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Severance agreement
A severance agreement is a contract between an employer and a departing employee that sets out the pay and terms of leaving. In exchange for a severance payment, the employee usually gives up the right to sue over the employment. Here is what a severance agreement includes, what to check before you sign, and how the rules differ in the US and Canada.
What a severance agreement is
A severance agreement, also called a separation agreement or separation and release, is a written contract that documents the terms of an employee leaving a company. It usually offers a payment or continued benefits, and in return the employee agrees to a set of terms, most importantly a release of legal claims against the employer. Companies use them after layoffs, restructurings, or negotiated departures to settle the relationship cleanly and reduce the risk of a later dispute.
Severance is not automatic in every situation. In the United States, most private employment is at will, and severance is often something the employer chooses to offer or that a contract or policy requires. In Canada, employees who are dismissed without cause are generally entitled to reasonable notice or pay in lieu, set by statute and by common law, so a Canadian severance agreement often formalizes an amount the employee already has a right to.
This is general information, not legal or tax advice. Rules vary by state and province, and the right choice depends on your facts. For anything important, check with a qualified professional.
What a severance agreement usually includes
- The parties and the separation date. Who is leaving and the last day of employment.
- The severance payment. How much is paid, and whether it is a lump sum or spread over time.
- Benefits. Whether health coverage or other benefits continue for a period, and how.
- Release of claims. A promise by the employee not to sue the employer over the employment or its ending.
- Return of property. A requirement to return laptops, keys, files, and other company items.
- Confidentiality and non-disparagement. Terms about keeping the agreement private and not making harmful public statements.
- Ongoing obligations. Reminders of any non-disclosure, non-solicitation, or non-compete terms that survive the job.
- References. Sometimes an agreed reference or a neutral statement of dates and title.
The release of claims
The release is the heart of most severance agreements. By signing, the employee gives up the right to bring legal claims connected to the job, such as wrongful dismissal or discrimination claims, in exchange for the severance. This is why the payment usually comes with a signature requirement. A release cannot waive every right. Some claims, such as certain unemployment benefits or vested retirement money, generally cannot be signed away, and rules differ by location.
What to check before you sign
A severance agreement is a legal contract, so it is worth reviewing carefully rather than signing on the spot.
- The amount and timing. Confirm how much you receive, whether it is a lump sum or installments, and the pay dates.
- What you are giving up. Read the release closely so you understand which claims you are waiving.
- Benefits and deadlines. Check how long health coverage lasts and any deadlines to elect it.
- Restrictive covenants. Look for non-compete, non-solicitation, or confidentiality terms and how long they last.
- Time to consider. Some laws give older workers a set number of days to review an agreement and a window to revoke it after signing.
- Taxes. Severance is generally taxable income, and withholding rules apply.
Can you negotiate a severance agreement?
Often yes. A first offer is not always the final one. Employees sometimes negotiate a larger payment, a longer benefits period, a positive or neutral reference, or the removal of a broad restrictive covenant. If the amount seems low compared to your length of service, or the release is very wide, it can be reasonable to ask for changes or to have a lawyer review it before signing. In Canada especially, an initial statutory offer may be less than the common law notice a court would award, so legal advice can matter.
How severance is calculated
There is no single formula. Employers often base severance on length of service, seniority, and company policy, and a written contract may set a specific amount. In Canada, minimum notice or pay is set by employment standards law, and additional common law entitlement depends on factors like age, length of service, position, and how hard it is to find similar work. Because the drivers differ so much, treat any rule of thumb as a starting point rather than a guarantee.
Severance and unemployment benefits
A common worry is whether accepting severance affects unemployment benefits. The answer depends on your location and how the payment is structured. In some places, a lump sum severance does not stop you from collecting benefits, while in others, severance paid out over a period can delay or reduce benefits for the weeks it covers. The release in a severance agreement generally cannot waive your right to apply for unemployment, since that is a government benefit rather than a claim against the employer. Before you sign, it is worth understanding how your local program treats severance so there are no surprises when you file.
How the release is usually written
The release section tends to be broad by design. It often says the employee releases the employer from all claims arising out of the employment, whether known or unknown, up to the date of signing. It may specifically name categories such as wage claims, discrimination claims, and wrongful dismissal, and it usually covers not just the company but its officers, directors, and related entities. Because the wording is wide, read it slowly and ask about anything you do not understand. Certain claims cannot be released as a matter of law, and some jurisdictions require specific language for a waiver of age discrimination claims to be valid, including extra time to review and a revocation window.
Questions to ask before you sign
- Is this the best offer, or is there room to negotiate? A first number is often not final.
- What am I giving up? Make sure you understand the full scope of the release.
- How and when am I paid? Confirm the amount, the schedule, and the tax treatment.
- What continues after I leave? Check benefits end dates and any ongoing restrictions like non-solicitation.
- How much time do I have? Do not let a short deadline pressure you into skipping a careful review.
If the agreement is complex or the amount is significant, having an employment lawyer review it before you sign is a reasonable step, and in some situations the employer even expects it.
Fill out and sign a severance agreement online
Whether you are an employer preparing an agreement or an employee completing one, you can handle it on your computer. Open our fill a PDF tool, add a severance or separation agreement template, type in the names, dates, and payment terms, and download the finished document. It is processed in your browser, so the details stay on your own device.
When it is time to sign, the sign a PDF tool lets each party draw, type, or upload a signature and place it on the page. For related documents such as a final resignation letter or offer letter, browse the form templates library.
Keep your employment paperwork together
A departure comes with several documents to sign and keep. Create a free account on fillable.ca to save your completed severance agreement and related forms, reuse a template for future situations, and keep everything organized in one place.
Frequently asked questions
What is a severance agreement?
It is a contract between an employer and a departing employee setting out the pay and terms of leaving. In exchange for a severance payment, the employee usually agrees to a release of legal claims against the employer.
Do I have to sign a severance agreement?
No, signing is voluntary. But the severance payment is usually offered in exchange for signing, especially the release of claims. Read it carefully, and consider legal advice before deciding, since you may be giving up important rights.
Can I negotiate my severance?
Often yes. Employees sometimes negotiate a larger payment, longer benefits, a reference, or narrower restrictive covenants. If the offer seems low or the release very broad, it can be reasonable to ask for changes or have a lawyer review it.
Is severance pay taxable?
Generally yes. Severance is usually treated as taxable income, and withholding applies. The exact treatment depends on your location and how the payment is structured, so check the rules that apply to you.
How is severance different in Canada and the US?
In the US, employment is often at will and severance is frequently optional. In Canada, employees dismissed without cause are generally entitled to notice or pay in lieu set by statute and common law, so severance often formalizes an existing right.
Can I fill out a severance agreement online?
Yes. Open a severance or separation agreement template in the fill a PDF tool, type in the names, dates, and terms, and download it. Use the sign a PDF tool to add signatures. The document stays on your device.