Severance is a trade, not a gift

There is no federal law that requires you to pay severance. Unless you promised it — in an offer letter, an employment agreement, a handbook policy, or an established past practice — an at-will employer generally owes a departing worker nothing beyond wages already earned and, in some states, accrued unused vacation. So the first question is not "how much severance," it is "why am I paying severance at all?"

The answer, almost always, is that you are buying something: a signed release of claims in which the employee agrees not to sue you. Severance is the consideration — the thing of value — you give in exchange for that promise. If you hand someone a check and get nothing signed in return, you have made a gift and kept all your legal exposure. That is the mental model for this entire topic: severance is a transaction, and the release is what you are actually purchasing.

When it is worth offering one

You do not offer severance to everyone who leaves. You offer it when the peace is worth paying for. The common situations:

  • Layoffs and reductions in force. When the separation is no fault of the employee, severance softens the blow, protects your reputation, and — critically — lets you obtain releases from a group of people at once. If you are cutting enough people to trigger it, coordinate this with your WARN Act and RIF planning, because group layoffs carry extra release requirements covered below.
  • Higher-risk terminations. If there is any real chance the person could bring a colorable discrimination, retaliation, or wrongful-termination claim — a long-tenured employee, someone in a protected class terminated close to protected activity, a messy situation — a modest severance in exchange for a release is often far cheaper than defending even a meritless suit.
  • Negotiated or mutual exits. When you and the employee both want a clean break, severance greases it and the release closes the book.
  • Goodwill and consistency. Some employers offer a standard formula (say, one to two weeks of pay per year of service) for all non-cause separations as a matter of policy. If you do this, apply it consistently — an ad hoc severance that is generous to some groups and stingy to others can itself become evidence of discrimination.

You generally do not owe or offer severance in a clean for-cause termination, though even then a small payment for a release can be worth it if the facts are murky.

The release only works if the consideration is real

A release is a contract, and a contract needs consideration — something the employee gets that they were not already entitled to. This is where small employers stumble. Final wages are not consideration. You owe those anyway; in most states you owe them fast (see final-paycheck laws). Accrued PTO you are legally required to pay out is not consideration either. The severance has to be something extra — money, extended benefits, a neutral reference — that the employee would not receive but for signing. If the only thing you are "offering" is what you already owe, the release can be attacked as unsupported.

What a release can and cannot buy

A general release can waive most private claims the employee has against you as of the date they sign — discrimination, wage disputes over disputed amounts, wrongful termination, and the like. But some things cannot be waived, and promising otherwise can taint the whole agreement:

  • Employees cannot waive the right to file a charge with the EEOC or a state agency, or to cooperate in an investigation. They can waive the right to personally recover money from such a charge, and that is the language you want — not a blanket "you may never contact the EEOC," which agencies treat as unlawful.
  • FLSA wage and overtime claims generally cannot be privately released without DOL or court supervision. If there is a genuine misclassification or unpaid-overtime issue lurking (see exempt vs non-exempt), a severance release will not reliably make it disappear.
  • Unemployment benefits, workers' compensation, vested retirement benefits, and future claims (things that have not happened yet) are typically off the table. You cannot buy a waiver of the right to file for unemployment; you can, and often do, agree not to contest it as part of the deal.

The age rule that invalidates careless releases: OWBPA

If the employee is 40 or older, waiving age-discrimination claims under the ADEA triggers the Older Workers Benefit Protection Act (OWBPA), and its requirements are strict and technical. Miss one and the age-claim waiver is void even though the employee cashed the check. To be "knowing and voluntary," the agreement must:

  • Be written in plain language the employee can understand.
  • Specifically reference ADEA rights and claims.
  • Advise the employee in writing to consult an attorney.
  • Give the employee at least 21 days to consider the agreement (extended to 45 days for a group termination or RIF).
  • Provide a 7-day revocation period after signing, during which they can back out — meaning severance should not actually be paid until that week passes.
  • For a group layoff, include the decisional-unit disclosure: a written breakdown of the job titles and ages of everyone selected and not selected for the program. Getting this exhibit right is fussy, and it is one of the strongest reasons to have counsel paper a group RIF.

The clauses that just got riskier

For years, employers packed separation agreements with broad confidentiality and non-disparagement clauses. In 2023 the National Labor Relations Board's McLaren Macomb decision held that offering a severance agreement with overly broad confidentiality or non-disparagement provisions can itself be an unfair labor practice for employees covered by the National Labor Relations Act — which includes most non-supervisory private-sector employees, union or not. The mere offer can violate the law, regardless of whether the employee signs.

That does not mean you cannot protect legitimate interests. It means the clauses must be narrowly tailored and must not restrain employees from discussing wages, working conditions, or otherwise exercising their protected rights, or from communicating with the NLRB, EEOC, or other agencies. Add a savings clause that expressly preserves those rights. If confidentiality of the settlement terms and trade secrets matters to you, say that specifically rather than imposing a blanket gag. This is an area that has shifted recently and continues to move — do not reuse a template you found online in 2019.

Other common, still-valid terms: the severance amount and payment timing, benefits continuation or a COBRA premium subsidy, return of company property, a mutually agreed reference, a reaffirmation of any surviving non-compete or other restrictive covenants, and a no-admission-of-liability clause.

Running the process cleanly

Present the agreement respectfully and give the employee the full statutory consideration window — do not pressure a same-day signature, which undercuts "knowing and voluntary." Deliver the severance only after any revocation period closes. Keep the signed agreement in a secure file separate from the general personnel file. Coordinate the mechanics with your standard offboarding process so property return, access shutoff, and final pay all line up with the agreement's terms. And remember the release closes claims that exist at signing — it does not license retaliation afterward, so treat the departed employee, and any references you give, with the same care.

Because severance agreements are contracts with technical enforceability rules — OWBPA windows, FLSA limits, the shifting NLRB line on confidentiality — this is the HR document most worth having employment counsel review or template for you, especially for anyone over 40 or any group layoff. The cost of a lawyer's review is trivial next to an unenforceable release you thought had protected you.

The small-employer bottom line

Pay severance when the peace is worth buying, and get a real release in return. Make sure the payment is genuine consideration beyond what you already owe, know which claims you cannot waive, follow the OWBPA script to the letter for anyone 40 or older, and keep confidentiality and non-disparagement narrow enough to survive current labor law. Done right, a separation agreement turns an ambiguous, anxious ending into a closed book. Done casually, it is money spent for protection you do not actually have.

This is general HR guidance, not legal advice. Release enforceability, OWBPA compliance, and the limits on confidentiality and non-disparagement clauses vary by jurisdiction and are actively evolving — have employment counsel review any separation agreement before you use it.