Key Clauses Every Separation Agreement Must Include

Recent Trends in Separation Agreements

In recent years, separation agreements have moved beyond executive-level transitions to become standard for broader employee departures, including layoffs and mutual exits. The rise of remote and hybrid work has added jurisdictional complexity—agreements now often specify which state’s law governs the document. Regulators and courts have also increased scrutiny of overly broad non-compete clauses, prompting employers to narrow their terms. Meanwhile, employees and their counsel are more frequently requesting carve-outs for regulatory whistleblowing and protected activity, reflecting a shift toward preserving legal rights even while signing away others.

Background: What These Agreements Do

A separation agreement, also known as a severance or termination agreement, typically resolves all potential claims an employee may have against an employer in exchange for financial or other benefits. Under federal law, waivers of age discrimination claims must satisfy the Older Workers Benefit Protection Act (OWBPA), requiring specific language, a seven-day revocation period, and consideration beyond what the employee already is owed. The document’s enforceability depends heavily on the clarity and completeness of its clauses. Missing or vague provisions can expose both parties to future disputes.

User Concerns: Key Clauses to Evaluate

Both employers and employees should verify that the following clauses are present and clearly worded. Gaps can lead to costly litigation or unintended obligations.

• General release of claims: Must list all waived causes of action (contract, tort, discrimination, wage-and-hour) and any statutory exceptions (e.g., workers’ comp, unemployment, protected activity). For age claims, the OWBPA checklist must be met.
• Consideration (severance package): Specify total amount, payment schedule (lump sum vs. installments), tax treatment, and any continuation of benefits. The offer must exceed what the employee already earned or was unconditionally entitled to.
• Confidentiality and non-disclosure: Defines what information cannot be shared (terms of the agreement, company trade secrets) and what is permitted (legal advice, immediate family, tax filings). Overly broad gag orders risk state and federal retaliation protections.
• Non-disparagement: Binds both parties not to make negative statements about one another. Should carve out truthful testimony under subpoena and internal HR complaints.
• Non-compete and non-solicitation: Describes scope (geography, duration, industry). Many states now ban or restrict non-competes for low-wage workers; some ban them outright. The clause must be reasonable to be enforceable.
• Return of company property: Lists devices, documents, keys, access badges, and digital credentials. A timeline for return and a certification of compliance is common.
• COBRA and benefits continuation: States duration of health coverage and who pays the premium. Also address retirement accounts, stock options, and accrued but unused vacation payout per state law.
• Reference and rehire provisions: Clarifies what future employers will be told (usually dates of employment and job title) and whether the employee is eligible for rehire.
• Governing law and venue: Specifies the state whose law applies and where any lawsuit must be filed. Remote workers should verify this is not an unfair forum.
• Revocation and acceptance period: Under the OWBPA, employees have at least 21 days to consider and 7 days to revoke after signing. Some states extend these periods.

Likely Impact on Parties

Properly drafted separation agreements reduce the risk of post-termination lawsuits by creating a clean break. For employees, a robust severance can provide a financial bridge and continued health coverage. However, overly restrictive non-competes or confidentiality clauses that conflict with whistleblower protections may be struck down or lead to state enforcement actions. Employers who use generic templates without tailoring to current state laws face agreements that are partially voidable, increasing litigation exposure. Courts are increasingly invalidating clauses that waive rights to file administrative charges or cooperate with government investigations.

What to Watch Next

• State-level non-compete bans: More states are expected to follow California, Minnesota, and others in restricting or prohibiting non-compete clauses for most workers. Federal rulemaking by the FTC is also pending, which could reshape national enforcement.
• Legislative attention on confidentiality: Laws that protect employees who report harassment or discrimination from being silenced by separation clauses are expanding. Future agreements may need explicit carve-outs for internal complaints and government agency communications.
• Independent legal review requirements: Several states now mandate that employees have the opportunity to consult with an attorney before signing, and some require a specific waiting period. Employers should expect more disclosure about the agreement’s terms before signing.
• Increased judicial review of consideration: Courts are scrutinizing whether severance pay is truly “additional” and whether continued employment for a short period counts as valid consideration. Clear language about what the employee receives beyond existing entitlements is becoming essential.