What is a Severance Agreement?

A severance agreement is a contract between an employer and employee that sets out the terms of termination of employment. It is also known as a “separation” or “termination” agreement.

What Does a Severance Agreement Look Like?

A severance agreement can look like a typical contract or it can be in a letter format. It will lay out the terms of the agreement, which might include:

  1. Severance Pay Amount
  2. Any Vacation Payout Amount
  3. Health Benefits (like COBRA)
  4. Return of Property
  5. A Non-Compete Clause
  6. A Confidentiality Agreement
  7. Unemployment Information
  8. A General Release of Claims and Waiver of Right to Sue

What is the Difference Between a Last Paycheck and Severance Package?

The last paycheck includes all pay for work done before the termination date, payouts for any accrued vacation time and any benefits that the employee elected during employment, minus any deductions. The severance package includes the severance pay and any benefits that an employer decides to offer beyond the employee’s existing entitlements.

What Do Employers Need to Do to Protect Themselves from Suit?

Employers need to carefully document everything. They need to have a justifiable business reason for the termination, which cannot be based on any protected class status like age, gender or race. Employers generally create a template on how they offer severance, often basing it on the number of years of service.

What are Some Financial Aspects to Consider?

The following may be factored into the severance pay:

1)        Severance pay based on terms of service

2)        Commission, bonuses and deferred compensation

3)        Pension, profit sharing, and 401(k) plans

4)        Stock options

5)        Loan repayment

6)        Unreimbursed business expenses

Deferred Compensation

Section 409A of the Internal Revenue Code lays out the rules regarding the payment of deferred compensation to employees. Anytime an employee is vested with a right during one year to receive compensation in another year, deferred compensation is being given to the employee. Severance compensation that is payable under a severance agreement is generally considered deferred compensation. Employers and employees must make sure that the severance agreement complies with Section 409A.

Is the Person Eligible for Unemployment?

Employees who have been terminated because of a reduction in workforce are eligible for unemployment. However, most states don’t allow terminated employees to get unemployment pay while they are still receiving severance pay.

What Will the Terminated Employee Do About Health Benefits?

Upon termination, many employers offer ex-employees a chance to continue using the company’s group health coverage. They will do this under the federal law known as the Consolidated Omnibus Budget Reconciliation Act, 29 U.S.C. (COBRA). If an ex-employee chooses COBRA, the company will continue to pay the employer's portion of the healthcare premiums for a specified period of time (usually 18 months).

[K1] What Should the Terminated Employee Do after Termination?

Some companies will help the former employee seek a new job by using outplacement companies to help with résumé writing, interviewing skills, or networking services. Outplacement services give terminated employees the opportunity to fine-tune what they are looking for in their next jobs.


If you have any employment-related questions do not hesitate to contact an experienced employment law attorney today at Garcia & Gurney. Our legal professionals can help you understand your rights, and advise you on the best course of action if you choose to file suit.

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 [K1]Melinda, I read that California invalidates non-compete clauses except for equity stakeholders. Is that correct?