Severance Agreements: What to Know Before You Sign

Losing a job is stressful enough without the added complexity of figuring out your severance agreement. Yet the documents you sign in those first days after a layoff can have a lasting impact on your money, your benefits, and even your ability to take your next role.

This page is designed as an expert-level resource to help you understand what severance packages typically include, what to look out for, and how to avoid leaving value on the table. While every situation is unique — and this is not legal advice — you’ll walk away with a clear framework for reviewing your severance documents with confidence.

Employers pay severance not as a gift, but because the business exchange is worth more to them than the added cost. They’re buying certainty—no lawsuits, no messy disputes, and a clean break—while you’re securing a financial bridge. That lens helps you evaluate whether what you’re getting truly matches what you’re giving up.

What Is a Severance Package?

A severance package is the bundle of pay, benefits, and obligations an employer offers when your employment ends involuntarily. It’s not legally required in most cases (except in certain contracts or union agreements), but it’s a common practice for employers that want to manage risk, preserve goodwill, or smooth the transition for employees.

Severance can be paid as:

A lump sum: One-time payment, often taxed like a bonus.
Salary continuation: Ongoing paychecks for a set period (e.g., 8 weeks of continued salary).
Hybrid structures: Several larger installments, or partial lump sum plus continuation .

The payment is usually offered in exchange for you signing a waiver of claims — meaning you agree not to sue the company for anything related to your employment or termination. That trade-off has been standard for decades.

How Severance Has Changed Over Time

Historically, severance was seen as a reward for service — a goodwill payout in exchange for legal waivers. Today, it’s increasingly framed as income replacement. Two key shifts have emerged:

Severance stops when you get a new job.
- This trend began in the early 2000s during mass layoffs. Companies restructured severance to function more like temporary unemployment benefits — ending payments once you’re re-employed. It reduces employer costs and reframes severance as a “bridge” rather than a bonus.
Employers covering COBRA health insurance.
- Traditionally, COBRA continuation was the employee’s financial responsibility. More recently, especially during crises like the 2008 recession and COVID-19, companies began covering COBRA premiums during the severance period. This protects employer reputation, eases employee transitions, and keeps alumni networks positive.

These shifts show how severance has evolved from a loyalty gesture into a risk-management and branding tool.

Typical Severance Payouts

A common rule of thumb is one week of severance pay for each year of service at the company. So if you worked for 10 years, you might be offered 10 weeks of pay.

However, that’s just a starting point. The actual amount depends on:

Company policy and precedent.
Your level of seniority (executives often negotiate higher).
Industry norms (tech and finance tend to be more generous than retail).
Whether the company is trying to avoid litigation or bad press.

The important thing: severance is negotiable. Unless you’re under a strict policy or union contract, there’s often room to adjust terms in your favor.

Step 1: Check the Dates

It may sound trivial, but incorrect dates are one of the most common errors in severance agreements — and they can directly cost you money.

Hire date: If it’s wrong, your service length (and thus your severance calculation) may be undervalued.
Separation date: Impacts last paycheck, benefits coverage, and unemployment eligibility.
Payment dates: Typos here can shorten the severance period.
Signature and effective dates: Determine when obligations start and end .

Always line up the paperwork dates with your actual employment history.

Step 2: Define “Salary” and Pay Elements

Agreements often say you’ll receive “salary continuation” or “X weeks of pay” — but what does “salary” include?

You need clarity on:

Base pay only, or also commissions? If you earned a commission right before termination but it won’t be paid until later, is it included?
Bonuses: Annual or quarterly bonuses may fall through the cracks if not explicitly listed.
Other incentive pay: Profit-sharing, performance awards, stipends.

➡️ Action: Review your last year (or more) of pay history. List every type of compensation you’ve received, then check whether it’s included in the severance language. If it isn’t written in the agreement, don’t assume it’s covered.

Real-world gotcha: Commissions often pay 30–90 days after a sale. If your severance uses vague “salary continuation” language and never mentions commissions, that money can slip through the cracks. Match deal dates, processing windows, and the termination date to confirm commissions are explicitly included.

Step 3: Understand Payment Structure and Taxes

Severance can be taxed differently depending on how it’s paid:

Lump sum: Taxed like a bonus — higher withholding at the time of payment.
Salary continuation: Taxed like normal paychecks.
Installments: May affect unemployment eligibility in your state.

There are also legal boundaries: severance cannot exceed two years of pay or double your last year’s earnings without being treated as a pension for tax purposes.

Severance can be taxed differently depending on how it’s paid. A lump sum may be taxed like a bonus with higher withholding, while salary continuation is taxed like normal paychecks. (See our severance pay guide for a deeper dive on calculations and limits.)

Step 4: Don’t Overlook PTO, Vacation, and Holidays

Unused paid time off is money in your pocket. In some states, payout of unused PTO is legally required; in others, it’s optional.

Checklist:

Vacation days not taken.
Sick leave (state laws vary).
Floating or religious holidays.

Confirm these are explicitly listed in the severance agreement so they don’t get lost .

Step 5: Review Benefits and COBRA Coverage

Health insurance is one of the most critical (and expensive) elements after a job loss.

COBRA continuation: By law, you can keep your employer’s group plan for up to 18 months (at your expense).
Employer subsidies: Increasingly, companies cover COBRA for part or all of the severance period.
Family coverage: Does the subsidy apply only to you, or to your spouse/children as well?

Other benefits to check:

Short-term or long-term disability coverage.
Life insurance.
Employee assistance programs.
Legal services.
Even “extras” like pet insurance.

COBRA Transition Gap (and Retroactive Coverage)

Even if you elect COBRA, there’s a short transition where your new COBRA card may not work yet. Employers typically have 21–60 days to process enrollment. Don’t panic if a claim is denied during that window: once COBRA is finalized and premiums are paid, coverage retroactively applies back to the first of the month after your termination—so you can submit those receipts for reimbursement.

COBRA lets you stay on your employer’s plan for up to 18 months, but watch out for processing gaps and family coverage limits. We break that down in our COBRA health insurance after a layoff guide.
Action step: Save all medical receipts during the transition window. Re-submit once your COBRA is active.

Story: A client’s insurance card was denied at a routine appointment three days after layoff. They paid out of pocket, kept the receipt, and were reimbursed once COBRA finalized because coverage backdated to the first of the month. Don’t confuse processing lag with lack of coverage—document and submit.Who’s Covered—You or Your Family?

If your employer subsidizes COBRA during severance, confirm who they’re covering. Some agreements cover employee only unless you negotiate spouse/dependents explicitly.

Money Matters: Family coverage can add $800–$1,200+/mo in value. Get it in writing.

Step 6: Stock, Equity, and Retirement Accounts

Equity grants (options, RSUs) and retirement contributions often get overlooked in the shock of a layoff.

Vesting schedules: If you’re mid-cycle, find out whether unvested shares are forfeited, accelerated, or partially vested.
401(k) matches: Usually stop at termination, but confirm.
Relocation or tuition reimbursement: These perks sometimes carry repayment obligations if you leave early — severance should clarify whether those are forgiven or enforced .

Step 7: Your Next Role and Restrictions

Today’s reality: Pre-2000s, severance felt like a “thank you.” Now it’s a bridge—and it typically ends when you’re re-employed. That’s why “notify us when you accept a job” and “payments cease upon re-employment” clauses are common. If you have leads in motion, negotiate front-loaded pay.

Your ability to work again quickly can be shaped — or blocked — by severance clauses:

Non-compete agreements: Check scope (geographic, time, industry). These can restrict your job options.

Don’t just skim duration; check scope (industry/roles), geography (25-mile radius vs statewide/nationwide), and practicality (can you still work in your field?). Ask for carve-outs tied to your real plans—consulting, specific clients, or roles in unrelated divisions.

Non-solicitation: May prohibit contacting former clients or colleagues.
Nondisclosure: Usually continues indefinitely, even for information you created.
Notification obligations: Some agreements require you to report if you take a new job, which can cut off severance pay or COBRA subsidies.
Clawbacks: If you breach a clause, you may have to repay severance already received.

Non-compete and non-solicitation clauses can restrict where you work, who you talk to, and even when severance stops. (See our guide on how severance affects your next job for examples of what to watch for.)

When Severance Stops (Re-Employment)

Salary continuation often ends the day you start a new job and some agreements require you to notify your former employer when you accept an offer.

Negotiation tip: If you expect to land quickly, ask for a lump sum instead of continuation so you don’t lose weeks of pay.

Clawbacks—Repaying Severance

Watch for “repayment” language if you breach a term (non-compete, non-solicit, NDA). Clawbacks can trigger even for accidental breaches.

Action step: Ask HR how clawbacks are triggered and capped. Get the answer inside the agreement text.

Balance Test—Non-Compete vs. Pay

If your non-compete is 6–12 months but severance covers only 2–3 months, you’re being asked to stay on the sidelines without income. Use that mismatch to negotiate shorter restrictions or longer pay.

Make It Explicit (Not Vague “Competitors”)

Request an explicit list of companies/roles that are off-limits, instead of open-ended “any competitor” language. It gives you clarity now and flexibility later.

Rehireability & References

Check if you’re eligible for rehire (and whether that extends to affiliates), and ask for neutral reference language (confirming dates/title only). Pair it with mutual non-disparagement so they can’t bad-mouth you either.

Step 8: Waivers and Entire Agreement Clauses

The legal “fine print” is just as important as the money.

Waiver of claims: You’re giving up the right to sue the company for past or future claims.
Non-disparagement: Often one-sided (you can’t bad-mouth them, but they can comment on you). Negotiating mutual terms can protect your reputation.
Entire agreement clause: Means this contract overrides all other promises, policies, or conversations. If it isn’t in writing here, it doesn’t count.
That “waiver of claims” paragraph means you’re giving up your right to sue—and sometimes even future claims. (Read more in our severance waiver rights guide).
Known vs. Future Claims

Waiving known claims (e.g., wage disputes) is the standard tradeoff. Waiving future/unknown claims is riskier—you can’t predict their value (think data breaches discovered later, or health issues tied to workplace conditions).

Negotiation tip: Try to remove “unknown/future claims” or narrow them.

Some waivers go further and require you to opt out of any class action within a few days of notice—even if you were added automatically. It’s aggressive but common. If it’s in there, decide now whether that tradeoff is worth the money on the table.

Entire Agreement = Only What’s On the Page Counts

The “entire agreement” clause means emails and side promises don’t count. If you’re relying on it—commissions, PTO payout, COBRA for family—it must be written into the severance itself.

Action step: Convert every verbal/email assurance into a sentence inside the document before you sign.

Step 9: Negotiation Opportunities

You don’t always have leverage — but often more is negotiable than people realize. Areas to consider:

Extending the severance pay period.
Requesting lump sum instead of installments.
Asking for COBRA subsidies or longer coverage.
Accelerating equity vesting.
Adding neutral reference clauses.
Making non-disparagement mutual.

Even small changes can add up to significant value.

Career services: Outplacement, recruiter support, resume help, or short-term coaching. Bigger companies do this; smaller ones sometimes agree if you ask.

Tips for Reviewing Severance

Get everything in writing. If it isn’t listed, it doesn’t exist.
Compare against past pay. Go line by line through last year’s pay history.
Watch for “silent” contracts. Tuition reimbursement, relocation agreements, and equity plans may still apply even if not mentioned.
Consider tax timing. Ask how lump sums will be taxed and whether installments affect unemployment.
Know the limits. Severance cannot exceed two years in length or double your last year’s pay without triggering pension treatment.
Seek professional review. Employment attorneys can spot risks you may miss, especially with non-competes or waivers.

Final Thoughts

Being laid off is one of life’s more difficult transitions — and in that moment, the paperwork you sign may feel like just one more hurdle. But your severance agreement is more than paperwork: it’s the key to ensuring you walk away with the money, benefits, and freedom you’ve earned.

By carefully checking dates, pay elements, benefits, restrictions, and waivers, you’ll protect yourself from costly oversights. Remember that severance is not always one-size-fits-all; negotiation is possible, and clarity is power.

Litmus test: Does the value you’re receiving—cash, benefits, time—equal or outweigh what you’re giving up—legal rights, restrictions, career flexibility? If not, adjust the dials: shorten the restrictions, extend the pay, add coverage, or get clarity in writing. This is your contract. Make it fit your life.