Leaving a job is a major transition. Sometimes it’s planned, sometimes it’s sudden, and sometimes it follows a conflict—like a discrimination or retaliation complaint. Whatever the reason, your employer may place a settlement or severance agreement in front of you.

At first glance, it looks like a win-win: sign here, collect your payout, and move forward. But these agreements are drafted by employers and their lawyers with one goal in mind—protecting the company. If you sign without understanding the fine print, you could be giving up valuable rights, limiting your future career options, or even exposing yourself to penalties later.

Here’s what every executive needs to know before signing.

1. What Claims Are You Giving Up?

The central feature of almost every settlement or severance agreement is the “release of claims.” In simple terms, you agree not to sue your employer for pretty much anything that happened during your employment, up until the day you sign.

That part makes sense—after all, the company is paying you in part to avoid litigation. But here’s where things get tricky:

• Past vs. future claims: You should only be releasing claims that arose before you sign the agreement. Employers sometimes draft broad language that sweeps in future claims too. That’s unfair—and in some cases, unenforceable. If your employer discriminates against you next year, you must keep the right to pursue that new claim.

• Non-waivable rights: Certain rights cannot be signed away. For example, you can’t be barred from filing a charge with or cooperating in an investigation by the EEOC, OSHA, or the Department of Labor.

Takeaway: Read the release section carefully. Make sure you’re not signing away rights that belong to your future self.

2. Confidentiality and Non-Disparagement Clauses

Most agreements include confidentiality and non-disparagement provisions—sometimes called the “silence” clauses. These control what you can say about the company and about the agreement itself.

But the details are what matter most:

• One-sided restrictions: Often, only the employee is restricted from speaking negatively. Negotiate for mutual terms so the company can’t disparage you either.

• Government reporting carve-outs: These provisions must never prevent you from speaking with regulators or investigators about potential legal violations.

• Scope: Some clauses are drafted so broadly they can stop you from discussing your work history, industry experience, or even mentioning why you left.

Takeaway: A fair confidentiality and non-disparagement section protects both sides, not just the employer.

3. Non-Compete and Non-Solicitation Restrictions

A severance agreement is also an opportunity for employers to reinforce—or sneak in—additional restrictions.

• Non-compete clauses: Limit where you can work after leaving, often for months or even years.

• Non-solicitation clauses: Prevent you from recruiting clients or coworkers if you change jobs.

These clauses can have a major impact on your future career. If they’re included, weigh the value of the severance pay against the restrictions on your livelihood. You may be able to negotiate better terms—or more money to compensate for the limits placed on your next move. Note also that some states prohibit the use of non-compete clauses in certain cases.

Takeaway: If the agreement restricts your future employment, the payment should reflect that cost.

4. Dispute Resolution and Penalty Traps

Another hidden danger lies in what happens if the agreement is allegedly breached. Consider these scenarios:

• Notice and cure: If the employer claims you violated confidentiality, will you have a chance to fix it before being penalized?

• Court vs. arbitration: Does the agreement require arbitration? If so, who chooses the arbitrator, and who pays the fees? Employers often control these details, which can tilt the process in their favor.

• Penalty provisions: Some agreements require employees to repay part—or all—of their severance if they breach. If penalties apply to you, negotiate to ensure they apply equally to the employer.

Takeaway: Don’t ignore the “what if something goes wrong” section. It can determine how any future fight unfolds.

5. Payment Structure and Tax Implications

Naturally, the payout catches most people’s attention. But even here, the fine print matters:

• Timing and method: Will payment be made in a lump sum or installments? By check or direct deposit? Ambiguity here can create unnecessary delays.

• Tax treatment: Settlement payments are taxed differently depending on how they’re categorized. Wages are reported on a W-2 and subject to standard withholding. Other amounts, such as compensatory or emotional distress damages, may be reported on a 1099 and taxed differently.

A misstep here could lead to higher taxes—or questions from the IRS later. Best practice is to consult with a tax advisor before finalizing.

Takeaway: It’s not just how much you’re paid, but how and when you’re paid that counts.

6. Other Hidden Clauses to Watch Out For

Severance agreements often contain small-print provisions that don’t get much attention—but can still affect your future:

• No rehire clauses: Bar you from ever applying to or working for the company again.

• Choice of law/venue: Decide which state’s laws and courts will govern disputes, often favoring the employer’s location.

• Indemnification: In rare cases, employees are asked to indemnify the employer—meaning you could be on the hook for certain costs if a third party sues.

Takeaway: Even the shortest clauses can carry major consequences.

Why Legal Review Matters

Once signed, settlement and severance agreements are binding contracts. Courts rarely let employees undo them later. That’s why it’s essential to know exactly what you’re agreeing to before you sign.

An experienced employment lawyer can:

• Flag one-sided or overreaching provisions.

• Negotiate stronger terms or higher compensation.

• Clarify how specific clauses could affect your career and finances.

• Ensure you’re not giving up rights you didn’t intend to.

Your employer has lawyers drafting the agreement to protect their interests. You should have someone protecting yours.

Final Thoughts

Settlement and severance agreements can bring closure and financial stability during a transition. But they can also create new problems if signed without careful review.

The key is balance: if you’re giving up rights, your compensation should fairly reflect that. If you’re agreeing to restrictions, they should be reasonable and not derail your future. And above all, you should understand the full scope of the deal before putting pen to paper.