Severance Agreement Template and Key Clauses (2026)

A severance agreement is a contract in which an employer pays a departing employee something extra, usually money and sometimes benefits, in exchange for a release of legal claims and a few promises about the future. No federal law requires severance, but a well-drafted agreement can turn an uncertain separation into a closed chapter for both sides. The details that matter most are the release language, the special rules for workers aged 40 and over, and how the payment is taxed.

This guide gives you a severance agreement template outline you can adapt, explains each clause in plain English, covers the 2026 legal landscape and walks through a worked example of a severance payment. It is general information, not legal advice. Because a defective release can be unenforceable, have an employment lawyer review the agreement for your state before you use it.

What a severance agreement does

Think of it as a trade. The employee gives up the right to sue over the employment and its end; the employer gives "consideration" the employee was not already owed. That consideration cannot be final wages or accrued vacation that your state requires you to pay anyway. Our guide to final paycheck laws by state explains what must be paid regardless of whether the employee signs.

Employers commonly use severance agreements when:

• A role is eliminated in a restructuring or layoff.
• Performance problems end in a negotiated exit instead of a contested firing.
• There is a risk of a discrimination, retaliation or wage claim.
• A senior employee knows confidential information or client relationships.

Severance agreement template: the clauses to include

Use the outline below as a starting framework. Square brackets mark the parts you fill in.

1. Parties and separation date. "This Separation Agreement and General Release is between [Company legal name] and [Employee name]. Employee's employment ends on [date] (the Separation Date)."
2. Final pay acknowledgment. "Employee will receive all wages earned through the Separation Date, and accrued unused vacation where required by law, whether or not Employee signs this Agreement."
3. Severance benefits. "In exchange for the promises in this Agreement, Company will pay Employee [amount], equal to [X] weeks of base pay, less applicable withholdings, in [a lump sum / installments on regular paydays] beginning after the Effective Date." Add any COBRA premium payments, bonus or equity treatment.
4. General release. Employee releases known and unknown claims arising from the employment and its termination, listing key statutes such as Title VII, the ADA, the ADEA and state equivalents.
5. Claims not released. Carve out rights that cannot be waived: unemployment and workers' compensation benefits, vested retirement benefits, claims arising after signing, and the right to file a charge with or assist a government agency such as the EEOC or NLRB.
6. Return of property. Laptops, keys, documents, client files and passwords.
7. Confidentiality of the agreement (drafted narrowly, see below).
8. Mutual or one-way non-disparagement (also narrow, with a protected-rights carve-out).
9. Continuing obligations. Reaffirm existing confidentiality, invention assignment or non-compete agreements, where enforceable.
10. Cooperation. Reasonable help with transitions or litigation, at the company's expense.
11. No admission of liability.
12. Age waiver provisions (for employees 40 and over): consideration and revocation periods and advice to consult an attorney.
13. Governing law, entire agreement, severability and signatures, plus the Effective Date definition.

OWBPA rules for employees aged 40 and over

A release of federal age discrimination claims is valid only if it meets the Older Workers Benefit Protection Act. The EEOC's Q&A on waivers in severance agreements summarizes the requirements:

Requirement	Individual separation	Group layoff or exit program
Time to consider	At least 21 days	At least 45 days
Revocation period after signing	7 days, cannot be shortened	7 days, cannot be shortened
Written in plain language	Yes	Yes
Specifically refers to ADEA rights	Yes	Yes
Advice to consult an attorney, in writing	Yes	Yes
Extra consideration	Yes	Yes
Disclosure of decisional unit, eligibility factors, job titles and ages of those selected and not selected	No	Yes

An employee can sign before the 21 or 45 days are up if they choose to, but you cannot pressure or reward early signing. Do not pay severance until the revocation period has passed.

Confidentiality and non-disparagement in 2026

In 2023 the National Labor Relations Board decided in McLaren Macomb that offering non-supervisory employees severance agreements with broad confidentiality and non-disparagement clauses can violate Section 7 of the National Labor Relations Act, which protects employees' rights to discuss working conditions. That rule applies to union and non-union workplaces alike.

The position is in flux. According to a June 2026 Venable analysis, the Board was still applying McLaren in 2026 decisions, while the General Counsel's August 2026 memo listed it among precedents to revisit. Until the Board actually overrules it, the safer approach for rank-and-file employees is to:

• Limit confidentiality to the amount and terms of the agreement.
• Limit non-disparagement to statements that are knowingly false or defamatory.
• Add a clear statement that nothing in the agreement restricts the employee's rights under Section 7 or their ability to communicate with government agencies.

Also note the federal Speak Out Act, which makes pre-dispute nondisclosure and non-disparagement clauses unenforceable for sexual harassment and assault disputes, and state laws in places such as California, New York and Washington that limit secrecy about workplace harassment or discrimination.

How severance pay is taxed

Severance paid to an employee is wages. That means:

• Federal income tax withholding, commonly at the 22% supplemental rate if paid separately from regular wages (37% for supplemental wages above $1 million in the year).
• Social Security (6.2%) and Medicare (1.45%) from the employee, matched by the employer.
• State income tax where applicable, and possibly state unemployment tax depending on state rules.
• Reporting on Form W-2 for the year it is paid, not on a 1099.

Our guides to employer payroll taxes and the bonus tax rate cover supplemental wage withholding in more detail.

Worked example: calculating a severance package

An illustrative case: a marketing coordinator, age 45, earning $78,000 a year ($1,500 a week) is laid off after six years. The company's policy is two weeks of pay per year of service plus three months of COBRA premiums.

Item	Calculation	Amount
Severance pay	6 years x 2 weeks x $1,500	$18,000.00
Federal income tax withheld	22% supplemental rate	-$3,960.00
Social Security	6.2%	-$1,116.00
Medicare	1.45%	-$261.00
Net before state tax		$12,663.00
Employer share of FICA	7.65%	$1,377.00 (company cost)
COBRA premiums paid by employer	3 months x $650	$1,950.00 (company cost)
Total cost to company		$21,327.00

Because she is over 40, she receives the agreement with 21 days to consider it and 7 days to revoke. Payment goes out on the first regular payday after the revocation period ends. Her final wages and any accrued vacation are paid on time under state law, separately from the severance.

Step by step: presenting a severance agreement

1. Confirm the decision and documentation with whoever reviewed the termination.
2. Calculate final pay and the severance amount, and confirm state final-pay deadlines.
3. Prepare the agreement with any OWBPA disclosures for group programs.
4. Hold the meeting and hand over a termination letter along with the agreement. Keep it short and factual.
5. Allow the consideration period and answer questions in writing.
6. Collect the signed agreement, wait for the revocation period to expire, then pay through payroll.
7. Record everything in the personnel file and run payroll with a proper pay stub; see our pay stub template.

Negotiating changes to the agreement

Employees, particularly senior ones or those with lawyers, often ask for more weeks of pay, a longer COBRA subsidy, an agreed reference or a narrower non-compete. Decide in advance how much flexibility you have. Put any changes in a revised draft, and remember that a material change for an employee aged 40 or over restarts the 21 or 45 day consideration period. Changes that are not material, such as fixing a typo, do not.

Common mistakes

• Making final wages conditional on signing. Earned wages are owed no matter what.
• Missing the age waiver rules, which can leave the release open to challenge on age claims while the employee keeps the money.
• Releasing claims that cannot be waived, such as unemployment benefits or the right to file an agency charge, which can taint the whole agreement.
• Paying severance as a 1099 payment. It is wages for an employee.
• Inconsistent offers, which can look discriminatory. Use a written policy as described in our employee handbook template.
• Ignoring Section 409A on deferred or installment payments to executives, where timing rules can apply.

Lump sum or installments?

A lump sum is simple and gives a clean break. Installments paid on regular paydays keep the departing employee on a predictable schedule and give the employer leverage if a continuing obligation, such as non-solicitation, is breached, because future payments can be conditioned on compliance. Installments can also affect when the employee may collect unemployment in some states, so check local rules before choosing.

Severance for contractors?

Independent contractors are not employees, so "severance" for them is really a contract termination payment, documented in a termination clause or settlement and paid against an invoice. If you are unsure which category a worker falls into, read our guide to W-2 vs 1099 workers before offering an employee-style package.

Whether you are ending an employment relationship or a contract, clear paperwork protects everyone. For contractor settlements and final project bills, create a clean, itemized invoice with our free invoice generator, no sign-up required, and download it as a PDF.