Beware of 6 Red Flags in Severance Agreement

Published on
April 21, 2025

A severance agreement is a legal contract between you and your employer that outlines what you’ll receive when your employment ends. As the Government of Canada explains, “Your employer may also offer you benefits when you lose your job. They may call it a severance package, severance agreement or retiring allowance.”

Key components typically include:

Money (notice pay, severance pay, bonuses)
Benefits continuation
References and job search support
Legal releases (what rights you’re giving up)
Confidentiality clauses
Non-compete restrictions

The agreement is essentially your employer saying: “Here’s what we’ll give you in exchange for you agreeing not to sue us.”

How Long to Review a Severance Agreement

Most employers pressure you to sign quickly, but you have more time than they want you to believe.

“An employee actually has two years to sign a severance agreement. That is the amount of time an employee in Ontario must sue for wrongful dismissal according to the statute of limitations.”

My recommendation:

Take at least 1-2 weeks to review properly
Ignore artificial deadlines from your employer
Get legal advice before signing anything
Don’t let anyone pressure you into immediate decisions

What to do during review period:

Read every word carefully
Calculate if the offer is fair
Research your legal entitlements
Consider consulting a lawyer
Think about your future career plans

How Long Does a Severance Agreement Last?

Once you sign a severance agreement, most of its terms are permanent, but some aspects have time limits.

Permanent effects:

You’ve released your right to sue (forever)
Confidentiality clauses (usually forever)
Non-disparagement agreements (ongoing)

Time-limited aspects:

Non-compete clauses (typically 6 months to 2 years)
Benefit continuation (specified period)
Outplacement services (usually 3-6 months)

You typically cannot undo a signed severance agreement, so get it right the first time.

Here Are The 6 Red Flags in Severance Agreements

1. Inadequate Compensation

The biggest red flag is when the severance offer is less than you’re legally entitled to receive.

Watch for:

Only minimum Employment Standards Act amounts
No recognition of your years of service
Missing benefits or bonus payments
Clawback provisions that reduce your pay

2. Overly Broad Release Clauses

Some employers try to get you to release rights you shouldn’t have to give up.

Red flags include:

Releases covering discrimination or harassment
Waivers of human rights complaints
Giving up pension or benefit rights
Releasing future claims not related to termination

3. Unreasonable Non-Compete Clauses

While Alberta law notes that “A terminated employee may be entitled to more than the minimum amount of termination notice or pay required under employment standards legislation,” some employers try to restrict your ability to work.

Problem clauses:

Geographic restrictions that are too wide
Time periods longer than 12-18 months
Restrictions on working in your entire industry
Vague definitions of “competing” businesses

4. Confidentiality Overreach

Legitimate confidentiality is reasonable, but some agreements go too far.

Warning signs:

Preventing you from discussing workplace harassment
Restricting truthful references to new employers
Blocking discussions with government agencies
Stopping you from talking to former colleagues

5. Repayment Triggers

Some agreements contain “clawback” provisions that could force you to return money.

Dangerous clauses:

Must repay if you find new work quickly
Penalties for negative references or reviews
Repayment if you file any future complaints
Unclear triggers for repayment obligations

6. Missing Standard Benefits

A fair severance package should include more than just basic pay.

Often missing:

Continuation of health and dental benefits
Life insurance and disability coverage
Employer pension contributions
Car allowances or expense reimbursements
Accrued vacation pay and bonuses

Before signing an employment contract, it is crucial to review the contract by an employment lawyer and learn how to negotiate for a higher severance package

Discrimination in Severance Packages

Unfortunately, some employers use severance negotiations to continue discriminatory practices.

Warning signs of discrimination:

Older workers offered less generous packages
Women receiving different terms than male colleagues
Minority employees getting inferior treatment
Disabled workers pressured to accept minimal offers

Human rights laws protect you during severance negotiations. You cannot be forced to release legitimate discrimination claims.

If you suspect discrimination, document everything and consult with an employment lawyer or file a human rights complaint.

What You Can Negotiate:

Financial Terms:

Amount of severance pay
Notice period length
Bonus and commission payments
Benefit continuation periods

Non-Financial Terms:

Reference letter language
Job search assistance
Use of company property during transition
Timing of payments

“Severance pay is compensation paid to an employee whose employment has been severed by their employer. The Employment Standards Act, 2000 requires employers of a certain size to compensate long-term employees for economic losses they suffer upon termination.”