Severance agreements: Parting ways without parting claims

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