What should an employment contract include?

A comprehensive employment agreement should include: (1) job title and description of duties; (2) compensation details — base salary, bonus structure, equity grants, and payment schedule; (3) benefits — health insurance, retirement plans, vacation, and sick leave; (4) employment classification — full-time, part-time, exempt, or non-exempt; (5) term — at-will or fixed duration; (6) termination provisions — notice periods, cause definitions, and severance terms; (7) confidentiality and non-disclosure obligations; (8) intellectual property and invention assignment clauses; (9) any restrictive covenants — non-compete, non-solicitation; and (10) dispute resolution procedures.

Are non-compete agreements enforceable?

Non-compete enforceability varies dramatically by state. California, Oklahoma, North Dakota, and Minnesota effectively ban non-competes for employees. Many other states enforce them only if they are "reasonable" in scope — typically limiting duration to 1-2 years, geographic reach to areas where the company actually does business, and activity restrictions to actual competitive roles. The FTC proposed a nationwide ban on most non-competes in 2024, though its implementation remains in legal dispute. Even in states that enforce non-competes, courts often modify overly broad agreements rather than enforcing them as written. Legal Tank's templates are drafted to maximize enforceability in each state.

What is at-will employment?

At-will employment means that either the employer or the employee can end the employment relationship at any time, for any reason (or no reason), without advance notice. This is the default rule in 49 states (Montana is the exception, requiring "good cause" after a probationary period). However, at-will employment has important exceptions: employers cannot terminate employees for discriminatory reasons (race, gender, religion, age, disability), in retaliation for protected activity (filing a workers' comp claim, whistleblowing), or in violation of public policy. A written employment agreement can also modify at-will status by requiring cause for termination or specifying a notice period.

When do I need a severance agreement?

A severance agreement is typically used when an employer terminates an employee (especially in layoffs or without cause) and wants to provide compensation in exchange for a release of legal claims. Severance is generally not required by law, but is offered to: reduce the risk of wrongful termination lawsuits; ensure the departing employee signs a non-disparagement and confidentiality agreement; enforce post-employment restrictions; and maintain goodwill. For employees over 40, the Older Workers Benefit Protection Act (OWBPA) requires specific language and a 21-day consideration period. Typical severance ranges from 1-4 weeks of pay per year of employment.

What is the difference between an employee and an independent contractor?

The distinction between an employee and an independent contractor has significant legal, tax, and benefits implications. Employees receive W-2 tax forms, have taxes withheld, are entitled to benefits and labor law protections, and work under the employer's direction and control. Independent contractors receive 1099 forms, pay their own taxes, are not entitled to benefits, and maintain control over how they perform their work. Misclassifying employees as contractors can result in significant penalties, back taxes, and liability for unpaid benefits. The IRS, DOL, and state agencies use multi-factor tests emphasizing behavioral control, financial control, and the nature of the relationship.

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When Do You Need a Severance Agreement?

Your company is terminating an employee and wants to offer a severance package in exchange for a release of legal claims. A severance agreement template provides the structured framework for documenting the separation terms, including severance pay, benefits continuation, and the general release of claims that protects the employer from future lawsuits. This document is essential whenever the departing employee might have potential claims for discrimination, wrongful termination, or wage violations.

You are an employee who has been presented with a severance offer and want to understand every provision before signing away your legal rights. Reviewing a severance agreement template helps you identify which sections are standard, which terms are negotiable, and what rights you are waiving. Compare the offered agreement against a standard template to spot unusual or overly restrictive clauses such as broad non-compete provisions that could limit your future employment.

Your organization is conducting a reduction in force (RIF) or group layoff and must provide severance agreements that comply with the Older Workers Benefit Protection Act (OWBPA). Group layoff severance agreements have additional disclosure requirements beyond individual separations, including providing affected employees with a list of job titles and ages of those selected and not selected for the layoff. The template includes the required OWBPA group disclosure exhibit.

You need to separate from an executive or senior employee who has access to trade secrets, client relationships, and proprietary business strategies. Executive severance agreements typically involve higher compensation and more detailed provisions for non-solicitation restrictions, cooperation obligations, and confidentiality terms. The template accommodates enhanced provisions for equity vesting, bonus clawback, and consulting transition arrangements.

An employee is voluntarily resigning, and your company wants to formalize the departure with mutual protections including non-disparagement commitments and confidentiality obligations that survive the end of employment. Even in amicable separations, a written severance agreement prevents future misunderstandings about final pay, benefits, references, and post-employment obligations related to the original employment agreement.

You are settling an internal complaint, grievance, or potential legal claim by offering enhanced severance in exchange for a comprehensive release. Settlement-oriented severance agreements require particularly careful drafting to ensure the release language covers all potential claims arising from the underlying dispute. The severance offer must provide adequate new consideration beyond what the employee is already owed under existing employment terms.

What Should a Severance Agreement Include?

Severance Pay and Compensation Details

The severance pay section must specify the exact amount, payment method (lump sum or installments), and payment schedule. Include whether severance is calculated based on years of service, weeks of base salary, or a negotiated flat amount. Address tax withholding obligations, clarify whether the severance payment is subject to offset for other income, and specify how installment payments interact with re-employment. Many disputes arise from ambiguous payment timing, so state exact dates or triggering events for each payment.

General Release of Claims

The general release is the core provision the employer receives in exchange for severance. It must enumerate the specific categories of claims being waived, including discrimination (Title VII, ADA, ADEA), wrongful termination, harassment, retaliation, breach of contract, and wage claims. Certain claims cannot be waived: workers' compensation benefits, unemployment insurance rights, vested ERISA benefits, and the right to file charges with the EEOC. The release must be knowing and voluntary to be enforceable.

ADEA and OWBPA Compliance Provisions

For employees age 40 and older, federal law imposes strict requirements on the release of age discrimination claims. The agreement must provide a 21-day consideration period (45 days for group layoffs), a 7-day revocation period after signing, and written advice to consult an attorney. The language must specifically reference the Age Discrimination in Employment Act by name. Group layoff agreements must also include a decisional unit disclosure showing job titles and ages of affected and unaffected employees. Non-compliance renders the age discrimination release voidable.

Benefits Continuation and COBRA

Detail which benefits continue after separation and for how long. Common provisions include employer-paid COBRA continuation for a specified number of months, accelerated vesting of stock options or restricted stock units, continuation of life insurance or disability coverage, and outplacement services. Specify whether the employer will pay COBRA premiums directly or reimburse the employee, as the tax treatment differs. Address how benefits continuation interacts with the employee obtaining new coverage through a subsequent employer.

Non-Disparagement and Confidentiality

Non-disparagement clauses restrict both parties from making negative public statements about each other. Recent NLRB guidance under the McLaren Macomb decision has limited the enforceability of overly broad non-disparagement and confidentiality provisions in severance agreements, finding that provisions which could chill employees' exercise of Section 7 rights are unlawful. Draft these clauses narrowly: permit truthful statements to government agencies, allow responses to legal process, and avoid language that could be interpreted as restricting protected concerted activity.

Non-Compete and Non-Solicitation Restrictions

If the severance agreement includes or reinforces post-employment restrictive covenants, they must comply with applicable state law. Several states have banned or severely limited non-compete agreements, and the FTC has also proposed federal restrictions. Non-solicitation provisions restricting the employee from soliciting the employer's clients or recruiting its employees are generally more enforceable but still must be reasonable in scope, duration, and geographic reach. Specify the restricted period, the definition of restricted activities, and any carve-outs.

Reference and Employment Verification

This section defines what the employer will say in response to reference checks and employment verification inquiries. Many severance agreements include a neutral reference provision limiting the employer's response to dates of employment, job title, and confirmation of salary. Some agreements include a mutually agreed-upon reference letter or talking points for the departing employee's direct manager. Specifying reference terms prevents the employer from undermining the employee's job search after separation.

Return of Property and Ongoing Obligations

The agreement must specify the employee's obligation to return all company property, including laptops, phones, access cards, documents, and electronic files. Address the employee's cooperation obligations, requiring reasonable assistance with transitioning responsibilities, responding to questions about ongoing matters, and participating in litigation or regulatory proceedings. Set time limits on cooperation obligations and specify whether the employee will be compensated for cooperation time beyond a minimal threshold.

Signature Requirements

E-Signature Valid

Severance agreements are valid with electronic signatures. Ensure ADEA/OWBPA compliance for employees over 40.

Related Employment Templates

A severance agreement is often used alongside other employment documents. Depending on your situation, you may also need:

Employment Agreement Template

Employment

Free Non-Compete Agreement Form

Employment

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How to Fill Out a Severance Agreement

Enter Employee Information and Separation Details

Fill in the employee's full legal name, job title, department, hire date, and last day of active employment. Specify the separation date, which may differ from the last working day if the employee is on garden leave or using accrued PTO. Note the employee's age, as employees 40 and older trigger mandatory ADEA/OWBPA compliance provisions. If this is part of a group layoff, indicate the decisional unit and attach the required age and job title disclosure exhibit.

Calculate and Enter Severance Compensation

Determine the severance amount using your company's formula (typically one to four weeks of base salary per year of service) or the negotiated figure. Enter the gross amount before tax withholding, specify the payment method (lump sum on a specific date or installments on regular payroll dates), and confirm that the amount constitutes adequate consideration beyond what the employee is already owed. If the employee has accrued but unused PTO, specify whether that will be paid out separately or included in the severance figure.

Customize the Release of Claims for Your Jurisdiction

Review the release language and ensure it references all applicable federal and state employment statutes. Add state-specific anti-discrimination and wage laws by name. Remove any claims that cannot legally be waived in your jurisdiction. For employees over 40, verify that the ADEA is specifically mentioned, the consideration and revocation periods are correctly stated, and the agreement advises the employee in writing to consult an attorney. For group layoffs, attach the OWBPA decisional unit disclosure.

Configure Post-Employment Restrictions

Review the non-compete and non-solicitation sections against your state's current law. Several states, including California, Minnesota, North Dakota, and Oklahoma, broadly prohibit non-compete agreements. Other states impose salary thresholds, duration limits, or additional consideration requirements. Narrow non-disparagement language to comply with NLRB guidance by excluding statements to government agencies, legal proceedings, and protected concerted activity. Set reasonable time periods; 12 months is the most commonly upheld duration for non-solicitation provisions.

Set Consideration and Revocation Periods

For employees under 40, there is no federally mandated consideration period, but providing at least 7 to 14 days demonstrates the release was knowing and voluntary. For employees 40 and older, you must provide at least 21 days to consider the agreement (45 days for group layoffs) and a 7-day revocation period after signing. Enter the specific dates: the date the agreement is presented, the deadline to sign, and the date the revocation period expires. The agreement does not become effective until the revocation period passes without revocation.

Execute and Store the Agreement

Have the employee sign and date the agreement within the consideration period. The employer representative who signs must have authority to bind the company. After the revocation period expires without revocation, the agreement becomes effective and binding. Process the first severance payment according to the schedule in the agreement. Store the executed agreement in the employee's personnel file with restricted access, as severance terms are typically confidential. Provide the employee with a fully executed copy for their records.

Free Template vs Custom Severance Agreement

Feature	Free Template	Custom (AI or Attorney)
Basic severance pay and separation terms
General release of claims language
Standard non-disparagement clause
ADEA/OWBPA compliance provisions for 40+ employeesIncludes 21-day and 45-day consideration period options	-
Group layoff decisional unit disclosure exhibitRequired for RIF/mass layoff compliance	-
Non-compete and non-solicitation restrictionsState-specific enforceability guidance included	-
COBRA and benefits continuation provisions	-
Equity vesting and bonus clawback provisionsFor executive-level separations	-
Cooperation and transition obligations	-
Attorney review and state compliance checkLicensed attorney reviews your completed agreement	-

Severance Agreement Template FAQ

Is severance pay taxable?

Yes, severance pay is considered taxable income by the IRS and is subject to federal income tax, Social Security tax, and Medicare tax withholding. The method of payment affects the timing: a lump-sum severance payment is taxed entirely in the year received, potentially pushing you into a higher tax bracket, while installment payments spread the tax liability across multiple pay periods or calendar years. Some employees negotiate the payment structure specifically to minimize the tax impact. State income taxes also apply in most states. Severance pay is reported on a W-2 form, and employers are required to withhold applicable taxes before issuing the payment. Supplemental wage withholding rates apply, which means the employer typically withholds at the 22% federal supplemental rate for amounts under $1 million. Employees should consult a tax professional or CPA to understand the full tax consequences of their specific severance package before signing.

Does severance pay affect unemployment benefits?

The relationship between severance pay and unemployment benefits varies significantly by state. In some states, receiving a lump-sum severance payment disqualifies you from collecting unemployment benefits during the period the severance covers. In other states, severance payments reduce your weekly unemployment benefit on a dollar-for-dollar basis. Several states, including California and New York, do not offset severance against unemployment benefits at all, allowing employees to collect both simultaneously. The payment structure matters: lump-sum payments and periodic installments may be treated differently under your state's unemployment law. Before negotiating severance terms, check your state's unemployment agency rules or consult an employment attorney to understand how the payment structure will interact with your unemployment eligibility.

What is the difference between severance pay and a severance agreement?

Severance pay refers specifically to the monetary compensation an employee receives upon termination, typically calculated as a number of weeks of base salary per year of service. A severance agreement is the legal document that governs the entire separation, including severance pay but also encompassing a general release of claims, non-disparagement commitments, confidentiality obligations, non-compete restrictions, benefits continuation terms, and reference provisions. Severance pay without a signed agreement means the employer gives money but receives no legal protection. That is why employers almost always condition severance pay on the employee signing a comprehensive severance agreement that includes a release of all employment-related claims. The agreement transforms a simple payment into a mutual exchange of value.

Can an employer revoke a severance offer before I sign?

In most cases, yes. An unsigned severance offer is generally considered a revocable offer under contract law, meaning the employer can withdraw or modify it at any time before the employee signs. However, there are important exceptions: if the severance terms were part of an existing employment agreement or company policy that contractually guarantees severance, the employer may be obligated to honor those terms. Additionally, if an employer revokes a severance offer in retaliation for the employee filing a discrimination charge or exercising a legal right, the revocation itself may give rise to a retaliation claim. Some employers include explicit expiration dates on severance offers to create urgency while remaining within the legally required consideration period.

What should I look for before signing a severance agreement?

Before signing, carefully review these critical provisions: the general release of claims (exactly which legal rights you are waiving, and whether any non-waivable claims like workers' compensation or EEOC filing rights are improperly included), the non-compete and non-solicitation restrictions (how long and how broadly they limit your future employment), the non-disparagement clause (whether it is mutual or one-sided, and how "disparagement" is defined), the confidentiality provisions (whether they prevent you from discussing the terms or the circumstances of your separation), and the cooperation obligations (whether you are required to participate in future litigation or investigations). Verify that the severance amount represents fair consideration beyond what you are already owed for accrued vacation, final wages, and vested benefits. Employees over 40 must receive at least 21 days to review and a 7-day revocation period under the OWBPA.

What claims cannot be waived in a severance agreement?

Federal and state law prohibit the waiver of certain rights regardless of what the severance agreement says. Employees cannot waive the right to file a charge with the EEOC or state equivalent agency (though they can waive the right to recover monetary damages from such a charge). Workers' compensation benefits, unemployment insurance eligibility, and vested ERISA retirement benefits cannot be waived. Future claims that have not yet arisen are generally not covered by the release. Some states prohibit the waiver of unpaid wage claims, final paycheck rights, or whistleblower protections. Recent NLRB guidance also restricts overly broad non-disparagement and confidentiality clauses in severance agreements, as they may infringe on employees' Section 7 rights under the National Labor Relations Act.

Can a signed severance agreement be challenged later?

Yes, a signed severance agreement can be challenged if the release was not knowing and voluntary. Common grounds for invalidating a release include failure to comply with ADEA/OWBPA requirements for employees over 40, fraud or misrepresentation by the employer, duress or coercion during the signing process, lack of adequate consideration (the employee did not receive anything beyond what was already owed), and unconscionable terms. Courts examine the totality of circumstances, including the employee's education and experience, the time allowed for review, whether the employee was advised to consult an attorney, and the clarity of the agreement language. Employees who discover that the employer concealed material information, such as the existence of a pending mass layoff or a discrimination investigation, may have stronger grounds for challenging the release.

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Attorney-Verified Document: All Legal Tank templates are drafted and reviewed by licensed attorneys to ensure legal accuracy and compliance with current state and federal laws. While our templates meet professional legal standards, individual circumstances vary. We recommend consulting with a licensed attorney in your jurisdiction for complex or high-stakes legal matters. Legal Tank is not a law firm and use of our platform does not create an attorney-client relationship.

Reviewed by licensed attorneys · Editorial policy · Last updated March 2026

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