Severance Agreements: Parting Ways Without Parting Claims

Employers who terminate an employee or mutually agree with an employee to part ways, may elect to, negotiate, 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 upon various factors (role of employee, employment status, reason for termination, length of employment, whether 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 employer to claims of wrongful termination 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 are not within the scope of this article.

Employment Separations and Severance Agreements Generally

Based upon the most recent statistics from the U.S. Bureau of Labor Statistics, there were over five million separations in the United States private sector in January 2026 (most recently compiled month) and over one million of those separations were attributable to Midwest employers. Given these statistics, separations from employment are frequent and take many forms: retirement, firings (for or without cause), lay-offs, 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 was not previously entered between an employer and employee, is by executing a severance agreement. Severance agreements are optional, unless required pursuant to a previous employment agreement or existing severance policy of the employer, 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, non-competition and non-solicitation restrictions, and confidentiality provisions in exchange for providing post-employment benefits to the employee. Meanwhile for an employee, a severance agreement can provide post-employment 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 ensure at a minimum that:

1. the terms are negotiated;
2. certain rights are afforded to the employee prior to execution (reasonable review period, ability to comment, and no fraud or duress exits);
3. legal requirements of a contract (offer, acceptance, and consideration) are performed;
4. consideration given is adequate; and
5. the release of claims does not waive or bar certain nonwaivable employee claims.

Standard Severance Agreement Terms and Explanation

A. Standard Severance Agreement Terms

At the highest level, a severance agreement should include provisions that state or address the following:

1. Departing employee’s last day of employment (“Separation Date”);
2. Amounts earned and owed to departing employee prior to Separation Date;
3.  Benefits earned and owed to departing employee prior to Separation Date;
4. Severance benefits to be paid to departing employee;
5. Release of employment law claims by departing employee;
6. Process for departing employee to review, comment, and accept agreement;
7. Return, assign, and/or destroy employer property;
8. Covenants of employer and departing employee after Separation Date; and
9. General contract terms specific to severance agreements.

B. Amounts Earned and Owed to Departing Employee

The amounts earned and owed to a departing employee are those amounts that the departing employee is entitled to from their employment prior to and on the Separation Date. These amounts owed to the departing employee would be any salary, wages, approved reimbursements, bonuses, and/or commissions earned by 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. These amounts are already earned and owed to the departing employee, so they would not be considered severance benefits or count toward consideration for released in the severance agreement.

C. Benefits Earned and Owed to Departing Employee

These provisions should state the end date of departing employee’s benefits earned prior to or in the month of the Separation Date. These benefits typically include, but are not limited to, health care insurance, health and flexible spending plans, retirement plans, and pensions. An employer 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, an employer 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 COBRA rights and disclosures to departing employees within the timeline required under COBRA.

D. 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 C, above) and any income amounts earned prior to the Separation Date (Subsection B, above). A departing employee will be most concerned with and likely to negotiate these provisions, because they define what departing employee will receive after termination and serve as the consideration of departing employee 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, or 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 prior to 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, and the employer’s financial condition, risk tolerance, potential for employment-related claims, and past severance package practices or existing severance plans.

E. 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 serves to protect an employer against many federal and state employment law claims that a departing employee may bring 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 the employer, 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, claims of wrongful termination under federal employment acts, such as the Age Discrimination in Employment Act (“ADEA”; for age discrimination), the National Labor Relations Act (“NLRA”), and the Fair Labor Standards Act (“FLSA”), cannot be waived at all or can be waived in part 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 of an employee under the Wisconsin Unemployment Compensation Act and the Wisconsin’s Employees’ Right to Know Law cannot be released. Before tailoring any release language in a severance agreement, an employer is recommended to consult an attorney practicing employment law to ensure that the release provisions do not 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 an employer to claims and damages.

F. Process for Departing Employee to Review, Comment, and Accept Agreement

For a severance agreement to be effective and binding upon 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 include the following:

1. be written in plain language;
2. specifically reference the claims being released or waived (especially the ADEA);
3. not waive or release claims arising after the date the severance agreement is signed;
4. include consideration to the departing employee that they would not otherwise be entitled to receive;
5. advise the departing employee to speak with an attorney about the severance agreement;
6. provide at least twenty-one days for the departing employee to review the severance agreement before signing (forty-five days if severance agreement is given to more than one employee at the same time); and
7. afford the departing employee seven days to revoke the severance agreement after signing.

G. Return, Assign, and/or Destroy Employer Property

Employer would be prudent to require that the departing employee return and assign any employer property to the employer and destroy any and all employer-related materials in departing employee’s possession promptly after the Separation Date. Further, an employer should require a departing employee, especially if they are in an engineering, design, or product-related role, to acknowledge that the departing employee has no rights of ownership in and to any and all employer property. Including these requirements and acknowledgements protects the employer’s intellectual property rights, avoids improper disclosure of employer’s sensitive information, and avoids a breach under contracts between employer and other third parties for improper disclosure.

H. Covenants of Employer and Departing Employee

Additional covenants between an employer and a departing employee that may be prudent and common are confidentiality, non-disclosure, non-competition, non-solicitation, and non-disparagement provisions. These provisions vary from state to state regarding enforceability and effect. However, these provisions offer an employer protection against the departing employee disclosing information to a direct competitor, competing directly with employer, poaching employer’s other employees, or making damaging comments about employer in the market. Further, these provisions can allow an employer to cease providing severance payments and/or severance benefits to a departing employee when the departing employee breaches any of these provisions.

I. 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 operation of the agreement. For severance agreements, an employer 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, including a provision stating that the severance agreement terms are the entire agreement and that there are no other oral or other representations or warranties of the employer other than those as written in the severance agreement. Including this provision can prevent the employee from bringing any misrepresentation claims or citing terms from other previous agreements between the parties in a dispute. Additionally, an employer 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, an employer may want to allow the agreement to be amended by the consent of both parties and/or assignable to an entity wholly owned by 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 for an employer, some cases within the past thirty 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. 522 U.S. 422 (1998). Oubre, a former employee of Entergy Operations, Inc. (“Entergy”) in Louisiana, challenged the release of her claims for wrongful termination by age discrimination under the ADEA on the grounds that she did not knowingly and voluntarily enter into the severance agreement.. Further, Entergy moved to dismiss the compliant on the grounds that Oubre did not 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 did not 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 enumerated in Section II.E above, Oubre’s challenge to the severance agreement would have been unsuccessful. Thus, an employer 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. 7 F. Supp. 3d 898 (March 13, 2014). Here, Lawson, a former employee of J.C. Penney Company Inc. lost her job due to a corporate restructure, signed a severance release, received severance payments, and brought a Title VII claim with the Equal Employee Opportunity Commission against J.C. Penney. The court granted a summary judgment 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, an employer 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 an employer to protect itself 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, an employer should ensure the following with respect to its severance agreement:

1. the terms are negotiated;
2. certain rights are afforded to the employee prior to execution (reasonable review period, ability to comment, and no fraud or duress exits);
3. legal requirements of a contract (offer, acceptance, and consideration) are performed;
4. consideration given is adequate; and
5. the release of claims does not waive or bar certain nonwaivable employee claims.

Although there have been few successful challenges by an employee to invalidate or void a severance agreement, it is important that an employer consults an attorney with respect to release of claims provisions, provides an adequate amount of severance benefits as consideration, and affords the departing employee ample time to review, comment, accept, and revoke a severance agreement.

This article, slightly modified to note recent updates, was featured online in the Wisconsin Employment Law Letter and published by BLR®—Business & Legal Resources. Reproduced here with the permission of BLR®—Business & Legal Resources.