Most founders build severance agreements under pressure. An employee is leaving under difficult circumstances. Emotions are running high. You need something signed quickly, and you’re Googling “severance agreement template” at 10pm hoping the first result is good enough.
That’s exactly the wrong time to draft this document. The aftermath is predictable: A severance agreement that wasn’t properly structured gets challenged. Claims that should have been released weren’t. The consideration period for older workers was skipped. The company ends up in litigation it thought it had closed.
The better approach: build your severance template before you need it. When a difficult exit comes, you pull out a document your counsel has already reviewed, make the situation-specific adjustments, and move forward with confidence.
Here’s what actually needs to be in a severance agreement that protects your company.
The Release of Claims: The Whole Point of the Document
A severance agreement without a proper release of claims is just a payment. The release is what you’re actually paying for.
The release should be broad and explicit. It should cover all claims the employee has or could have against the company, its officers, directors, employees, and affiliates, whether known or unknown, arising from their employment or its termination.
That last phrase matters. “Known or unknown” is essential in certain states, particularly California, which has a specific statutory requirement tied to Civil Code Section 1542. If you have California employees and your release doesn’t address this provision, the agreement may not hold.
The release should specifically enumerate categories of claims: discrimination claims under Title VII, the ADA, and the ADEA; wage and hour claims; breach of contract claims; and any claims under applicable state law. A generic “all claims” release sounds comprehensive but can create ambiguity in litigation. Specificity protects you.
One important carve-out: A release cannot waive claims that haven’t yet accrued, claims for workers’ compensation benefits, or the right to file a charge with the Equal Employment Opportunity Commission (EEOC) (though it can waive the right to monetary recovery from such a charge). Trying to release these is unenforceable and signals to a court that the agreement was drafted carelessly.
The ADEA Consideration Period: The Rule Most Companies Miss
If the employee being separated is 40 or older, the Older Workers Benefit Protection Act (OWBPA) imposes specific requirements that cannot be waived by agreement.
The employee must be given 21 days to consider the agreement before signing. If the separation is part of a group layoff, that window extends to 45 days. After signing, the employee has 7 days to revoke. The agreement does not become effective until that revocation period expires.
You cannot pay severance before the revocation period closes, and you cannot structure the agreement to eliminate this window. The agreement must also specifically advise the employee in writing to consult with an attorney before signing. This isn’t a suggestion you add to be kind. It’s a legal requirement, and its absence can invalidate the entire release of age discrimination claims.
These requirements apply regardless of how the agreement is structured or what state you’re in. They are federal requirements. If your template doesn’t include them and you’re separating an employee over 40, you do not have a valid release of ADEA claims.
Confidentiality and Non-Disparagement: Protecting What Comes After
Confidentiality and non-disparagement provisions are standard in severance agreements, but they need to be drafted carefully to be enforceable.
Confidentiality should cover the terms of the agreement itself (the amount paid, the existence of the agreement) and reinforce any existing confidentiality obligations the employee has regarding your business information, trade secrets, and customer data. This is also the moment to confirm that their obligations under any prior confidentiality agreement survive the separation.
Non-disparagement should be mutual. An agreement that prohibits only the employee from disparaging the company while leaving the company free to say whatever it wants about the employee is increasingly scrutinized by courts and is a common point of challenge. Mutual non-disparagement is cleaner and more defensible.
One significant development: The National Labor Relations Act limits the scope of non-disparagement clauses for non-supervisory employees. Overly broad non-disparagement language that could be read to prevent an employee from discussing wages, working conditions, or their rights under the NLRA may be unenforceable. Recent NLRB decisions and federal appellate court rulings have made this a real enforcement issue. Your template needs to reflect current National Labor Relations Board (NLRB) guidance.
Return of Company Property and IP: Don’t Skip This
The severance agreement is the last formal document you’ll have the employee sign. Use it.
Include an explicit acknowledgment that the employee has returned all company property: devices, access credentials, documents, and any physical materials. If they haven’t returned something, the agreement should specify what they’re returning and when.
More importantly, include a reaffirmation of any intellectual property assignment obligations from their employment agreement. Any work product, inventions, or innovations they created during employment belong to the company. The severance agreement is the moment to make that explicit one final time, particularly if the employee worked on anything proprietary.
If you don’t have strong IP assignment language in your employment agreements to begin with, the severance agreement can’t fully fix that gap. But it can reinforce what you do have.
Multi-State Teams: Where This Gets Complicated
If you have remote employees or a team spread across multiple states, a single template severance agreement creates real risk.
California has the most employee-protective employment laws in the country. Non-compete provisions that are standard in Maryland or Virginia are unenforceable in California. The Civil Code § 1542 waiver requirement: discussed earlier is California-specific. California employers face distinct requirements that differ significantly from other jurisdictions.
Beyond California, states like New York, Washington, and Illinois have their own specific requirements around severance, non-disparagement, and post-employment restrictions. Some states require specific language. Others prohibit provisions that are routine elsewhere.
The practical answer for multi-state companies: you need a base template that covers federal requirements, plus state-specific addenda or review protocols for employees in states with heightened protections. One document does not fit all.
Build It Before You Need It
The best time to review your severance template is during a quiet period, not during a tense exit conversation.
When you’re in the middle of a difficult separation, you’re managing the employee relationship, thinking about the team’s reaction, and trying to close the situation quickly. That’s not the environment where you catch a missing ADEA consideration period or notice that your non-disparagement clause runs afoul of current NLRB guidance.
A properly structured severance agreement is one of those documents that feels like overhead until the moment you actually need it. Then it becomes the difference between a clean exit and a lawsuit.
If you’re not sure whether your current template covers what it should, that’s worth a conversation. The review doesn’t take long, and the peace of mind is worth considerably more than the time it takes.
If you want contracts that hold, IP that’s protected, and legal bills that don’t surprise you every month—let’s talk. Garcia-Zamor Law Firm delivers fractional in-house counsel with a unique advantage: business law PLUS IP expertise, backed by 70+ years of combined experience. Passionately devoted to your success. Visit garcia-zamor.com or call (410) 531-9853.
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