, that is a forfeiture. An extension is often available and is worth more than additional weeks of pay.

Check the restrictive covenants. A non-compete that would prevent the employee from working in their field is the most consequential term in many agreements, and its enforceability under the governing state's law should be assessed before it is reaffirmed. Ask for a release, a narrowing, or a carve-out for identified employers.

Check the confidentiality and non-disparagement clauses. They are increasingly unlawful as drafted, and asking for the carve-outs is both reasonable and usually granted.

Check the timing. For an employee 40 or over in a group program, 45 days plus seven to revoke. Use them. There is no advantage to signing early and, occasionally, real value in the group disclosure the employee is entitled to receive.

Model the taxes. Severance is wages, withheld at supplemental rates, and the net figure is frequently a surprise. Where the agreement resolves an actual claim, the allocation between wage and non-wage components has real tax consequences and is negotiable.

Confirm the unemployment position. In most states severance does not disqualify a claimant, though salary continuation may delay benefits. An agreement in which the employer agrees not to contest the claim is worth asking for.

Read the cooperation clause. An open-ended obligation to assist in future litigation, unpaid, can be a genuine burden years later. Ask for expense reimbursement and an hourly rate, and for a reasonableness limitation on the demands.

Related articles

This guide is provided for general informational purposes and does not constitute legal advice. Release requirements, restrictions on confidentiality and non-disparagement provisions, and the enforceability of restrictive covenants vary substantially by state and are changing. Consult qualified employment counsel before offering a severance agreement.