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What to Look For in a Severance Agreement

What to Look For in a Severance Agreement

by

JG Wentworth

March 8, 2023

8 min

a man sits at a desk with a laptop, talking on his phone

The information on this blog is provided for educational and informational purposes only. Such information or materials do not constitute and are not intended to provide legal, accounting, or tax advice and should not be relied on in that respect. We suggest that you consult an attorney, accountant, and/or financial advisor to answer any financial or legal questions.

Being let go from a job can come as a shock—and the last thing you want to do when you get that bad news is try to understand a complex contract.

So what should you do if you’ve been fired or laid off? If your employer gave you a severance agreement, knowing what to look for can help you minimize the stress of losing your job and looking for a new role.

What is a severance agreement?

man reviewing papers at a desk

A severance agreement outlines the terms of an employment termination (i.e., a layoff or firing), including the benefits the terminated employee can expect to receive and what the employee is allowed to do after they exit the company. 

While specific rules around severance vary by state, employers are not required by federal law to offer severance packages. They typically offer these packages in order to avoid a wrongful termination lawsuit, as well as to foster goodwill with the person being let go and not affect the morale of the employees still at the company.  

Some employers have rules around termination written into their employee handbook. If you want to know what you can expect from a severance agreement with your employer, take some time to familiarize yourself with that section of their guide. 

What’s in a severance package? 

A typical severance agreement outlines the important details of what you can expect from your employer after termination. This is a non-exhaustive list of what you might find in a severance agreement, and laws can differ from state to state.  

Wages and payment  

Your employer may offer to continue to pay your wages for a set period after your employment is terminated. This could cover you for two weeks or several months. 

How much severance pay you get can be negotiated; however, as a general practice, severance pay is typically tied to the amount of time an employee has been with their company. If it’s not written into your agreement, you could also negotiate to have your unused PTO included in your severance pay. 

Payment schedule  

The agreement will outline when you can expect your final payment(s) from the company and how that amount will be paid. That is, your employer may disburse your payments over their typical payday schedule, or they may give you a lump sum up front.  

Depending on what state you’re in, your employer may not be required to pay you straight away. To find out when you’re owed your severance pay, look up the rules in your state. This may be something you want to negotiate with your employer before signing your agreement. 

Healthcare benefits

The Consolidated Omnibus Budget Reconciliation Act (COBRA) requires your employer to allow you to stay on their health insurance plan for up to 18 months after termination.  

However, COBRA doesn’t require your employer to continue to pay their share of your premiums—meaning continuing coverage could cost you a lot! For that reason, you aren’t required to continue your coverage. 

If you’re worried about being able to afford health insurance while you’re unemployed, you could also try to negotiate with your employer to pay part or all of your insurance premium until you find new employment that offers health insurance.

Non-compete clause 

If you want to stay in the same industry as the company you’ve just been let go from, you may not want to sign an agreement with a non-compete clause.  

This type of clause limits where you’ll be able to work after your termination. For example, your employer may want to prevent you from working at a direct competitor in order to ensure you won’t use your knowledge of their business to compete with them.  

Because this clause could affect your future job opportunities, make sure you understand a non-compete clause fully and consider all the consequences before agreeing to it. 

Non-disparagement clause 

A non-disparagement clause limits what you’re allowed to say about your employer after termination. It may specify that you’re not allowed to talk about the circumstances that led to your termination or that you can’t speak negatively about your employer to others.  

This clause might be difficult for your employer to enforce, but if you sign an agreement with non-disparagement written in, your employer can sue you if they can prove you’ve spoken poorly of them. 

A non-disparagement clause can go both ways; you can make sure that your former employer doesn’t disclose the reason for your termination to anyone or speak poorly of you, too. Making sure this condition is added to your agreement ensures that your employer won’t be able to make harmful comments about your performance or negatively impact your future employment opportunities.  

Liability release 

A liability release ensures that a terminated employee cannot sue their employer for wrongful termination, including for civil rights violations, FMLA violations, or discrimination.  

If you believe your rights are being violated and you could have a legal case against your employer, you should consult an attorney about your options before signing a severance agreement with a liability release. 

Vesting retirement contributions or stock options 

If you have retirement benefits and/or non-vested stock options with your employer, you could negotiate to vest your employer’s contributions or to exercise your stock options. 

How to negotiate your severance agreement 

woman sitting at desk with laptop looking concerned, with coworkers behind her

When handed a severance agreement, it’s in your best interest not to sign right away. (In fact, you don’t have to sign your severance agreement at all if you don’t like the terms—but that means you won’t reap any of the benefits outlined in the contract, either.)  

Losing a job is stressful at best and traumatizing at worst, so take a day or two to process what happened and read over your agreement with a clear mind. Most employers give you 21 days from the termination of your employment to sign your agreement; the exact date should be noted on your agreement. 

Just like you negotiate the terms of your employment before you start at a new company, you can negotiate the terms of your termination. If you feel that it will be taken in good faith, you can try to do this yourself. However, if your employer is resistant to reasonable negotiations, you may wish to consult with an attorney about your agreement. 

Should you hire a lawyer to negotiate your severance agreement? 

Hiring an attorney to negotiate your severance agreement is a personal decision; there’s no one-size-fits-all answer.  

It’s helpful to have someone review your agreement, but it’s not necessary. At the very least, an attorney can give you an expert answer to questions you might have about any clauses in your agreement you aren’t sure about.  

A lawyer can also help you in any instance where your employer is illegally withholding your final paycheck, not paying out your PTO, or otherwise not holding up their end of the bargain. Because severance laws differ from state to state, a lawyer can help you understand what your rights are and advocate for yourself during a difficult time. 

If you feel you’ve been discriminated against, you may want to hire an attorney—but you don’t have to have a lawyer to file a discrimination complaint with an enforcement agency like the Equal Employment Opportunity Commission (EEOC).  

Consulting a lawyer to review your options doesn’t mean you necessarily have to pursue a lawsuit; at the very least, it can help you make more informed decisions about the agreement your employer has offered you. 

Sources cited

  1. Severance pay laws by state. Her Lawyer. (2022, September 20). Retrieved from https://herlawyer.com/severance-pay-laws-by-state/
  2. U.S. Department of Labor. (n.d.). Continuation of Health Coverage (COBRA). Retrieved from https://www.dol.gov/general/topic/health-plans/cobra
  3. Spencer, J. (2021, May 17). The top four provisions to look for in a severance agreement. Jackson Spencer Law. Retrieved from https://jacksonspencerlaw.com/severance-agreement-provisions/
  4. Retirement topics – vesting. Internal Revenue Service. (2022, May 17). Retrieved from https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-vesting
  5. Lee, J. (2022, July 21). Exercising stock options: How & when to exercise. Carta. Retrieved from https://carta.com/blog/exercising-stock-options/
  6. Yuille, B. (2022, November 4). The layoff payoff: A severance package. Investopedia. Retrieved from https://www.investopedia.com/articles/pf/08/negotiating-severance-agreements.asp
  7. Filing a charge of discrimination. US EEOC. (n.d.). Retrieved from https://www.eeoc.gov/filing-charge-discrimination

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