Severance Agreements: What You Are Signing and What You Are Giving Up
An employer offers severance — a sum of money in exchange for a signed agreement. The money is real. So is what you are waiving. Before you sign, you should understand both sides of the exchange.
The severance agreement arrives at a moment of maximum vulnerability. The employee has just been told the job is over. They are upset, or anxious, or distracted by the logistics of what comes next. And now there is a document — sometimes a few pages, sometimes a dozen — that offers money in exchange for a signature.
The money is typically straightforward: a lump sum or a continuation of salary for a defined period, sometimes with an extension of health benefits. What surrounds the money is not straightforward at all. A severance agreement is a contract, and its purpose, from the employer’s perspective, is to purchase finality — to ensure that the departing employee will not bring any claim, of any kind, arising from the employment relationship.
There is nothing inherently wrong with that exchange. But it is an exchange, and the employee should understand both sides of it before signing.
What the general release does
The central provision of every severance agreement is the general release of claims. By signing, the employee agrees to waive and release all claims — known and unknown — against the employer, its officers, directors, agents, and affiliated entities, arising out of or related to the employment or its termination.
The scope of that language is broad by design. It covers discrimination claims, retaliation claims, harassment claims, wage and hour claims, breach of contract claims, tort claims, and any other legal theory the employee might assert. It covers claims the employee is aware of and, under most formulations, claims the employee does not yet know about.
California Civil Code section 1542 provides that a general release does not extend to claims that the releasing party does not know or suspect to exist. To override this protection, severance agreements routinely include a specific waiver of section 1542 — an acknowledgment that the employee is giving up unknown claims as well as known ones. That waiver, when knowing and voluntary, is enforceable.
What this means: if the employee signs a properly drafted release and later learns of a claim they did not know about at the time of signing — a pattern of discrimination they were not aware of, a wage violation they had not yet discovered — the release may bar that claim. The release purchases not only peace with respect to known grievances but insurance against unknown ones.
What cannot be waived
Not everything is waivable. Certain rights and claims are protected by statute and cannot be released, regardless of what the agreement says.
Workers’ compensation benefits. An employee cannot waive the right to file a workers’ compensation claim for an injury that occurred during the employment.
Unemployment insurance. The right to apply for and receive unemployment benefits is not waivable. A severance agreement may affect the timing of eligibility — some states offset severance payments against unemployment benefits — but the right itself cannot be contracted away.
PAGA claims. Under the Private Attorneys General Act, an employee who brings a PAGA claim does so in part on behalf of the state. The California Supreme Court has held that an individual employee’s PAGA claim cannot be waived through a private settlement without the consent of the Labor and Workforce Development Agency. An employer cannot use a severance agreement to extinguish a PAGA claim it does not know about.
Future claims. A release covers claims that have accrued as of the date of signing. It does not — and cannot — waive claims arising from events that have not yet occurred.
Indemnification rights. Labor Code section 2802 requires employers to indemnify employees for losses incurred in the course of employment. That obligation is not waivable.
Provisions worth reading carefully
Beyond the general release, severance agreements commonly contain provisions that impose ongoing obligations on the departing employee. These deserve careful attention.
Non-disparagement. Most severance agreements include a clause prohibiting the employee from making negative statements about the employer, its management, its products, or its business practices. These clauses vary in scope and enforceability, but they can restrict the employee’s ability to speak publicly about their experience, to post online reviews, or to discuss the circumstances of their departure with future employers.
Confidentiality of the agreement. Employers frequently require the employee to keep the existence and terms of the severance agreement confidential. Under certain circumstances, California law restricts these provisions. Senate Bill 331, the Silenced No More Act, effective January 2022, provides that a settlement or severance agreement may not prevent the disclosure of information about workplace harassment or discrimination based on any protected characteristic under FEHA — not only sex-based claims, as under the earlier Stand Together Against Non-Disclosures (STAND) Act, but all categories. An employer that insists on a blanket confidentiality provision covering the facts of a harassment or discrimination complaint may be running afoul of this statute.
Cooperation clauses. Some agreements require the employee to cooperate with the employer in any future litigation or investigation. This can mean being available for interviews, depositions, or testimony. The obligation is not inherently unreasonable, but its scope should be defined: for how long, at whose expense, and with what limitations.
Non-solicitation and non-competition. California Business and Professions Code section 16600 provides that every contract by which anyone is restrained from engaging in a lawful profession, trade, or business is void. Non-compete agreements in California are, with narrow statutory exceptions, unenforceable. A severance agreement that includes a non-compete clause is unlikely to bind the employee under California law. Non-solicitation clauses — provisions restricting the employee from soliciting the employer’s clients or employees — are evaluated under the same framework and are frequently found to be unenforceable restraints on trade.
The timing rules for employees over forty
Federal law imposes specific procedural requirements on the release of age discrimination claims by employees who are forty years old or older. The Older Workers Benefit Protection Act, an amendment to the Age Discrimination in Employment Act, requires that a waiver of ADEA claims be knowing and voluntary, and sets minimum conditions for validity.
The employee must be given at least twenty-one days to consider the agreement — or forty-five days if the release is offered in connection with a group termination or exit incentive program. The employee must be given seven days after signing to revoke the agreement. The agreement must advise the employee in writing to consult with an attorney. In the case of a group termination, the agreement must include specific disclosures about the class of employees affected, the eligibility criteria, and the ages and job titles of those who were and were not selected.
An employer that fails to comply with these requirements risks having the age-discrimination waiver found invalid — which means the employee could retain their ADEA claim even after cashing the severance check. These procedural requirements apply only to the age-discrimination waiver, not to the entire agreement, but in practice a defective OWBPA disclosure can unravel the release’s most valuable protection.
Whether to sign
There is no universal answer. A severance agreement is a transaction, and whether the transaction is favorable depends on both sides of the ledger: how much is being offered, and how much is being given up.
An employee with a strong potential claim — clear evidence of discrimination, retaliation, or substantial wage violations — may be giving up more than the severance is worth. An employee with no viable claim may be receiving money they would not otherwise be entitled to, in exchange for a release that costs them nothing in practical terms.
The difficulty is that most employees, at the moment the agreement is presented, do not know which category they fall into. They have not had time to evaluate whether they have a legal claim, how strong it might be, or what it could be worth. The employer, by contrast, has almost certainly had its lawyers evaluate these questions before drafting the agreement. The information asymmetry is significant, and it is the primary reason the agreement should be reviewed by an attorney before it is signed.
Reviewing a severance agreement is not a commitment to litigation. It is an assessment of the exchange: what are the claims being released, how strong are they, and is the severance offered a reasonable value for the rights being waived? In many cases, the analysis leads to a negotiation rather than a lawsuit. In some, the original offer is fair and the right decision is to sign. In others, it is not.
If you have been offered a severance agreement, the document is not a formality — it is a contract that permanently waives legal claims in exchange for a defined payment. Whether the exchange is fair depends on what you are giving up, and that is best evaluated before you sign.
This article is general information about California law and is not legal advice. Every situation turns on its particular facts.