Your employer has handed you a severance agreement — sometimes called a separation agreement — with a deadline to sign. Or you are the employer, and you want an agreement that will hold up. A severance agreement is a contract: the company gives you money or benefits, and you give up legal rights, usually including the right to sue. Federal and New York law limit what these agreements can require. Here is what to check before you sign.
What the Release Gives Up, and What It Cannot
The heart of the agreement is the release. In exchange for severance, you typically give up claims against the company that arose before you sign, often including claims you do not yet know about. So ask first whether you may have a claim worth more than the offer — for example, if you believe the termination was discriminatory or retaliatory. (Our overview of exceptions to at-will employment in New York explains when a firing may be unlawful.) The severance should also be more than pay or benefits you have already earned.
Some rights cannot be signed away. No agreement can bar you from filing a charge with the U.S. Equal Employment Opportunity Commission (EEOC) or participating in its investigations, and a waiver of discrimination claims cannot reach claims that arise after you sign. Under New York law, an employee’s agreement to waive unemployment insurance rights is not valid. EEOC guidance also lists workers’ compensation, COBRA, and vested retirement benefits among the rights an agreement should not ask you to release.
Extra Protections If You Are 40 or Older
The federal Age Discrimination in Employment Act (ADEA) protects workers 40 and older and generally applies to employers with 20 or more employees. Under the Older Workers Benefit Protection Act (OWBPA), a release of ADEA claims is not “knowing and voluntary” — and does not waive them — unless, at a minimum:
- it is written in a manner calculated to be understood and specifically refers to the ADEA;
- it does not waive claims that arise after you sign;
- you receive something of value beyond what you are already entitled to;
- it advises you in writing to consult an attorney before signing;
- you have at least 21 days to consider it (at least 45 days if it is part of a group layoff or exit incentive program); and
- you have at least seven days after signing to revoke, and the agreement is not effective until that period ends.
In a group program, the employer must also disclose in writing the job titles and ages of everyone selected or eligible, and the ages of those in the same job classification or unit who are not. You may sign early, but you do not have to, and the revocation period cannot be shortened. In Oubre v Entergy Operations, Inc., 522 US 422 [1998], the U.S. Supreme Court held that a release that did not meet these requirements could not bar the employee’s age claim, even though she had kept the severance.
New York’s Limits on NDAs in Discrimination Claims
If the agreement resolves a claim involving discrimination, harassment, or retaliation, New York’s General Obligations Law § 5-336, as amended in 2023, adds protections:
- The underlying facts and circumstances can be kept confidential only if that is your preference. You have up to 21 days to consider such a term, and at least seven days after signing to revoke.
- A confidentiality term is void to the extent it would stop or restrict you from participating in a local, state, or federal agency investigation, or from disclosing facts needed to receive unemployment insurance, Medicaid, or other public benefits.
- The release is unenforceable if the agreement requires you to pay liquidated damages, or to forfeit all or part of your severance, for violating a nondisclosure or non-disparagement clause, or if it contains or requires a statement by you that you were not in fact subject to unlawful discrimination, harassment, or retaliation.
Separately, any provision in an agreement with your employer that bars disclosing facts about a future discrimination claim is void unless it tells you that you may still speak with law enforcement, the EEOC, the New York State Division of Human Rights, the Attorney General, a local human rights commission, or your own lawyer.
How Severance Affects Unemployment Benefits and Taxes
New York treats severance as “dismissal pay” for unemployment purposes, so the size and timing of the payments matter. Under Labor Law § 591(6), you cannot collect benefits for the weeks your severance covers if the weekly amount exceeds the maximum weekly benefit rate plus what the statute calls your “partial benefit credit.” A lump sum is allocated week by week, based on your regular pay, starting the day after your last day of work. But the rule does not apply if the first severance payment is made more than 30 days after your last day of employment. Payments for pension, retirement, accrued leave, and health insurance do not count as dismissal pay. And remember that the Department of Labor, not your employer, decides eligibility.
Severance is also taxable: the IRS treats it as wages, included in income and subject to income tax withholding and Social Security and Medicare taxes. Confirm whether the figures are gross or net and exactly when each payment will be made.
Read the Health Insurance and COBRA Terms Closely
If the agreement offers to pay part of your health premiums for a period, read the conditions. A subsidy that applies only “if you elect” continuation coverage does nothing for you unless you actually enroll in COBRA (or, if your employer has fewer than 20 employees and an insured health plan, New York’s state continuation coverage) before the election deadline. (Under federal COBRA, the election period lasts at least 60 days.) Check how many months the company will pay, whether the subsidy ends if you become eligible for another plan, and what you will owe afterward: you can generally be charged up to 102 percent of the plan’s full premium, not just the share that came out of your paycheck. New York also requires your employer to tell you in writing, within five working days after termination, the exact date your benefits end.
Restrictive Covenants and Clawback Provisions
If the agreement adds or reaffirms restrictions — a non-compete, a non-solicitation clause, or confidentiality obligations — compare them with what you signed at hiring and note anything new or broader. Whether a restriction would be enforced is a separate question (see our discussion of whether non-compete agreements are enforceable in New York), but agreeing to a new one in exchange for severance deserves real thought.
Then read what happens if the company says you breached: whether it can stop payments, claw back severance already paid, or collect “liquidated damages,” who decides whether a breach occurred, and whether you get notice and a chance to cure. Beyond New York’s limits for discrimination claims, federal regulations bar terms in a release of federal age claims that penalize you for challenging the release, such as a requirement that you first return the severance.
Deadlines and Negotiation
As the U.S. Department of Labor puts it, severance pay is “a matter of agreement between an employer and an employee.” The EEOC notes, however, that in group layoff and exit incentive programs the employer sets the terms, which typically are not negotiable. Treat the deadline as real. If you are being rushed, the EEOC’s advice is to ask for more time and to put that request in writing.
Beyond the payment itself, a severance agreement generally sets terms on benefits and references, and it may also address unemployment compensation and confidentiality. Review each of those terms as carefully as the dollar amount.
Before You Sign
For employees: read the whole agreement, make sure you understand every term, and do not let a deadline rush you into signing.
For employers: these rules double as a drafting checklist. A release of federal age claims that misses an OWBPA requirement does not waive those claims, and in New York a release of a discrimination claim is unenforceable if the agreement includes the penalty, forfeiture, or disclaimer terms described above.
If you have been offered a severance agreement, or need one drafted or reviewed, our employment and labor law practice in Albany can help.
This article is general information about New York law, not legal advice, and does not create an attorney-client relationship. Every situation is different; consult a lawyer about your specific circumstances.
