A complete guide to severance agreements with template & best practices

Having the right contracts in place before bringing on new employees can save your organization from a world of headaches. In particular, a well-crafted severance agreement can protect an employer from legal disputes and make sure an employee receives proper severance pay and other support if they’re terminated. 

Without a carefully structured severance agreement, an employer risks lawsuits and costly disputes. Issues like wrongful termination and age discrimination can arise if an employee feels they were not given fair severance pay ( severance benefits). Failing to put a clear severance package in writing may also violate federal or state law, which can result in penalties. During mass layoffs, a reduction in force, or even voluntary separations, a missing or vague agreement can lead to misunderstandings and tarnish an employer’s brand.

In this guide, we’ll walk you through why these agreements matter, what to include in them, and offer a sample severance agreement you can use as a starting point. We’ll also share best practices to help employers stay compliant with employment laws and maintain a positive reputation.

What is a severance agreement?

A severance agreement is a binding contract between an employer and an employee that outlines the terms of the separation when the working relationship ends, including any severance package or severance pay the employee is entitled to. In other words, it’s a contract that details how much severance pay the departing employee will receive, the payment schedule (whether via a lump sum or installments), any continuation of benefits, and specific clauses both parties must follow upon termination.

Often, a severance agreement is presented to a terminated employee following a layoff, resignation, or termination for performance issues. This document helps ensure both the employer and the employee understand what severance pay and/or severance package terms apply under these circumstances.

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Why are severance agreements important?

Every employer should carefully structure a severance agreement to address severance pay and any additional benefits for a departing employee. This demonstrates compliance with relevant employment law, lowers the chance of disputes, and supports workers who may need a new job or assistance with unemployment benefits. Whether voluntary or forced, a transparent approach to severance pay builds trust and goodwill.

Here are some important reasons for crafting a severance agreement with any departing employee:

Legal protection for employers

A severance agreement offers legal protection for employers. By clearly specifying severance pay, severance benefits, and other provisions, the contract helps mitigate the risk of wrongful termination or discrimination lawsuits. Employers can also limit liability under federal laws by making sure the agreement meets statutory requirements.

Clarity and mutual understanding

Explicit clauses about severance pay, a lump sum payment agreement or installment timetable, and outplacement options create clarity for both the employer and the employee. This transparency avoids confusion around compensation and helps smooth the separation. Many employers use a concise severance letter to clearly communicate these details.

Maintaining a positive employer brand

Providing a fair severance package strengthens the employer’s reputation, even during difficult layoffs or reductions in force. By pairing severance pay with outplacement assistance, employers show departing employees that they are valued and respected. This can reduce negative feedback from former employees and make the organization more attractive to future talent.

What to include in a severance agreement

Below are common elements to address in a solid severance agreement:

1. Severance pay terms: Clearly specify the severance pay calculation—whether it’s a lump sum or installment—and outline the payment schedule.

2. Benefits continuation: Define which benefits will remain in place post-separation, such as health coverage, and for how long.

3. Waiver of legal claims: Include a clause indicating the employee will not pursue legal action for issues like discrimination or wrongful termination, as long as the employer honors the agreement.

4. Confidentiality clause: A clause protecting trade secrets or other sensitive employer information post-termination.

5. Non-compete clause: Employers may incorporate non-competes to prevent departing employees from competing in the same industry for a set period. These clauses must comply with relevant employment laws and federal laws.

6. Dispute resolution process: Detail whether arbitration, mediation, or lawsuits will be used if conflicts arise. This clause can save both sides from expensive legal battles.

7. Acknowledgment of voluntary termination (if applicable): If the separation is voluntary, confirm that the employee chose to leave. This underscores that the employee was not forced out or part of layoffs.

8. Outplacement support: Some employers add outplacement services to help employees find a new job more quickly. This can be included in the severance package to smooth the transition.

Severance agreement template

Below is a sample severance agreement you can use for your organization. While this severance package example provides a good starting point, it’s always a good idea to consult with an employment attorney or HR expert to ensure compliance with federal and state laws.

SEVERANCE AGREEMENT

This Severance Agreement (“Agreement”) is entered into between [Employer Name] (“Employer”) and [Employee Name] (“Employee”) to address the terms and conditions related to Employee’s separation from employment.

1. Separation Date:Employee’s last day of employment with Employer will be [Date].

2. Severance Pay:Employer agrees to provide Employee with severance pay in the total amount of [Amount], paid in a lump sum or in installments, subject to standard payroll deductions.

3. Benefits Continuation:Employer will continue Employee’s health insurance benefits until [Date], consistent with Employer’s policies.

4. Waiver of Claims:Employee fully and forever waives any legal claims, including claims of discrimination, wrongful termination, or violation of federal law or employment laws.

5. Confidentiality Clause:Employee agrees not to disclose any proprietary or confidential information of Employer.

6. Non-Compete Clause:Employee agrees not to engage in any competitive activities that conflict with Employer’s business interests for [Time Period].

7. Entire Contract:This Agreement, along with any other relevant contracts, constitutes the entire understanding between Employee and Employer regarding the separation and supersedes all prior agreements.

8. Sign and Date:Both parties must sign this Agreement for it to become effective. By signing below, Employee and Employer acknowledge and agree to all terms.

DISCLAIMER: This is a sample severance agreement for informational purposes only. It does not replace professional guidance from attorneys. Employers should consult an employment attorney before finalizing any severance agreement.

Severance agreement tips for employers

1. Ensure clarity and simplicity

Employers should keep contracts easy to read. Plain language helps employees understand their severance package, pay, and any clauses (such as non-compete clauses or confidentiality) without confusion.

2. Comply with legal requirements

Stay up-to-date with federal and state regulations, as well as employment standards. Employers must also be aware of age discrimination and other discrimination laws. Working with an attorney can help make sure the severance agreement meets all rules.

3. Offer fair and reasonable terms

Provide severance pay and other severance package elements that reflect the employee’s service. Some employees may prefer a lump sum, while others favor periodic payments, extra benefits, or outplacement services to help land a new job.

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Severance agreement FAQs

What is the purpose of a severance agreement?

A severance agreement helps an employer define severance pay and the rest of the severance package owed to an employee once their employment ends. It creates a legal record of both parties’ responsibilities, addresses potential non-compete restrictions, and clarifies what happens in voluntary departures or forced termination situations.

What is a typical severance package?

A standard severance package may include severance pay tied to length of employment (either as a lump sum payment or ongoing compensation) and continuing benefits for a time. Some employers also offer outplacement support for former employees to help them find a new job. Exact details vary by employer policy and the reason for the separation.

What is a severance deal?

A “severance deal” is another term for a severance agreement that specifies the severance package and benefits for an employee leaving the organization.