Severance agreements are legally binding contracts between an employer and an employee. The agreement could also be referred to as a separation agreement.

A severance agreement sets forth what an employee will receive when their employment ends, such as severance pay, continued benefits, or other compensation. It is critical that every employee thoroughly understand the severance agreement before it is signed because it will require the employee to give up important legal rights in exchange for compensation. Once executed, the terms are usually final and enforceable, leaving little or no opportunity to renegotiate or challenge the agreement later. Taking the time to review and understand the agreement helps ensure the employee knows exactly what they are receiving, what rights they are waiving, and whether the terms are fair under the circumstances.

Even employees who are parting in an amicable manner should seek legal guidance about signing an agreement to ensure that the terms are reasonable. Severance agreements are prepared by the employer and are designed to protect the company’s interests, not the employee’s. Because the employer has no obligation to ensure that the terms are fair to the employee, independent legal review is critical.

For employees age 40 and older, severance agreements must comply with the Older Workers Benefit Protection Act (OWBPA). The severance agreement must advise the employee to consult with an attorney and must give the employee 21 days to consider the agreement and 7 days after signing it to revoke the agreement.