A severance agreement is a contract entered into between a departing employee and his or her employer.  In a typical severance agreement, the outgoing employee agrees not to sue the employer for wrongful termination or related legal claims, while the employer agrees to give the employee some form of additional compensation, often called a "severance package." Such compensation (called "consideration" in legal terms) is required in order for the departing employee's release of liability to be valid. If there is no such consideration, the employee will retain the right to sue the employer for any claims he or she may have.

Negotiating Severance Terms 

Several things should be kept in mind when considering and/or negotiating a severance agreement with an employer: 

• Before employees execute a release of all claims, they should make sure that the agreement entitles them to adequate additional compensation.
• Employees may also wish to obtain a release of rights from the employer, to be protected from any potential claims for wrongful behavior or harassment that might be brought against the employee.
• Severance provisions relating to certain conditions or characteristics, such as age, should be specifically worded to ensure that any potential liability for discrimination is waived.

There is no federal law requiring an employer to give an employee severance pay. Severance pay is a matter of agreement between an employer and an employee. The amount and type of compensation in an given severance agreement will vary according to specific circumstances, but the amount of severance pay is usually based on a number of factors, including:

• Length of the employee's tenure with the employer;
• Circumstances under which the employment relationship ended (i.e. company "downsizing," employee misconduct, or layoff)
• Employer's financial condition (i.e. filing for bankruptcy, or experiencing economic growth)