Separation Agreements And Releases: What US Employers Should Review

When an employee leaves your company, whether due to resignation, layoff, or termination, you may want to use a separation agreement and release of claims. These documents help clarify the terms of departure, set expectations, and reduce the risk of future lawsuits. However, many US startups and small businesses make costly mistakes when preparing or using these agreements. Common errors include using outdated templates, missing required disclosures, or misunderstanding which claims can be waived. This guide explains what to review in a separation agreement and release, highlights federal and state rules, and provides practical examples, checklists, and common mistakes to help you avoid legal trouble.

What Is a Separation Agreement and Release of Claims?

A separation agreement is a contract between an employer and a departing employee (or sometimes an independent contractor) that outlines the terms of their exit. These agreements often include a release of claims, where the worker agrees not to sue the employer for certain legal claims related to their employment or separation. Separation agreements are especially common in layoffs, terminations, and sometimes resignations, particularly when the employer offers severance pay or other benefits in exchange for the release.

Typical elements in a separation agreement and release include:

• Severance pay or benefits: Payment or benefits provided to the employee, usually in exchange for the release of claims. For example, a startup may offer two weeks of pay and continued health insurance for a month.
• Release of claims: A provision where the employee waives the right to bring certain legal claims against the employer. This is the core of the agreement and must be carefully drafted to be enforceable.
• Confidentiality: Terms restricting the employee from disclosing certain information about the business, clients, or the terms of the agreement. For instance, a tech company may want to keep its severance practices private.
• Non-disparagement: A clause preventing the employee from making negative statements about the business or its leadership.
• Return of company property: Requirements for the employee to return laptops, files, access cards, or other business assets by a specific date.
• References and future employment: Agreements about what the employer will say to future employers or whether the employee is eligible for rehire.
• Non-compete or non-solicit terms: In some states, these may be included, but enforceability varies widely.

While separation agreements can help reduce legal risk, they do not guarantee that all claims are fully released. Certain rights cannot be waived, and poorly drafted agreements may not be enforceable if challenged. For example, an agreement that attempts to waive unpaid wage claims without proper process may be invalid.

Practical Example: A SaaS startup lays off a sales manager and offers three weeks of severance in exchange for a release of claims. The agreement includes a confidentiality clause, a non-disparagement provision, and a list of company devices to be returned. However, the agreement does not mention the employee's right to file an EEOC charge or provide the required review period for an employee over 40. This oversight could make parts of the agreement unenforceable.

Federal Rules: What Can and Cannot Be Released

At the federal level, there are strict limits on what claims an employee can release in a separation agreement. The Equal Employment Opportunity Commission (EEOC), Department of Labor (DOL), and other agencies have clear rules about waivers of certain rights.

• Wage and hour claims: Under the Fair Labor Standards Act (FLSA), most wage claims cannot be waived without DOL or court approval. For example, if an employee claims unpaid overtime, a private agreement may not prevent them from pursuing that claim later unless it is approved by the DOL or a court.
• Discrimination claims: Employees can waive some discrimination claims (such as under Title VII, ADA, or ADEA), but the waiver must be knowing and voluntary. The Older Workers Benefit Protection Act (OWBPA) sets specific requirements for waivers of age discrimination claims for employees 40 and older, including a 21-day review period and a 7-day revocation window.
• Right to file a charge: Employees cannot be prevented from filing a charge with the EEOC or participating in an agency investigation, even if they waive their right to recover damages.
• Retaliation and whistleblower protections: Federal law prohibits agreements that restrict an employee's right to report violations to government agencies or retaliate against them for doing so. For example, an agreement cannot prevent a worker from reporting wage theft to the DOL.

Employers should ensure their agreements do not attempt to waive rights that cannot be legally released. Using clear, plain language and including required disclosures is critical for enforceability. The DOL and EEOC have published guidance on what makes a waiver knowing and voluntary, and courts will closely scrutinize these agreements if challenged.

Common Mistake: A founder uses an online template that includes a blanket waiver of "all claims, known or unknown," without specifying which claims are being released or referencing the employee's right to file an EEOC charge. This could result in the release being invalid for key claims, exposing the company to future lawsuits.

Checklist:

• List the specific federal claims being released.
• Include required language for age discrimination waivers if the employee is 40 or older.
• State that the employee retains the right to file charges with agencies like the EEOC or DOL.
• Do not attempt to waive wage claims without DOL or court approval.
• Advise the employee to consult an attorney (especially for age discrimination waivers).

State Law Considerations: Key Differences and Traps

State laws can significantly affect what can be included in a separation agreement and release. Some states, such as California, Illinois, New York, and Washington, have additional requirements or restrictions beyond federal law. Failing to account for these can make your agreement unenforceable or even expose you to penalties.

• Non-disparagement and confidentiality: Several states limit or prohibit confidentiality and non-disparagement clauses related to claims of harassment or discrimination. For example, California law (California Code of Civil Procedure Section 1001) restricts confidentiality provisions that would prevent an employee from disclosing information about unlawful acts in the workplace. New York and Illinois have similar restrictions.
• Timing and consideration: Some states require additional consideration (something of value) beyond what the employee is already entitled to. For example, in Texas, continued employment is generally not enough; there must be new consideration. In Massachusetts, severance pay is often required for a valid release.
• Review and revocation periods: Some states extend federal requirements. For example, Minnesota requires a 15-day revocation period for certain releases, and Oregon requires written notice of the right to consult an attorney.
• Worker classification: State labor agencies may scrutinize releases involving independent contractors or misclassified employees. If a worker was misclassified, a release may not prevent claims for unpaid wages, unemployment, or workers' compensation. For example, California uses the "ABC test," making it harder to classify workers as independent contractors, and releases may not be effective if classification was wrong.
• Enforceability of waivers: Certain claims, such as unpaid wages, unemployment benefits, or workers' compensation, may not be waivable under state law, even if the agreement says otherwise. For example, Florida prohibits waivers of unemployment claims, and some states limit waivers of wage claims.
• Non-compete clauses: Many states, including California and Oklahoma, ban or severely restrict non-compete agreements. Others, like Illinois and Washington, require specific disclosures and minimum compensation for non-competes to be valid.

Practical Example: An Illinois startup offers a departing employee a separation agreement with a confidentiality clause covering all workplace conduct. The employee later alleges sexual harassment. Under Illinois law, the confidentiality clause may be unenforceable as it relates to harassment claims, and the employer could face penalties for attempting to restrict disclosure.

Checklist:

• Check state law for limits on confidentiality, non-disparagement, and non-compete clauses.
• Confirm that the agreement provides adequate consideration under state law.
• Include required review and revocation periods for age discrimination waivers and group layoffs.
• Do not attempt to waive claims that are non-waivable under state law (such as workers' compensation or unemployment in many states).
• Tailor the agreement to the state where the employee worked, not just where your company is based.

Common Mistake: Using a generic template that does not account for state-specific rules, resulting in unenforceable or illegal provisions.

Classification Risks: Employees vs. Contractors

Worker classification is a critical issue when preparing separation agreements and releases. The IRS and DOL have specific guidance on distinguishing employees from independent contractors, and misclassification can lead to significant penalties, including back pay, taxes, and fines.

If you are asking a departing worker to sign a release, consider the following:

• Was the worker properly classified? If a contractor was actually functioning as an employee, a release may not prevent them from later pursuing wage, overtime, or benefit claims. For example, if a gig worker was treated like a full-time employee, a release may not shield you from liability.
• IRS and DOL scrutiny: Both agencies may disregard a release if they determine the worker was misclassified. Releases cannot be used to avoid tax or labor obligations. The DOL's economic realities test and the IRS's control test are key references.
• State labor agency rules: Some states use stricter tests for classification. For example, California's "ABC test" presumes workers are employees unless the business can prove otherwise. another state and Massachusetts also use strict tests.
• Scope of release: Releases should be tailored to the worker's actual status and should not attempt to waive rights that cannot be legally released. For example, a release that tries to waive minimum wage rights for a misclassified contractor will likely be invalid.

Practical Example: A marketing startup hires a designer as an independent contractor but controls their schedule and work methods. When the contract ends, the startup offers a release of claims in exchange for a small payment. If the designer later claims they were misclassified, the release may not prevent them from seeking back pay or benefits, and the startup could face IRS and DOL investigations.

Checklist:

• Review the worker's classification using IRS and DOL guidance before offering a release.
• Do not use releases to try to avoid wage, tax, or benefit obligations for misclassified workers.
• Tailor the release language to the worker's actual role and status.
• Consult IRS and DOL materials if you are unsure about classification.

Common Mistake: Assuming that a signed release from a contractor will protect your business from all future claims, even if the worker was misclassified.

Checklist: What to Review Before Signing

Before presenting a separation agreement and release to a departing worker, use this practical checklist:

• Confirm the worker's classification (employee or contractor) using IRS and DOL criteria, and review state labor agency guidance if applicable.
• Identify all claims you intend to release and check which ones can legally be waived under federal and state law.
• For employees over 40, include OWBPA-required language, a 21-day review period, and a 7-day revocation period for age discrimination waivers. For group layoffs, check for additional requirements.
• Provide clear, plain language explaining what rights are being waived and what consideration (payment or benefits) is being provided. Avoid legal jargon.
• Review state-specific rules on confidentiality, non-disparagement, non-compete, and required disclosures. For example, in California, do not include blanket confidentiality clauses for harassment claims.
• Ensure the agreement does not prohibit filing a charge with the EEOC or other agencies, or restrict whistleblower rights.
• List all company property to be returned and set a deadline for return. For remote workers, provide instructions for shipping equipment.
• Document any agreements about references, future employment, or non-compete terms (if allowed in your state).
• Allow the employee sufficient time to review and, if appropriate, consult an attorney. For age discrimination waivers, this is required by law.
• Keep a signed copy for your records and provide one to the departing worker. Store the agreement securely.

Practical Example: A founder in New York prepares a separation agreement for a remote employee based in California. The agreement includes a non-disparagement clause and a confidentiality provision covering all workplace conduct. The founder reviews California law and realizes these clauses need to be narrowed to avoid violating state restrictions. By customizing the agreement, the founder avoids potential penalties and ensures the release is enforceable.

Common Mistakes Checklist:

• Using a one-size-fits-all template without state-specific updates.
• Failing to provide required review or revocation periods for age discrimination waivers.
• Attempting to waive non-waivable claims, such as unpaid wages or workers' compensation.
• Not providing adequate consideration for the release.
• Including illegal or unenforceable non-compete or confidentiality clauses.
• Not confirming the worker's classification before offering a release.

Using these checklists can help reduce the risk of unenforceable terms or future disputes. Remember, a generic approach rarely works for separation agreements and releases. If you are unsure about your contract, legal review can help ensure compliance.

FAQs

Can a separation agreement release all legal claims?

No. While a separation agreement can release many employment-related claims, some rights cannot be waived. For example, wage claims under the FLSA usually require DOL or court approval, and employees cannot waive the right to file a charge with the EEOC or participate in agency investigations. State laws may also prohibit waivers of certain claims, such as unemployment or workers' compensation benefits.

What is required for a valid age discrimination waiver?

For employees age 40 or older, the Older Workers Benefit Protection Act (OWBPA) requires that the waiver be knowing and voluntary. This means the agreement must use clear language, advise the employee to consult an attorney, provide at least 21 days to consider the offer, and allow 7 days to revoke after signing. Group layoffs have additional requirements, such as disclosure of job titles and ages of affected employees.

Do I need to offer severance pay for a release to be valid?

Generally, a release must be supported by consideration, meaning the employee receives something of value they are not already entitled to. This is often severance pay, but could also be extended benefits, outplacement services, or another benefit. Without consideration, the release may not be enforceable. State law may set additional requirements for what counts as valid consideration.

Can independent contractors sign a release of claims?

Yes, but the enforceability depends on proper classification and the nature of the claims. If a contractor was misclassified and should have been treated as an employee, a release may not prevent them from pursuing wage or benefit claims. Always review IRS and DOL classification guidance before using releases with contractors, and check state labor agency rules for stricter standards.

Are non-disparagement and confidentiality clauses always enforceable?

No. Some states limit or prohibit these clauses, especially in cases involving harassment or discrimination. For example, California and New York restrict the use of confidentiality provisions related to unlawful acts in the workplace. Always check state law before including these terms, and tailor the language to comply with local requirements.

Key Takeaways

• Separation agreements and releases can help clarify the end of employment and reduce legal risk, but must be carefully drafted to comply with federal and state law.
• Not all claims can be waived, and some rights (such as filing a charge with the EEOC or reporting violations) are protected by law.
• Worker classification is critical; misclassified contractors may still have enforceable claims despite a release.
• State rules on confidentiality, non-disparagement, non-compete, and required disclosures can affect enforceability.
• Use practical checklists and seek legal review to avoid common mistakes and ensure your agreement is enforceable.

If you are preparing a separation agreement and release of claims or have questions about what to include, our team can help you review your documents and flag key risks. Call (888) 449-8437 or email team@sprintlaw.com to discuss your needs. Where legal services are required, they are delivered by licensed lawyers at trusted law firm partners through the Sprintlaw platform.