Beware of These Five Red Flags in Your Severance Agreement

Before leaving your current place of employment, you may be asked to sign a severance agreement. In many cases, that agreement will include beneficial terms such as severance pay and extended benefits. Sounds great, right?

But in exchange for your benefits, the agreement will also include terms that benefit your employer—at your expense. In some instances, these terms will strongly favor the employer and may even unfairly harm you, the employee. Look out for these five potential red flags: they may warrant declining to sign the severance agreement or at least consulting with an employment attorney first.

Red Flag #1: You Are Asked to Sign the Severance Agreement on the Spot

If you’re not given at least a few days to carefully review the severance agreement, that might signal that the terms of the agreement are very unfavorable to you. It might also demonstrate that your employer is taking an adversarial position toward you.

This adversarial positioning doesn’t necessarily mean you shouldn’t sign the severance agreement. But it does signal that your departure is under unpleasant terms. Often, the reason for this conflict will be obvious, but if it isn’t, you should figure out what’s really going on before you sign any severance agreement.

How much time is enough? We discussed the amount of time an employee has to review a severance agreement (and the special rule for employees over 40 years old) in our blog post “How Long Do You Have Before You Must Decide to Sign or Decline a Severance Agreement Offer?”

Red Flag #2: The Agreement Contains Language That Might Make You Ineligible for Unemployment

State law usually governs unemployment benefits, and most states have laws that prohibit employees from receiving unemployment benefits if they resign or are fired for cause. Look out for language in your severance agreement that states you are resigning and/or that you engaged in improper behavior.

If you intend to file for unemployment benefits, you need to change this language. Otherwise, your employer may use the agreement to contest your request for unemployment.

Red Flag #3: The Agreement Discontinues Your Health Insurance Benefits

Some severance packages include a promise by the employer to continue paying for a former employee’s health insurance benefits for a period of time. But even if this isn’t the case for you, you should continue to receive health insurance benefits from your former employer through the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA).

If your severance agreement has language that denies your continued health insurance coverage through COBRA, do not sign the agreement until this has been addressed. You might ask to have the severance agreement rewritten, or you may need to make arrangements to get health insurance coverage elsewhere.

Red Flag #4: Overly Restrictive Covenants

In return for your severance pay or other benefits in a severance agreement, your employer may seek to impose restrictive covenants to prevent business competition. Two of the most common covenants are noncompete and nonsolicitation clauses.

To be enforceable, the time and geographic restrictions in a noncompete or nonsolicitation clause must be reasonable. However, even if they are legally enforceable, these terms can still be overly restrictive when it comes to finding replacement work. If you feel the covenants in your severance agreement are unreasonable or will unfairly burden you, it may be worth consulting with an employment attorney and trying to renegotiate these terms.

Red Flag #5: One-Way Clauses

Your severance agreement may also contain a nondisparagement or nondisclosure clause requiring you to keep quiet about the details of your employment or your termination. If you are subject to either of these clauses, make sure that they apply not just to you but to your former employer as well. Otherwise, you could find yourself under a gag order, unable to defend yourself, while your former employer badmouths and blackballs you with impunity.

For More Information

Do you still have questions about severance agreements? Need help applying this information to your own case? Please feel free to contact us to discuss your specific situation.

1. Payment, release language, and the time to consider

A severance agreement often describes a payment or benefit and asks the employee to release certain claims. Read the payment and release language together: the scope of the release, the time period, the people or entities covered, and any exclusions can affect what the text means.

Federal law contains specific requirements for certain waivers of age-discrimination claims under the ADEA. For example, 29 U.S.C. § 626(f) and EEOC regulations set out written-advice, consideration, timing, and disclosure requirements in defined circumstances, with different rules for individual and group programs. Those provisions are not a universal severance deadline and do not determine the effect of a particular agreement.

4. Post-employment restrictions and incorporated terms

Restrictions may address future work, solicitation, customer contact, confidentiality, inventions, noncompetition, repayment, or non-disparagement. An agreement may also incorporate an earlier offer letter, plan, policy, equity document, or restrictive-covenant agreement. The scope, duration, definitions, governing law, and incorporated documents can all matter.

Noncompete rules vary by jurisdiction and agreement. The FTC’s 2024 noncompete rule is not in effect or enforceable; it should not be treated as an active nationwide rule. A particular restriction requires an analysis of its own terms and applicable law.

5. Confidentiality, nondisparagement, and protected communications

Confidentiality and nondisparagement clauses can differ widely. The National Labor Relations Board’s McLaren Macomb decision addressed particular provisions and employee rights under the National Labor Relations Act in the circumstances of that case. The decision is not a universal answer for every worker or agreement.

The federal Speak Out Act addresses judicial enforceability of certain pre-dispute nondisclosure and nondisparagement clauses in defined sexual-harassment or sexual-assault disputes.

This article is general information, not legal advice. Employment law changes, and your situation may differ. For advice about your own case, talk to an attorney.

Beware of These Five Red Flags in Your Severance Agreement