What Happens if You Don’t Sign a Severance Agreement

You often sign or reject a severance agreement after ending employment. Understanding the potential consequences helps workers make informed decisions. This article explains what may happen if a severance agreement is offered and why someone might choose not to sign, along with practical considerations for negotiation, legal rights, and financial outcomes.

What A Severance Agreement Is And Why It’s Offered

A severance agreement is a contract between an employer and employee that provides compensation or benefits in exchange for specific promises, usually including a waiver of claims against the employer. Common terms include a severance payment, continuation of benefits, outplacement services, and confidentiality or non-disparagement clauses. Employers use these agreements to reduce the risk of future litigation and to provide a smoother transition for departing workers. For employees, the document can be a source of financial support, but it may also impose legal obligations and restrictions.

Consequences Of Not Signing: Immediate And Practical Effects

Declining to sign typically preserves the employee’s legal rights but can also limit access to the offered severance package. If the only offer on the table is severance, refusal might mean no payout, no continued benefits, and no additional transition assistance. Some employers may set a deadline for signing; missing that deadline can result in an offer expiring. It is important to read any time limits carefully and seek guidance if the situation is unclear. Refusing to sign does not automatically revoke unemployment eligibility in most cases, but it can influence how benefits are perceived by state agencies and former employers.

Legal Rights And Waivers: What Is Being Waived?

Most severance agreements require a waiver of claims under employment law, including claims under federal or state statutes. Commonly waived rights include age discrimination, wrongful termination, harassment, retaliation, and wage-and-hour claims. In some states, certain claims cannot be waived, or waivers must be unequivocal and supported by adequate consideration. Before signing, a worker should ensure the waiver is clear and that it is supported by meaningful consideration—often the severance payment or extended benefits. Consulting an attorney can help assess whether any waivers are overly broad or implicate rights that cannot be relinquished.

What To Do Before You Decide To Sign Or Refuse

Independent review is crucial. Consider these steps:

• Take time to review the document thoroughly and identify any non-compete, non-solicitation, or privacy provisions that could affect future employment.
• Ask about reconsideration or a revised offer if terms seem unfavorable, such as missing or underfunded benefits.
• Check for required disclosures, like COBRA continuation rights, retirement benefits, or vesting details for stock options.
• Determine if the agreement includes a compensation calculation that is accurate and complete, including earned but unpaid wages, vacation pay, and bonuses if applicable.
• Verify the effective date and whether signing triggers release of claims globally or only specific aspects.

Negotiating A Severance Agreement

Many employees can negotiate better terms. Effective strategies include:

• Requesting a longer continuation of health benefits, especially for family coverage.
• Seeking a higher severance amount or additional weeks of pay, particularly for longer tenure or managerial roles.
• Clarifying tax withholding, retirement plan treatment, and timing of payments.
• Removing or narrowing restrictive covenants that could hinder future employment opportunities.
• Obtaining assistance with job placement, references, or outplacement resources.

Unemployment Benefits And Severance: What To Expect

Receiving severance does not automatically disqualify a person from unemployment benefits, but it can affect when benefits begin. Each state has its own rules about severance and unemployment eligibility. Some states treat severance as exempt income for a particular period, potentially delaying benefit payments. It’s essential to report severance accurately to the relevant state workforce agency and the employer. If benefits are delayed or denied, filing an appeal or requesting a reconsideration with supporting documentation is a viable path.

Alternatives To Accepting Or Signing: Waiver-Free Options

In some situations, an employee might negotiate a severance proposal that avoids a broad waiver. Options include:

• An informal separation agreement without a general release of claims, focused on specific issues like final pay or benefits.
• A separate release addressing only non-claims-related matters while preserving rights for potential undiscovered claims.
• Documentation of a mutual agreement to maintain confidentiality without broad non-disparagement clauses.

Tax Considerations And Financial Implications

Severance typically is treated as taxable income and may be subject to withholding. The timing of payments can affect tax liability, especially if the severance spans multiple calendar years. In some cases, severance can impact eligibility for benefits or require estimated tax payments. Workers should review potential tax implications with a tax professional to avoid unexpected liabilities and to optimize withholdings.

Common Pitfalls To Avoid

Several pitfalls recur in severance negotiations:

• Signing a release without fully understanding its breadth or long-term impact.
• Accepting a small severance package with limited or no continued benefits.
• Overlooking post-employment restrictions that affect future work opportunities.
• Failing to verify all earned compensation and benefits are correctly calculated.

How A Decision Is Made: Timeline And Considerations

Decision timelines vary by employer and state law. Typically, a severance offer arrives during the departure process, followed by a deadline to decide. The decision should consider financial needs, ongoing healthcare requirements, potential litigation risks, and long-term career goals. If legal counsel is consulted, the attorney can help assess the value of the severance package compared to potential risks of lawsuits or claims that could be waived.

Summary: Weighing Your Options

Not signing a severance agreement preserves the employee’s right to pursue claims and potentially seek litigation or arbitration. However, it forgoes immediate severance benefits and ongoing support. Signing with a carefully negotiated waiver and favorable terms can provide essential financial support and smoother transition, while ensuring rights are protected and future employment is not overly restricted. The choice depends on individual circumstances, risk tolerance, and the specific terms offered.