When NOT to sign a severance agreement – 5 Examples

You are under no legal obligation to sign a severance (also called a separation) agreement. 5 examples of when you may not want to do so are when:

1. you intend to sue your employer after your termination,
2. the severance package is not sufficient,
3. you do not have legal representation,
4. it would unduly restrict your professional future, and
5. you do not fully understand the agreement.

When Should I refuse to sign a severance agreement?

If a severance agreement does not suit your interests, you do not have to sign it. Also known as a separation agreement, these documents are binding contracts. Both you and your employer agree to give something up in exchange for receiving something else. Generally, that exchange looks like this:

• you agree not to pursue legal action against your employer related to former employment and termination, in exchange for this,
• your employer provides severance pay and other incentives.

In many cases, you also agree not to harm your employer in other ways after being terminated. This generally requires that you do not:

• solicit your employer’s clients, customers, or other workers, (called a non-solicitation agreement)
• compete with your employer,
• reveal your employer’s trade secrets, and
• disparage your employer after your termination.

You may not want to sign such an agreement for many reasons, though.

1. You intend to sue your employer

Perhaps the most common reason not to sign a severance offer is that you fully intend to sue your employer after your termination. Employers use severance agreements to prevent lawsuits, which is why many terminated employees are not offered one.

If you do get offered a severance package, it is a sign that your employer thinks you may have a case against them. They want you to waive your rights to sue and are willing to pay for it.

Waiver of claims

A key provision in the severance agreement will be called “waiver of claims” or “release of claims.” That provision will list the types of lawsuits that you are agreeing to relinquish in order to receive the severance package.

The types of lawsuits included in this provision often reflect what your employer is worried about. They often include legal claims for:

• defamation,
• wrongful termination,
• discrimination,
• disability claims,
• continuation of healthcare coverage under the Consolidated Omnibus Budget Reconciliation Act (COBRA),
• family leave rights under the Family and Medical Leave Act (FMLA),
• retirement benefits under the Employee Retirement Income Security Act (ERISA), and
• any other claims that are unknown at the time of the signing of the severance agreement.

They also often forbid you from joining any class action lawsuits against the employer.

If the legal action you want to file against your employer is listed in this release of claims, signing the agreement relinquishes your right to bring it. You give up your right to bring these claims if you sign the agreement and accept your severance package.

Unwaivable claims

However, there are some legal rights that you cannot waive in a separation agreement. These include your rights to:

• unemployment benefits and other rights under your former employer’s unemployment insurance,
• workers’ compensation benefits,
• unpaid wages that you have already earned, including overtime pay or minimum wage benefits, and to
• file a workplace discrimination charge under Title VII with the Equal Employment Opportunity Commission (EEOC).

Additionally, separation agreements only partially strip you of some claims. For example, in California, you can relinquish your right to file a class action lawsuit against your employer in a severance agreement. However, your right to sue your former employer as a part of a class action under the Private Attorney General Act (PAGA) survives this waiver.

Despite this, many employers still list these unwaivable rights in a severance agreement. If they do so, that provision of the agreement is not enforceable. You still have a right to sue.

2. The severance package is not enough

Another common reason not to sign a separation agreement is that the severance package is not adequate. If you think it is too low, you can refuse to sign the agreement.

Severance agreements are generally not “take it or leave it” deals. They can be negotiated. You can increase the amount of severance pay being offered, especially if you have leverage.

When the severance package is enough

Even if you intended to sue your employer and the agreement would force you to give up your rights to do so, the severance package may still make it worth it. While your employer’s offer will usually be less than what you stand to recover by filing a lawsuit, it may still be in your interests to take it.

You will be certain to receive the severance pay, often in a lump sum. You will also not have to go through the cost, effort, and time of filing a lawsuit.

However, your employer’s initial offer rarely comes close to what you may deserve. Your severance package is usually only adequate after a few rounds of negotiations. It is generally unwise to sign the agreement until it is enough to pay for you to relinquish your rights.

3. You do not have a lawyer

You should also not sign a severance agreement if you do not have a lawyer. You should get the legal advice of an attorney before signing a severance agreement for several reasons. Chief among them are:

1. an attorney will have the experience to know whether the severance package is adequate,
2. the terms of a severance agreement can be difficult to understand,
3. the rights that you are agreeing to waive may be unwaivable, making that part of the agreement unenforceable, and
4. you may not fully appreciate how strictly the agreement will regulate your post-termination conduct.

Establishing an attorney-client relationship with a lawyer from a reputable employment law firm is essential.

4. The agreement restricts your future

Many severance agreements aggressively restrict what you can do, post-termination. They generally include a non-disparagement clause that forbids you from talking badly about the company.

In some cases, severance agreements can prevent you from earning a living or getting a new job. This is most commonly done through a non-compete agreement. This is a provision in the severance agreement. It forbids you from competing with your former employer.

Non-compete agreements

Non-compete agreements can prevent you from either:

• starting a new business that might take clients away from your old employer, or
• working for a business that competes with your former employer.

While many non-compete clauses are only for a limited amount of time, they often last for a year or more. During this period of time, you can be severely limited in your future employment possibilities.

Without these options, a non-compete can detract from your career prospects. This is especially true if you worked in a small industry and your skillset confines you to it. If you were going to take either of these post-termination options, you may not want to sign the severance agreement.¹

5. You do not fully understand the terms of the agreement

If you do not completely understand the terms of the severance agreement and all of its implications, you should not sign it.

Lots of terminated employees have signed separation agreements, collected their severance payment, moved on with their lives, and then gotten sued by their former employer. Because the former employee did not fully understand the agreement, they had violated it without knowing it. In many cases, they end up losing significant professional progress.²

If I sign the agreement, am I waiving my rights?

Yes, if you sign a severance agreement, you are agreeing to waive your rights to file certain employment lawsuits against your former employer. That is the reason why your employer is offering its severance package – in order to keep you from suing.³

You do not give up all of your employee rights, though. Some workplace rights are unwaivable. For those that can be waived, it can still be worth waiving them to collect your severance pay.

Note that there are special protections for workers over 40 who enter a severance agreement.

What is the law in California?

Severance agreements are frequently used in California. However, all non-compete agreements are unenforceable in the state.⁴ If your severance agreement includes one, courts will not enforce it against you.

However, many employers still include one, anyways. They hope that you will not understand your rights under state law. They hope that you will be too intimidated by it to compete with their company after your termination.

Additional resources

For more information, refer to the following:

• Severance Pay – Short description by the U.S. Department of Labor.
• Severance Pay: What It Is and Why You Should Negotiate a Package Before Accepting a Job – Article by the Wall Street Journal.
• What to know about severance pay, insurance and benefits if you’re laid off from your job – Guide by CNBC.
• Severance pay laws by state 2024 – Overview by Workforce.com.
• Severance and Taxes: Is Severance Taxable? – Discussion by H&R Block.

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