An employee separation agreement is a legal document that outlines the terms of termination between an employer and terminated employee.
By signing the agreement, the employee waives their right to sue for wrongful termination or additional severance pay (while keeping certain rights). Employers can use a separation agreement with employees who resign, are fired or laid off, or who mutually agree to separate.
Employee separation agreements can have many different names. They’re also known as termination agreements; release of claims for employment; employment separation agreements; and severance agreements.
What can go in a separation agreement?
There are typically two parts to each employee separation agreement.
The first is a release of claims, which often includes a general waiver of any and all claims arising from the employment. We’ll cover some common examples below.
Second, the employer provides something of value, usually severance pay (paid as a lump sum or in installments), that the employee wouldn’t otherwise be entitled to.
An employee separation agreement can also include additional clauses and agreements that protect the business, including:
A description of company-owned items the employee must return on or before their last day.
A confidentiality clause regarding the agreement’s terms, and often a non-disclosure agreement about confidential information.
A non-compete clause (a promise not to work for a competitor, or start a competing business, for a set period and area after leaving). Enforceability varies widely by state.
A non-solicitation agreement (a promise not to actively recruit or lure away the company’s people or business for a set period after leaving).
A non-disparagement clause (a promise not to make negative statements about the company, and sometimes its leaders, products, or employees).
Are there laws that cover separation agreements?
There are laws that cover separation agreements at both the federal and state level, and the rules depend on what your agreement includes. Federal laws that commonly come into play include:
The Age Discrimination in Employment Act (ADEA) and the Older Workers Benefit Protection Act (OWBPA): Set review and revocation periods for employees age 40 and older.
The Consolidated Omnibus Budget Reconciliation Act (COBRA) and the Employee Retirement Income Security Act (ERISA): Cover health coverage and vested retirement benefits, which follow their own plan rules regardless of what your agreement says.
The National Labor Relations Act (NLRA): The National Labor Relations Board (NLRB) has said overly broad confidentiality and non-disparagement clauses can unlawfully restrict the rights of non-supervisory employees.
The Fair Labor Standards Act (FLSA): Wage claims like unpaid overtime generally can’t be released privately without Department of Labor (DOL) or court supervision.
The Defend Trade Secrets Act (DTSA): If your agreement includes confidentiality terms, a short whistleblower immunity notice lets you recover certain remedies, like exemplary damages and attorney fees, in a trade secrets case.
State law varies even more, especially for:
Non-competes: California and Minnesota largely prohibit them. Washington’s ban takes effect June 30, 2027. Other states limit them by pay level, industry, or notice requirements.
Confidentiality and non-disparagement: Several states, including California, New York, Washington, New Jersey, and Illinois, restrict clauses that cover harassment, discrimination, or retaliation.
Final pay and review periods: Timing for the last paycheck, PTO payout, and employee review time can differ by state.
What rights does an employee still have after signing a separation agreement?
Even after signing an agreement, employees keep certain rights, and your agreement should say so plainly. They can still:
File a charge with, or take part in an investigation by, agencies like the Equal Employment Opportunity Commission (EEOC), NLRB, Securities and Exchange Commission (SEC), or DOL (though they can typically waive the right to personal monetary recovery).
Apply for unemployment and workers’ compensation benefits.
Keep benefits they’ve already earned, like vested 401(k) balances.
Speak up about unlawful workplace conduct, including harassment, discrimination, and retaliation, in states that protect that right.
Which claims does a release usually cover?
A strong separation agreement and release names the claims it covers instead of relying on general language.
Common examples include Title VII of the Civil Rights Act (discrimination), the Americans with Disabilities Act (ADA), the ADEA (age discrimination), the Family and Medical Leave Act (FMLA), and their state equivalents, plus breach of contract and wrongful termination.
What else belongs in a separation agreement?
Beyond the release and severance amount, you’ll want to cover the details that save everyone confusion later:
Final pay and PTO: When the last paycheck arrives and whether unused time off is paid out.
Taxes: Severance counts as taxable wages, so it’s subject to withholding. Installment payments can trigger additional rules under Section 409A of the tax code.
Health coverage: How long coverage lasts, how the employee can continue it through COBRA, and whether you’ll help cover the cost.
Stock options and equity: Any changes to vested and unvested equity, including how long the employee has to exercise vested options.
References and announcements: What you’ll say to future employers, and how you’ll tell the team.
Mutual terms: Many employers agree to a neutral reference or mutual non-disparagement. It’s often an easy ask that makes the whole agreement feel fairer.
Standard legal clauses: Governing law, severability (if one part fails, the rest still stands), and an entire-agreement clause that says this document replaces earlier understandings.
A separation agreement should give both sides a clear, respectful way to move forward. A well-built one protects your business and treats the person leaving fairly, which matters just as much.
Be sure to bring in an employment attorney to draft or review your agreement before you offer it. With the right terms in place, you can handle the separation with confidence and keep your focus on your team and what’s next.
FAQs
Do employers have to offer severance or a separation agreement?
No. Federal law doesn’t require employers to offer severance or a separation agreement. Severance may still be owed under an employment contract or written company policy, and the WARN Act requires 60 days’ notice (or pay instead) for some large layoffs. Employers who offer severance usually ask for a signed release of claims in exchange.
How much severance is typical?
There’s no required amount. A common rule of thumb is one to two weeks of pay for each year of service, though amounts vary by company, role, and seniority. Using a consistent formula for similar employees helps keep offers fair. Our severance package guide covers how to build one.
Can an employee negotiate or refuse to sign a separation agreement?
Yes. A separation agreement is a contract, so employees can negotiate terms like the severance amount or the scope of restrictions. They can also decline to sign. In that case, they generally still receive what they’re already owed, like final pay, but not the severance offered in exchange for the release.
Can an employee collect unemployment after receiving severance?
Often, but it depends on the state. Severance doesn’t automatically disqualify someone, though some states count it as income that delays or reduces benefits, depending on how it’s paid. Employees should apply promptly and check with their state unemployment agency. Employers can’t waive an employee’s right to file.
What happens if an employee breaks a separation agreement?
The employer can typically sue for breach of contract, and the agreement may allow it to stop unpaid severance or request repayment. A court can also order the violation to stop. Remedies depend on the agreement’s wording and state law, so spell them out. Repayment rules differ when an employee challenges an age-discrimination waiver.
How long does an employee have to review a separation agreement?
For employees age 40 or older, the OWBPA generally requires at least 21 days to consider the agreement, or 45 days if it's part of a group layoff, plus seven days to revoke after signing. Younger employees aren't covered by that rule, but giving reasonable time to review is good practice, and some states set their own periods.
Is a separation agreement the same as a severance agreement?
Often the terms are used interchangeably. A separation agreement is the broader document that sets the terms of the departure, including the release of claims, and severance is the payment offered in exchange. Some employers use "severance agreement" for the same document when pay is the main term.
