What is a severance agreement?
A severance agreement trades a payment for a release of claims. Learn what is negotiable, what you give up, and the clauses to read carefully before you sign.
The short answer
A severance agreement (sometimes called a settlement or separation agreement) pays you something extra when your employment ends, in exchange for you giving up the right to bring claims against the employer. The payment is the obvious part; the price is the release, plus any confidentiality, non-disparagement and restrictive covenants attached to it.
What you are trading
The core bargain is money for a release of claims. Read the release carefully: it is usually drafted to cover all claims of any kind, known and unknown, against the company and everyone connected to it.
Certain rights cannot normally be signed away — accrued wages, vested pension or equity, workplace injury claims, and the right to report unlawful conduct to a regulator. A well-drafted agreement lists those carve-outs; if yours does not, ask.
Check the money line by line
Separate the amounts you were already owed from the genuinely extra payment. Notice pay, accrued but untaken holiday, and earned commission are usually owed anyway — they should not be presented as generosity.
- Severance payment amount, timing and tax treatment
- Notice pay or payment in lieu, and whether you must work the notice
- Accrued holiday and any outstanding expenses
- Bonus or commission earned but unpaid
- Equity: what vests, what lapses, and how long you have to exercise
- Benefits continuation, especially health cover, and for how long
Non-disparagement and references
Non-disparagement clauses are usually one-way. Ask to make them mutual, and ask for an agreed reference wording attached as a schedule, plus a named person who will give it. A promised 'neutral reference' with no agreed text is worth very little two years later.
Restrictive covenants can be renegotiated here
Your exit is one of the rare moments when non-competes and non-solicits are genuinely negotiable, because the employer wants the release. Ask to shorten the period, narrow the scope, or waive a restriction that blocks a specific role you want.
If the employer wants new or extended restrictions in the severance agreement, that is additional consideration they should pay for.
Take the time you are given
Many jurisdictions require a minimum consideration period, independent legal advice, or a revocation window before a release is valid. Pressure to sign the same day is a warning sign, not a deadline — and rushing you may make the release unenforceable anyway.
Sample clause language
Illustrative wording, written for this guide — not copied from any real contract.
Employee releases all claims of any nature against the Company and agrees not to make any statement concerning the Company. Employee acknowledges this Agreement must be signed and returned by close of business today.
No carve-outs, one-way non-disparagement, and same-day pressure that can itself undermine enforceability.
Employee releases claims arising from the employment and its termination, excluding accrued wages, vested equity, pension entitlements, personal injury claims unknown at the date of signature, and the right to make a protected disclosure to any regulator. Neither party shall disparage the other. The Company shall provide a reference in the form of Schedule 2. Employee has 21 days to consider this Agreement and 7 days to revoke after signing.
Carve-outs preserved, mutual non-disparagement, agreed reference wording and a real consideration period.
Red flags to look for
- Release with no carve-out for whistleblowing or regulator reports.
- Same-day signing pressure or no offer of independent advice.
- Money that is only what you were already owed, relabelled as severance.
- New or extended non-competes added without extra payment.
- One-way non-disparagement with no agreed reference.
What to ask for
- Ask for the severance figure to be increased or the notice period paid in full.
- Request carve-outs for accrued pay, vested equity and protected disclosures.
- Make non-disparagement mutual and attach agreed reference wording.
- Ask for extended benefits cover or a longer equity exercise window.
- Use the moment to shorten or waive restrictive covenants.
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Frequently asked questions
Do I have to sign a severance agreement?
No. If you do not sign, you keep your right to bring claims but usually lose the extra payment. Whether that trade is worth it depends on the strength of any claim and how much is on the table.
Can I negotiate severance?
Usually yes. The employer is buying certainty, and the amount, the reference, the benefits period and the restrictive covenants are all commonly adjusted.
How long do I have to decide?
It varies by jurisdiction and by the type of claims released; some laws require a set consideration period and a revocation window. Never treat a same-day deadline as genuine without checking.
Is severance pay taxed?
Usually yes, though treatment differs by country and by what the payment is for. Ask for the breakdown between taxable pay and any tax-free element in writing.
Related guides
This guide is general educational information about how these clauses usually work. It is not legal advice, and contract law differs by jurisdiction. For a decision that matters, speak to a qualified lawyer.