Severance Agreement
A contract between an employer and a departing employee under which the employer provides specified compensation, benefits continuation, or other consideration in exchange for the employee's release of legal claims and other negotiated obligations.
A severance agreement is a contract between an employer and a departing employee under which the employer provides specified compensation, benefits continuation, or other consideration in exchange for the employee's release of legal claims against the employer and other negotiated obligations. Severance is generally voluntary on the employer's part, Texas law does not require severance pay absent contract or company policy.
Typical structure
(1) Severance compensation (lump sum, salary continuation, or a combination); (2) benefits continuation (typically COBRA-related); (3) general release of claims, broadly worded; (4) reaffirmation of confidentiality, noncompete, and nonsolicitation obligations from prior agreements; (5) non-disparagement; (6) cooperation in transition or litigation; (7) return of property.
OWBPA requirements (age 40+)
For releases of Age Discrimination in Employment Act claims by employees age 40 or older, the OWBPA requires: (1) plain-language drafting; (2) specific reference to ADEA rights; (3) advice to consult an attorney; (4) at least 21 days to consider (45 days for group reductions); (5) at least 7 days to revoke after signing; (6) consideration beyond what the employee was already entitled to receive. Failure renders the ADEA waiver unenforceable.
Texas-specific considerations
Releases of Texas Commission on Human Rights Act claims under Tex. Lab. Code Ch. 21 are generally enforceable if knowing and voluntary. Releases cannot waive future claims, FLSA wage claims (which require DOL or court approval to compromise), or workers' compensation claims for injuries already sustained.
Tax treatment
Severance is wages, subject to income tax withholding and employment taxes. Allocations to non-wage components (e.g., release of personal injury claims) may be tax-advantaged but invite IRS scrutiny.
Severance agreements are negotiated documents. Employees should understand they are waiving claims they may not yet recognize as available; employers should ensure OWBPA compliance for age-40+ employees and clear documentation of consideration beyond what was already earned or owed.
Companion article: Before Firing an Employee in Texas