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; (7) no waiver of claims arising after signing; and (8) for a group program, written disclosure of the eligibility factors and the job titles and ages of those selected and not selected. A waiver that misses any of these is not knowing and voluntary as to ADEA claims.
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 generally require DOL or court approval to compromise, although the Fifth Circuit enforces private settlements of a bona fide dispute over hours worked), 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., damages received on account of personal physical injuries or physical sickness, excludable under 26 U.S.C. § 104(a)(2)) may be tax-advantaged but invite IRS scrutiny.
Severance agreements are negotiated documents. A general release can reach claims the employee has not yet identified. For employees 40 and older, the ADEA waiver fails unless the OWBPA conditions are met, including consideration beyond anything already earned or owed.
Companion article: Before Firing an Employee in Texas