Losing your job is stressful, and if your employer offers you a severance agreement, you may feel pressured to sign it quickly. But before you do, it’s important to understand the top 10 things to watch out for in severance agreements.
What Is a Severance Agreement?
A severance agreement is a legally binding contract between a terminated employee and the employee’s former employer in which the terminated employee receives a payment in exchange for the employee’s agreement to waive all known and unknown legal claims against the former employer.
While severance pay can provide financial relief, severance agreements ordinarily are written to benefit the employer, not the employee. Before signing, it’s crucial to understand the terms you’re agreeing to because several different common severance agreement clauses can limit your rights in ways you might not expect. Below are 10 key severance agreement clauses commonly found in most severance agreements, including what they mean, why employers include them, and potential pitfalls to avoid.
Top 10 Things to Watch Out for in Severance Agreements
Number 1: Confidentiality Clause
What Is It: A confidentiality clause is an agreement between you and the company that restricts your ability to publish or talk about the severance agreement, including the amount of the severance payment. It means you are agreeing not to talk about the severance agreement, its terms, or the payment made under it. What it primarily aims to restrict is an employee broadcasting on the Internet or in social media information about the fact that the company paid a severance or the amount of the severance payment.
Why Employers Include It: The company wants to prevent employees from discussing the fact that the company paid a severance or the amount the amount of money received because that could encourage others to make claims.
Tricky Aspects: Some clauses are overly broad and can restrict you from talking to co-workers, attorneys, or even government agencies.
Best for Employees: Ensure the clause allows you to speak with:
- Your lawyer
- Tax advisors
- Family members
- Government agencies (EEOC, DFEH, etc.)
Number 2: Liquidated Damages Clause
What It Means: A liquidated damages clause is an agreement between the employer and the terminated employee that says if the employee violates the confidentiality clause, the employee must pay to the employer a pre-determined (liquidated) fine.
Why Employers Include It: The liquidated damages clause is the enforcement mechanism of the confidentiality clause. Employers include it as a financial deterrent to restrict anyone’s publication or discussion of the terms of the severance agreement or the payment.
Tricky Aspects:
- The pre-determined amount of the fine has to be reasonable and can’t be an arbitrary penalty.
- The higher the severance payment, the higher the penalty tends to be.
- Most liquidated damages clauses require $1,000 to $5,000 per violation, though some demand full repayment of severance for a single violation—this is uncommon but possible.
Best for Employees
- Ideally, get this clause removed.
- If it stays, negotiate the penalty down—employers often accept $1,000 or $500.
- Reality check: These clauses are almost never enforced unless there’s an extreme violation.
Number 3: Cooperation Clause
What It Means: It’s an agreement between you and the company that after your employment ends, you will cooperate with the company if they need particular knowledge, information or data that you have related to your former employment.
Why Employers Include It: They want access to you if they need help with litigation, audits, or internal issues.
Tricky Aspects:
- No time limit—the agreement often doesn’t say how long you have to cooperate.
- No guarantee of payment—the severance doesn’t include extra pay for cooperation
Best for Employees:
- Demand a time limit (e.g., six months or one year).
- Require that any cooperation be on paid time at a fair hourly rate.
Number 4: Non-Cooperation Clause
What It Means: An agreement between you and the company that you will not help other individuals assert a claim against the employer.
Why Employers Include It: All employees that are able to settle their claims and get money may have information that’s helpful to people that are in a similar plight. The company wants to restrict that so no one has any inside information on what the employer may be willing to do.
Tricky Aspects: Some agreements illegally suggest that you can’t comply with government investigations—this is unenforceable.
Best for Employees: Ensure the clause allows you to testify truthfully in court and cooperate with government agencies.
Number 5: ADEA/OWBPA Waiver Deadline
What Is It: The Older Worker Benefit Protection Act (OWBPA) is an amendment to the Age Discrimination in Employment Act (ADEA), the federal law that prevents age discrimination for people that are 40 years or older.
Why Employers Include It: to secure a legally binding waiver of a federal age discrimination claim.
If you’re at least 40 years old when presented the severance agreement, the company is required to comply with the OWBPA waiver requirements in order to have a complete release—i.e., a release that includes a federal claim for age discrimination.
If you’re over 40, the severance agreement must include specific information about your rights, including your right to review the agreement for at least 21 days (or 45 days in group layoffs) and a 7-day revocation period following the date of your signature.
Tricky Aspects:
- If you agree to the severance and don’t have any changes, then there’s no reason not to sign the agreement and return it immediately.
- The 7-day revocation is non-waivable, meaning the effective date of the agreement won’t be until the 8th day after the plaintiff signs it. That determines the date the payment is due. In practical terms, if you have an ADEA/OWBPA waiver in your severance agreement, the company will not pay you until at least the 8th day after you submit the signed agreement.
Best for Employees: Make an effort to have a lawyer review the severance agreement, especially if it contains any of the terms included in this blog.
Number 6: Severance Agreement Revocation Deadline
What Is It: A 7-day, non-waivable period during which you can revoke your agreement to the severance agreement, if the agreement contains and ADEA/OWBPA waiver. If you revoke the agreement by notifying the company before the end of the 7th day, the severance agreement is void. As a result, severance payments ordinarily will not be paid until the expiration of the 7 day revocation period.
Common Misconception: Employees often think that the 21-day review period is a drop-dead date for return of the severance agreement. While technically a deadline, it’s very uncommon—rare even—for an employer to withdraw the agreement if the employee is in communication with them.
Why Employers Include It: It’s a legal requirement for ADEA waivers.
Tricky Aspects:
- Employees often think the 21-day period is a hard deadline—but most employers will accept late agreements if the employee stays in touch.
- Important note: Do not ask for an extension to negotiate—this signals hesitation and a willingness to accept the initial severance offer if negotiations are not productive. Instead, just start negotiating without requesting an extension. Employers rarely withdraw a severance offer, even if the deadline for signature has passed.
Best for Employees: Revoking the severance agreement pursuant to the ADEA/OWBPA waiver rarely is justified. Revocation would be warranted only if you discovery solid evidence that may warrant additional claims prior to the end of the 7-day revocation period. Getting legal advice in a timely manner is essential.
Number 7: Choice of Law and Venue Provisions
What It Means: This clause dictates which state’s law will apply to disputes regarding the severance agreement and where legal proceedings must take place.
Why Employers Include It: Employers may attempt to designate a state’s law that is more favorable to them or require disputes to be resolved in a distant or inconvenient location, making it harder for employees to challenge the agreement.
Tricky Aspects:
- California Law Must Apply: Under California law, employers cannot require employees who primarily worked in California to agree to a different state’s laws. However, some employers still attempt to insert such provisions despite this being illegal.
- Venue Manipulation: Employers may require arbitration or litigation in an inconvenient location, such as Los Angeles instead of Redding, even if the employee primarily worked in a different city.
Best for Employees:
- Ensure California Law Governs: If you worked in California, confirm that the agreement explicitly states California law applies.
- Demand a Fair Venue: The agreement should allow disputes to be resolved in a reasonable location, preferably near where you worked or lived.
Number 8: Compelled Testimony Clause
What It Means: An agreement that requires you to notify the company if you are compelled to testify about your former job.
Why Employers Include It: They want to ensure they have favorable witnesses in legal matters.
Tricky Aspects:
- Applies only to subpoenas and court orders, not voluntary testimony.
- If there’s a non-cooperation clause, it might restrict voluntary testimony.
Best for Employees:
- Ensure you are fairly compensated for your time.
- Limit the obligation to a specific reasonable timeframe.
Number 9: Civil Code Section 1542 Waiver
What It Means: A waiver of unknown claims—meaning you give up the right to sue for anything you might find out about later. California Civil Code section 1542 requires a waiver of unknown claims to include a verbatim listing of the text of section 1542 in the severance agreement in order for the waiver of unknown claims to be enforceable.
Why Employers Include It: Ensures no past claims can be made by the terminated employee after severance is accepted.
Tricky Aspects: Many employees don’t realize they are giving up the right to sue over something they learn about later.
Best for Employees:
- This waiver must be verbatim—if it’s not exactly as written in California law, it’s invalid.
Number 10: Severance Agreement Effective Date & Payment Terms
What It Means: This defines when the agreement takes effect and when severance will be paid.
Why Employers Include It: To ensure all obligations (like the release of claims) are met before they pay you.
Tricky Aspects:
- If you are over 40, the effective date is never before the 8th day after signing because of the 7-day revocation period required with an ADEA/OWBPA waiver.
- Be careful with “business days” vs. “calendar days.”
- 14 calendar days = 2 weeks
- 14 business days = nearly 3 weeks
- Employers often take the full payment window, so don’t expect immediate payment.
Best for Employees:
- If paid in installments, specify exact amounts and dates in the agreement. Example: “$10,000 on April 30, another $10,000 on May 31.”
FREQUENTLY ASKED QUESTIONS
What is a severance agreement, and why is it important?
A severance agreement is a legally binding contract where an employer offers compensation in exchange for an employee waiving all known and unknown claims against the company arising from employment. It’s important to understand its terms before signing, as you may be giving up your ability to sue for wrongful termination, discrimination, or other claims.
Can I negotiate my severance agreement?
Yes. Employers often present severance agreements as “standard” or “non-negotiable,” but many terms can be adjusted, including severance pay amount, confidentiality clauses, and other relevant terms.
In a group layoff, severance payments are generally very difficult to negotiate because employers use a formula based on tenure to avoid claims of favoritism or discrimination. Unless you have a very clear pending legal claim, negotiating the severance amount in a group layoff is usually very difficult.
What are the most important clauses to watch for in a severance agreement?
Key clauses include:
- Confidentiality clause
- Liquidated damages clause (Add: “Not all severance agreements that include confidentiality clauses have a liquidated damages enforcement mechanism. If they do, it’s normally found at the end of the confidentiality clause or immediately after it.”)
- Non-disparagement clause
- Severance payment terms
Do I have to accept a severance agreement immediately?
No. If you are over 40, you typically have at least 21 days to review under the Age Discrimination in Employment Act (ADEA) and 7 days to revoke it after signing. Even if you’re under 40, take time to review it with an employment attorney. Employers often will accept severance agreements past the stated deadline in the agreement.
What happens if I violate a confidentiality or non-disparagement clause?
Employers may pursue legal action or demand repayment of a portion of the severance payment (i.e. the liquidated damages amount) if you breach these terms.
Can a severance agreement restrict me from working for a competitor?
Non-compete clauses are not enforceable in California except in very limited circumstances. However, non-solicitation and confidentiality clauses could still impact your ability to work in the same industry.
What if I later discover I have a valid legal claim against my employer?
If you signed a Civil Code Section 1542 waiver, you waived your right to sue for unknown claims—this applies every single time with no exception.
Should I have a lawyer review my severance agreement?
Yes. An employment attorney can help you understand what you’re giving up, identify unfair clauses, and negotiate better terms to protect your rights.
Final Thoughts
Severance agreements are often presented as “standard” or “non-negotiable,” but that often is not true. Understanding what these clauses mean and how they should be written in your favor can help you protect your rights. If anything in your agreement seems unfair, unclear, or overly restrictive, consult with an employment attorney before signing.
Contact the Ruggles Law Firm at 916-758-8058 to Evaluate Your Potential Lawsuit
Matt Ruggles has a thorough understanding of California employment laws and decades of practical experience litigating employment law claims in California state and federal courts. Using all of his knowledge and experience, Matt and his team can quickly evaluate your potential claim and give you realistic advice on what you can expect if you sue your former employer.
Contact the Ruggles Law Firm at 916-758-8058 for a free, no obligation consultation.
Blog posts are not legal advice and are for information purposes only. Contact the Ruggles Law Firm for consideration of your individual circumstances.
