When employment ends whether through a layoff, restructuring, or negotiated departure employers often present departing employees with a severance agreement. These agreements typically offer compensation or benefits in exchange for the employee agreeing to certain legal terms.
Before signing, however, employees should understand that a severance agreement is not simply an administrative formality. It is a binding legal contract that may affect your rights long after you leave your job. In many cases, signing a severance agreement requires employees to waive potential legal claims against the employer.
For that reason, employees should carefully review the agreement and fully understand its implications before signing.
What Is a Severance Agreement?
A severance agreement sets the terms governing the end of an employment relationship. In exchange for compensation, often referred to as severance pay, employees typically agree to certain conditions that benefit the employer.
Common provisions in severance agreements may include:
- severance pay, sometimes based on years of service
- continuation of health benefits for a limited period
- a general release of legal claims against the employer
- confidentiality or non-disparagement provisions
- return of company property
- restrictive covenants such as non-compete or non-solicitation clauses
- arbitration provisions governing future disputes
Employers frequently offer severance agreements during layoffs, company restructurings, position eliminations, or negotiated separations.
Because severance agreements often require employees to waive potential legal claims, understanding the legal framework surrounding these agreements is critical.
Are Employers Required to Offer Severance in New Jersey?
In most cases, New Jersey employers are not legally required to provide severance pay. However, there are several important exceptions.
Employment Contracts or Company Policies
If an employment agreement, executive contract, or written company policy promises severance benefits, the employer may be legally obligated to honor that commitment. Under basic contract principles, these promises may become enforceable agreements.
New Jersey courts have long recognized that employment agreements must be supported by adequate consideration, meaning each party must receive something of value in exchange for their obligations. See Martindale v. Sandvik, Inc..
The New Jersey WARN Act
Severance pay may also be required under the Millville Dallas Airmotive Plant Job Loss Notification Act, commonly known as the New Jersey WARN Act.
This law applies to certain large-scale layoffs and business closures involving employers with at least 100 employees. When a covered employer conducts a qualifying mass layoff, plant closing, or transfer of operations, affected employees are generally entitled to severance equal to one week of pay for each full year of service.
If the employer fails to provide the required notice before the layoff, employees may be entitled to additional compensation under the statute.
More information about the law can be found here - https://www.nj.gov/labor
Legal Requirements for a Valid Severance Agreement
Consideration
Like any contract, a severance agreement must be supported by consideration. This means the employee must receive something of value in exchange for the promises being made.
For example, if an employee is asked to waive legal claims, the employer must offer benefits that the employee was not already entitled to receive, such as severance pay or extended health coverage.
Additional Protections for Employees Over 40
Employees who are age 40 or older receive additional protection under the Older Workers Benefit Protection Act when asked to waive claims under the Age Discrimination in Employment Act.
Among other requirements, the agreement must:
- be written in clear and understandable language
- specifically reference rights under the Age Discrimination in Employment Act
- provide at least 21 days to review the agreement (or 45 days in group layoffs)
- allow the employee 7 days to revoke the agreement after signing
- advise the employee to consult with an attorney
Failure to comply with these requirements may render the waiver unenforceable.
Learn more - https://www.eeoc.gov
New Jersey Laws That Affect Severance Agreements
Non-Disclosure Provisions and Workplace Claims
Under N.J.S.A. 10:5-12.8, provisions that attempt to conceal details of claims involving discrimination, retaliation, or harassment are generally against public policy and unenforceable.
If an employee publicly discloses details of such a claim in a way that reasonably identifies the employer, the nondisclosure provision may also become unenforceable against the employer.
The New Jersey Supreme Court reinforced this principle in Savage v. Township of Neptune, emphasizing that the state’s public policy favors transparency in workplace discrimination matters.
This law does not prohibit employers from protecting legitimate confidential information, such as trade secrets or proprietary business data.
Waivers of Certain Legal Rights
Another provision of the New Jersey Law Against Discrimination, N.J.S.A. 10:5-12.7, prohibits employment agreements that attempt to waive substantive or procedural rights related to discrimination, retaliation, or harassment claims.
Compliance with Wage Laws
Severance agreements must also comply with New Jersey wage laws. Under N.J.A.C. 12:61-1.6, settlement agreements that violate wage payment requirements may be deemed null and unenforceable.
Non-Compete and Restrictive Covenant Provisions
Some severance agreements include non-compete or non-solicitation clauses that limit an employee’s ability to work for competitors or solicit former clients.
New Jersey courts will enforce restrictive covenants only if they are:
- reasonable in geographic scope
- reasonable in duration
- necessary to protect legitimate business interests
- not unduly burdensome to the employee or harmful to the public
For example, the Appellate Division addressed the enforceability of restrictive covenants in ADP, LLC v. Kusins.
Are Severance Agreements Negotiable?
Many employees assume that severance agreements are final offers that cannot be changed. In reality, employers often expect some level of negotiation.
Potential negotiation points may include:
- increased severance compensation
- extended health insurance coverage
- modification or removal of non-compete clauses
- clarification of confidentiality provisions
- agreement regarding job references or announcements
When Should You Consult an Employment Attorney?
Employees should strongly consider consulting an employment attorney before signing a severance agreement when:
- The termination may involve discrimination or retaliation
- The agreement includes restrictive covenants such as a non-compete clause
- The employee is over 40 and waiving age discrimination claims
- The severance offer appears unusually limited
- The termination occurred as part of a large layoff
The Bottom Line
A severance agreement is more than a routine HR document; it is a binding legal contract that may significantly affect an employee’s legal rights and future employment opportunities.
Before signing any severance agreement, employees should carefully review the document and understand the rights they may be waiving.
Contact an Employment Attorney
If you have been presented with a severance agreement and are unsure about your rights, seeking legal guidance can help you make an informed decision.
You may contact Chris Heyer at cheyer@scura.com or call (973) 696-8391 to schedule a consultation and discuss your situation.
