What Should Indiana Employers Include in a Severance Agreement?

When a key employee leaves your organization, the terms of their departure carry real legal and financial weight. A poorly drafted severance agreement can expose your business to litigation, reputational damage, and lost proprietary information. A well-crafted one protects your operations, limits liability, and sets a professional tone for the separation.

At McNeelyLaw LLP, our attorneys work with Indiana employers to build severance agreements that reflect their specific business needs while staying compliant with state and federal law.

A strong Indiana severance agreement often includes:

• Compensation and benefits continuation terms
• A release of claims provision
• Confidentiality and non-disparagement clauses
• Compliance with applicable state and federal laws

An attorney can help you devise a suitable severance agreement based on your specific situation.

What Compensation and Benefits Should You Include in a Severance Agreement?

The financial terms of your agreement set the foundation for everything else. Employers should clearly spell out the amount of severance pay offered, whether it will be paid as a lump sum or in installments, and the timeline for payment. Vague or incomplete payment terms invite disputes.

Beyond base compensation, consider the following:

• Health insurance continuation: Specify whether the company will cover COBRA premiums and for how long, or whether the employee assumes that cost upon separation.
• Retirement plan contributions: Clarify whether any contributions continue during the severance period and how vesting is affected.
• Accrued PTO or vacation: Indiana law does not require payout of unused vacation unless your company policy or employment contract specifies otherwise. Address this explicitly in the agreement.
• Bonuses and commissions: If the departing employee earned compensation that has not yet been paid, include clear terms on how those amounts will be handled.

Well-defined payment terms reduce the risk of wage disputes under the Indiana Wage Payment Statute and give both parties a clear record of what was agreed.

What Release of Claims Provisions Should Be in an Indiana Severance Agreement?

A release of claims clause is typically the central reason employers offer severance in the first place. In exchange for financial compensation, the employee waives their right to pursue legal action against the company.

To be enforceable, this provision must meet specific legal standards. Under Indiana and federal law, the release should:

• Clearly identify the claims being waived, including those arising under the Indiana Civil Rights Law, the Indiana Wage Payment Statute, and applicable federal statutes.
• Cover only claims that arose before the agreement’s effective date; future claims cannot be waived.
• Be supported by adequate consideration, meaning the employee must receive something of value beyond what they are already owed.

For employees aged 40 or older, the Older Workers Benefit Protection Act (OWBPA) adds additional requirements. These employees must be given at least 21 days to review the agreement (or 45 days in a group layoff situation), as well as a 7-day revocation period after signing. Failure to meet these requirements can render the release of age discrimination claims unenforceable.

Why Do Confidentiality and Non-Disparagement Terms Matter to Indiana Employers?

Protecting your company’s reputation and proprietary information does not end when an employee walks out the door. Confidentiality and non-disparagement provisions extend that protection into the post-employment period.

A confidentiality clause typically restricts the former employee from disclosing trade secrets, client lists, business strategies, or the terms of the severance agreement itself. A non-disparagement clause prohibits negative public statements about the company, its leadership, or its products and services.

When drafting these provisions, Indiana employers should keep in mind:

• Mutual vs. one-sided terms: Employees are increasingly likely to request that non-disparagement obligations apply equally to both parties. Consider whether offering mutual terms serves your interests.
• Clawback provisions: Include language that allows the company to recover severance payments if the employee violates confidentiality or non-disparagement terms.
• NLRA limitations: Recent guidance from the National Labor Relations Board limits how broadly these clauses can restrict employee speech, particularly around protected concerted activity. Overly broad language may not hold up to legal scrutiny.

Non-compete and non-solicitation clauses, which prevent former employees from joining competitors or recruiting your staff, should also be reviewed carefully. Indiana courts will enforce these restrictions only when they are reasonable in scope, duration, and geographic reach.

How Do State and Federal Laws Shape Indiana Severance Agreements?

Legal compliance is not a background consideration; it is the framework around which every provision must be built. Indiana employers should account for the following:

• Indiana Wage Payment Statute: Governs final paycheck timing and what qualifies as wages, which affects how you handle accrued leave and bonus payments.
• Indiana Civil Rights Law: Provides state-level protections against discrimination. Any release of these claims must be written clearly and specifically.
• OWBPA: As noted above, this federal law establishes mandatory review and revocation periods for employees aged 40 or older who are waiving age-discrimination claims.
• FMLA: Rights under the Family and Medical Leave Act may be waived through a severance agreement, but only under specific conditions. Tread carefully here.
• Indiana non-compete law: Restrictive covenants are evaluated by courts on a case-by-case basis. A clause that is too broad may be reduced or invalidated entirely.

Receive Guidance on Your Severance Agreement

A severance agreement is among the more consequential documents your business will use during an employee’s departure. The right terms protect your company’s financial interests, guard your confidential information, and reduce the likelihood of future legal disputes.

McNeelyLaw LLP has served Indiana employers across a wide range of industries for over 50 years. Our attorneys can help you draft, review, or refine your severance agreements to address your needs while staying on the right side of Indiana and federal law. Contact us for a consultation.