Severance Agreement — US Drafting Reference

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Drafting reference for US severance agreements — OWBPA waivers, ADEA group disclosure, Section 409A timing, Speak Out Act, McLaren Macomb, SEC Rule 21F-17.

The severance agreement is the contract that closes the employment relationship. Its core economic structure is simple: the employer pays the departing employee an amount above what the employee is otherwise entitled to receive, and in return the employee releases the employer from all claims arising from the employment. Around that core, however, a dense layer of federal and state requirements operates — most prominently the Older Workers Benefit Protection Act (OWBPA), which prescribes the exact mechanics of any ADEA waiver from an employee aged forty or over; IRC § 409A, which controls the timing of any post-termination payment; the Speak Out Act and parallel state NDA-ban statutes, which limit confidentiality and non-disparagement provisions covering sexual harassment; and SEC Rule 21F-17 and the NLRB’s McLaren Macomb decision, which limit any provision that could chill an employee’s right to communicate with government agencies or to engage in concerted activity. This page is the drafting reference for the post-employment release in the US. Cross-reference the Employment Agreement page for severance commitments made on hire, the non-compete and non-solicitation page for restrictive-covenant re-affirmation in severance, and the standard boilerplate clauses page for the general-provisions architecture.

Consideration — The Threshold Question

A general release of claims requires consideration — something the employee receives beyond what the employee is already legally entitled to receive. Accrued unpaid wages, accrued unused vacation in states where it is wages (e.g., Cal. Lab. Code § 227.3), already-vested benefits, and statutory severance under a mini-WARN regime are not consideration — they are owed regardless of the release. Valid consideration is, for example, severance pay above any pre-existing severance commitment, COBRA-premium subsidy, extended stock-option-exercise window beyond the standard 90-day post-termination period, accelerated vesting, or outplacement services. The amount need not be substantial — courts have held even small additional amounts sufficient — but it must be additional. Without bona fide additional consideration the release is unenforceable; this is hornbook contract law, reinforced in the federal-employment context by 29 USC § 626(f)(1)(D) for ADEA waivers and by general waiver doctrine for Title VII and ADA waivers.

OWBPA — The ADEA Waiver Architecture

The Older Workers Benefit Protection Act (29 USC § 626(f); implementing regulations at 29 CFR § 1625.22) sets out the requirements for a knowing and voluntary waiver of ADEA claims by an employee aged forty or over. The Supreme Court enforces these requirements strictly. In Oubre v. Entergy Operations, Inc., 522 U.S. 422 (1998), the Court held that an ADEA release failing any OWBPA requirement is unenforceable, and — strikingly — that the employee need not return or tender back the severance consideration to challenge the release. The OWBPA requirements are:

  1. Written agreement in plain English. The release must be in writing and “written in a manner calculated to be understood by such individual, or by the average individual eligible to participate.”
  2. Specific reference to ADEA. The release must specifically refer to rights or claims arising under the ADEA.
  3. No waiver of post-signing rights. The release cannot waive rights or claims that arise after the date the waiver is executed.
  4. Consideration above what is already owed. The waiver must be in exchange for consideration in addition to anything of value to which the individual is already entitled.
  5. Written advisory to consult counsel. The employee must be advised, in writing, to consult with an attorney before executing the agreement.
  6. Consideration period. The employee must be given at least 21 days to consider the agreement before signing (45 days if the agreement is in connection with an exit-incentive or other employment-termination program offered to a group or class of employees).
  7. Revocation period. The employee must be given at least 7 days after signing to revoke the agreement. The agreement is not effective until the revocation period has expired without revocation.
  8. Group-termination disclosure. For agreements offered as part of an exit-incentive or other termination program to a group or class of employees, the agreement must be accompanied by written information about (a) the decisional unit — any class, unit, or group of individuals covered by the program; (b) the eligibility factors for the program; (c) the time limits applicable to the program; and (d) the job titles and ages of all individuals eligible or selected for the program, and the ages of all individuals in the same job classification or organisational unit who are not eligible or selected (29 USC § 626(f)(1)(H); 29 CFR § 1625.22(f)).

The 21-day and 45-day periods may be shortened only by the employee’s voluntary waiver — and even then the employee may sign early without losing the right to revoke during the 7-day post-signing window. The group-termination disclosure is the most technically demanding piece of the architecture: getting the decisional unit definition wrong is one of the most common OWBPA-compliance failures in practice. The decisional unit must reflect the universe from which the employer drew employees for the program — not merely those selected — and the disclosure must list ages by job title in that unit.

What Cannot Be Waived

Even a properly executed release cannot waive certain rights:

  • Future ADEA claims. OWBPA expressly bars waiver of ADEA rights arising after the date of signing (29 USC § 626(f)(1)(C)).
  • EEOC charge filing. While private ADEA, Title VII, and ADA claims can be released, the right to file a charge with the EEOC cannot be released — only the employee’s right to recover personally. The EEOC remains free to pursue an enforcement action that may include relief for the releasing employee. EEOC v. Cosmair, Inc., 821 F.2d 1085 (5th Cir. 1987) is the foundational authority.
  • FLSA wages and overtime. Federal minimum wage and overtime claims under the FLSA cannot be waived by private agreement — Brooklyn Savings Bank v. O’Neil, 324 U.S. 697 (1945) is the foundational case. Settlements of FLSA claims require DOL supervision or court approval as a “fair and reasonable resolution of a bona fide dispute” under Lynn’s Food Stores, Inc. v. United States, 679 F.2d 1350 (11th Cir. 1982). Drafting consequence: severance agreements that purport to release FLSA wage claims are vulnerable to challenge; better practice is to keep FLSA wage disputes separate and resolve them through DOL or court-approved settlement.
  • Workers’-compensation claims. State workers’-comp statutes typically prohibit release of pending or future workers’-comp claims by private agreement.
  • Unemployment-insurance claims. State law typically bars release.
  • SOX whistleblower claims. Sarbanes-Oxley § 806 (18 USC § 1514A) protects publicly-traded company employees who report securities violations; pre-dispute release of SOX rights is generally unenforceable, and the right to communicate with the SEC is protected by Rule 21F-17.
  • Right to communicate with government agencies. SEC Rule 21F-17 (17 CFR § 240.21F-17) prohibits any provision that impedes communication with the SEC about possible securities violations. The rule has been enforced aggressively since In re KBR, Inc., Exchange Act Rel. No. 74619 (April 1, 2015), in which a $130,000 civil penalty was imposed for confidentiality language that required pre-approval before contacting the SEC. Subsequent enforcement: Activision Blizzard ($35 million, 2023), Anheuser-Busch InBev ($6 million, 2016), BlackRock ($340,000, 2016), JPMorgan ($18 million, 2024). Standard practice is a conspicuous reporting-rights carve-out covering SEC, OSHA, EEOC, DOJ, NLRB, FINRA, and equivalent state agencies, including any monetary award the employee may receive under the SEC whistleblower program.

Section 409A — Payment Timing

IRC § 409A governs the timing of any post-termination payment that is not paid within two-and-a-half months of the year following the year in which the employee’s right to payment vests. § 409A imposes immediate income inclusion and a twenty-percent additional tax on the employee for non-compliant payments — a tax burden that the agreement typically attempts to allocate but cannot shift onto the employer in the eyes of the IRS. Severance is structured to qualify for one of two safe harbours:

  • Short-term deferral exception. Treas. Reg. § 1.409A-1(b)(4). Payment by the fifteenth day of the third month following the year in which the employee’s right to the payment vests (i.e., the year in which the release becomes effective and the conditions to payment are satisfied). For a December 1, 2025 termination with a release that becomes effective on December 22, 2025, the short-term deferral deadline is March 15, 2026. For a December 1, 2025 termination with a release that becomes effective in 2026 (e.g., because the consideration-period runs into January), the right vests in 2026 and the deadline is March 15, 2027 — but careful drafting is required to avoid letting the employee elect which year’s tax treatment applies.
  • Separation-pay safe harbor. Treas. Reg. § 1.409A-1(b)(9). Separation pay payable on involuntary termination (or, in some cases, “good reason” resignation that meets specific § 409A criteria), capped at two times the lesser of (a) the employee’s annualised compensation for the year preceding termination or (b) the IRS § 401(a)(17) compensation limit ($350,000 for 2025), and paid in full no later than the last day of the second taxable year following the year of separation from service.

For publicly-traded employers, the specified-employee six-month delay under § 409A(a)(2)(B)(i) requires that payments to a “specified employee” — top fifty officers and certain owners — be deferred for six months following separation from service. Drafting must build in the six-month delay for any post-separation payment to a specified employee.

The release-execution timing bright line is critical: a clause that permits the employee to delay the payment by delaying signing of the release will fail § 409A. The standard fix is to provide that payment will be made on a specified date — the latest of, for example, the 60th day following termination — regardless of when within that period the employee signs and the revocation period expires.

Confidentiality, Non-Disparagement, and the McLaren Macomb / Speak Out / STAND Limits

The 2022-2023 regulatory pivot tightened the rules around confidentiality and non-disparagement provisions in severance agreements. Three federal and state pillars now apply.

Speak Out Act. The federal Speak Out Act (Pub. L. 117-224, enacted December 7, 2022) makes unenforceable any pre-dispute non-disclosure or non-disparagement clause “with respect to a sexual assault dispute or sexual harassment dispute.” The Act applies to pre-dispute agreements — meaning those entered into before the conduct giving rise to the claim. Severance and settlement agreements entered into after the dispute arises remain enforceable. Drafting consequence: confidentiality and non-disparagement provisions that were embedded in the initial employment agreement, offer letter, or PIIA are unenforceable as applied to sexual-harassment or sexual-assault disputes; the severance agreement entered after the dispute is the place to address confidentiality, and even there the carve-outs in the next paragraph apply.

State NDA bans. California’s STAND Act (Cal. Code Civ. P. § 1001), enacted 2018 and expanded by SB 331 (“Silenced No More Act”) in 2021, prohibits provisions in settlement and severance agreements that prevent disclosure of factual information related to sexual harassment, sexual assault, workplace discrimination, harassment, or retaliation. New York Gen. Oblig. Law § 5-336 prohibits settlement-agreement non-disclosure of facts of harassment, discrimination, or retaliation unless the complainant prefers the non-disclosure (and even then only after a 21-day consideration period). New Jersey N.J.S.A. 10:5-12.8 extends the bar to discrimination, retaliation, and harassment. Washington RCW 49.44.210, Oregon, Illinois, Hawaii, Vermont, and Tennessee have analogous laws. The drafting consequence is that confidentiality of the severance agreement cannot reach the facts of any underlying harassment or discrimination claim in these jurisdictions.

NLRB McLaren Macomb. McLaren Macomb, 372 NLRB No. 58 (Feb. 21, 2023) held that severance agreements containing broad confidentiality or non-disparagement provisions violate Section 7 of the NLRA when offered to employees covered by the Act (non-supervisory employees in the private sector). The mere offer of such an agreement — not just its enforcement — is an unfair labor practice. McLaren Macomb overruled the more permissive Trump-era Baylor University Medical Center (369 NLRB No. 43, 2020) and IGT/International Game Technology (370 NLRB No. 50, 2020) standards. The NLRB’s General Counsel Memorandum 23-05 (March 22, 2023) read McLaren Macomb broadly, taking the position that even narrowly-drafted confidentiality and non-disparagement provisions may be problematic. The drafting response is to (a) limit confidentiality to the agreement’s financial terms rather than to all facts; (b) carve out the right to discuss the agreement with attorneys, spouses, tax advisors, and government agencies; (c) carve out the right to engage in concerted activity protected by Section 7; (d) for supervisory employees not covered by the Act, the older broader provisions remain enforceable, though practitioners often follow the post-McLaren approach uniformly to avoid line-drawing.

DTSA whistleblower notice. The severance agreement re-affirms or extends pre-existing confidentiality obligations. Any contract or amendment governing trade-secret or confidential-information use by an employee, entered or modified after May 11, 2016, must include the DTSA whistleblower-immunity notice under 18 USC § 1833(b) — failure forfeits exemplary damages and attorneys’ fees in any subsequent DTSA action. The notice may be incorporated by reference to an employer policy that contains it.

Restrictive-Covenant Re-Affirmation

Most severance agreements re-affirm the employee’s continuing obligations under existing confidentiality, IP-assignment, and (where enforceable) non-solicit and non-compete covenants. The severance pay can serve as additional consideration to support enforceability where state law requires new consideration for mid-employment covenant modifications (Illinois under Fifield — but the severance is itself the new consideration; Washington under RCW 49.62 — but the wage threshold must still be met). New non-competes imposed in severance are subject to the full state-law analysis; the change in posture (departing employee) does not relax the state’s substantive limits. California, of course, voids all such covenants regardless of timing.

COBRA, Stock Options, and Outplacement

COBRA continuation. Under 29 USC § 1166, the plan administrator must provide a COBRA election notice within 14 days of being notified of the qualifying event; the employer has 30 days to notify the administrator (44 days total in single-employer plans where the employer is also the administrator). The severance agreement often subsidises the employer’s share of the COBRA premium for a stated period — typically three to twelve months. Note that employer-paid COBRA subsidy is taxable wages to the employee under IRC § 106 interpreted in light of post-ACA guidance, except where structured as direct payment to the carrier on the employee’s behalf — and even then taxation rules apply.

Stock-option treatment. The standard 90-day post-termination exercise window for vested stock options derives from the option-plan terms, not the severance agreement. The severance agreement can extend the exercise window — typically to six or twelve months — but only for non-qualified stock options. Extending the window beyond 90 days disqualifies an incentive stock option under IRC § 422, converting it to a non-qualified option and forfeiting the favorable tax treatment. Accelerated vesting on involuntary termination is common for senior executives but rare for rank-and-file employees.

Outplacement. Outplacement and career-counseling services are non-taxable working-condition fringe under IRC § 132(d) — the agreement can therefore include outplacement value above the taxable cash component without increasing the employee’s tax burden.

Tax Treatment

Severance pay is wages. It is reported on Form W-2, is subject to federal income tax withholding (at the supplemental wage rate of 22% for amounts up to $1 million in a calendar year and 37% for amounts exceeding $1 million per Treas. Reg. § 31.3402(g)-1), and is subject to FICA (Social Security and Medicare) withholding. The Supreme Court’s decision in United States v. Quality Stores, Inc., 572 U.S. 141 (2014) confirmed that severance payments are wages subject to FICA, ending a long-running circuit split. Allocation of severance between a general release (taxable) and a physical injury or physical sickness settlement (excludable from income under IRC § 104(a)(2)) is permitted but requires careful drafting and credible substantiation — emotional-distress damages standing alone are not excludable under § 104(a)(2).

Sample Release Language

Below is illustrative general-release language for an employee aged 40 or over with full OWBPA-compliant elements.

Release of Claims. In consideration of the severance benefits set forth in Section X, Employee, on behalf of Employee and Employee’s heirs, executors, administrators, successors, and assigns, hereby releases, waives, and forever discharges the Company and its parents, subsidiaries, affiliates, predecessors, successors, and assigns, and each of their respective current and former officers, directors, employees, agents, and representatives (collectively, the “Released Parties”), from any and all claims, demands, causes of action, liabilities, damages, costs, and expenses of every kind, whether known or unknown, suspected or unsuspected, that Employee has, had, or may have against any of the Released Parties as of the date Employee signs this Agreement, arising out of or in any way relating to Employee’s employment with the Company or the termination of that employment. Without limiting the generality of the foregoing, this release specifically includes any claims under:

  • the Age Discrimination in Employment Act of 1967, 29 USC § 621 et seq., as amended by the Older Workers Benefit Protection Act;
  • Title VII of the Civil Rights Act of 1964, 42 USC § 2000e et seq.;
  • the Americans with Disabilities Act, 42 USC § 12101 et seq.;
  • the Family and Medical Leave Act, 29 USC § 2601 et seq.;
  • the Genetic Information Nondiscrimination Act, 42 USC § 2000ff et seq.;
  • the Equal Pay Act, 29 USC § 206(d);
  • 42 USC §§ 1981 and 1983;
  • the Employee Retirement Income Security Act (other than claims for vested benefits);
  • the Worker Adjustment and Retraining Notification Act, 29 USC § 2101 et seq.;
  • the Fair Credit Reporting Act, 15 USC § 1681 et seq.;
  • any applicable state employment-discrimination, fair-employment-practices, anti-retaliation, wage-payment, and leave statutes;
  • any common-law claims for wrongful termination, breach of contract (express or implied), breach of the covenant of good faith and fair dealing, defamation, intentional or negligent infliction of emotional distress, fraud, negligent misrepresentation, invasion of privacy, or interference with contract or prospective economic advantage.

Employee acknowledges that this release does not extend to: (a) claims that may arise after the date Employee signs this Agreement; (b) Employee’s right to file a charge with, communicate with, or participate in any investigation or proceeding conducted by the Equal Employment Opportunity Commission, the National Labor Relations Board, the Occupational Safety and Health Administration, the Securities and Exchange Commission, or any other federal, state, or local government agency, including reporting possible violations of law or regulation, although Employee waives the right to recover any monetary damages or other individual relief in connection with any such charge (except for any award the Employee may receive under any government whistleblower program); (c) claims for unemployment-insurance benefits; (d) claims for workers’ compensation benefits; (e) claims for vested benefits under any employee benefit plan of the Company; (f) any rights or claims that cannot be waived as a matter of law.

California § 1542 Waiver (where applicable). Employee expressly waives the protections of California Civil Code § 1542, which provides: “A general release does not extend to claims that the creditor or releasing party does not know or suspect to exist in his or her favor at the time of executing the release and that, if known by him or her, would have materially affected his or her settlement with the debtor or released party.” Employee acknowledges having read and understood § 1542 and intentionally waives its protections.

OWBPA Acknowledgements. Employee specifically acknowledges and agrees that: (a) Employee is hereby advised in writing to consult with an attorney before signing this Agreement and has had the opportunity to do so; (b) Employee has been given at least twenty-one (21) days [or “forty-five (45) days” for a group-termination program] to consider this Agreement; (c) Employee may revoke this Agreement at any time during the seven (7) days following Employee’s signature by delivering written notice of revocation to [designated contact]; (d) this Agreement will not be effective and the severance benefits described in Section X will not be payable until the eighth (8th) day following Employee’s signature, provided Employee has not revoked; (e) Employee has signed this Agreement voluntarily, with full knowledge of its terms, and in exchange for consideration to which Employee was not otherwise entitled.

Bibliography

Cross-references

Disclaimer: Handbook content is informational, not legal advice. Last verified 2026-05-10. Severance agreements have a complex compliance footprint across federal and state employment, tax, securities, and labor law; always consult licensed counsel before issuing or signing a release.