A severance agreement in Colorado has to satisfy general contract rules plus a stack of overlapping state and federal requirements covering consideration, releases, age discrimination waivers, non-competes, confidentiality, and tax withholding. Colorado severance agreement requirements come from no single statute; they are assembled from the Colorado Wage Act, C.R.S. 8-2-113, the Equal Pay for Equal Work Act, the Older Workers Benefit Protection Act, the Defend Trade Secrets Act, National Labor Relations Board precedent, and EEOC guidance. Get one piece wrong and the affected provision, or sometimes the whole agreement, is unenforceable, with non-compete violations carrying penalties of $5,000 per affected worker.
Severance Pay Is Not the Same as Final Wages
Colorado’s Wage Act explicitly excludes severance pay from its definition of “wages” or “compensation.”1Colorado Department of Labor and Employment. Colorado Wage Act Revised August 6 2025 Severance is a contractual benefit governed by the agreement’s own terms, not by statutory wage rules.
Final wages are different. When an employer terminates the relationship, all earned and determinable wages are due immediately. If the payroll department is closed at the time of discharge, payment must be available within six hours after the next regular workday, or up to twenty-four hours if the accounting unit is off-site. An employee who quits gets final wages on the next regular payday. Withholding earned wages to pressure a severance signature exposes the employer to penalties of two to three times the unpaid amount depending on willfulness.2Justia. Colorado Revised Statutes Section 8-4-109 – Termination of Employment – Payments Required – Civil Penalties Earned wages also cannot be released or bargained away in the severance document, because they are owed by statute.
The Agreement Needs Real Consideration
A severance agreement is enforceable only if the employee receives something of genuine value beyond what they were already owed. A final paycheck is not consideration. New value can take the form of a lump sum, salary continuation, employer-paid COBRA premiums, extended benefits, outplacement services, or some combination.
Spell out the specifics: dollar amounts, payment schedule, method of delivery, and any conditions that could delay or forfeit payment. “Continued benefits for a reasonable period” is the kind of language that produces litigation. If the employer is covering COBRA premiums, the agreement should state the duration and clarify how the employer’s contribution interacts with the employee’s 60-day federal election window for continuation coverage.3U.S. Department of Labor. COBRA Continuation Coverage
What a Release Can and Cannot Waive
The heart of most severance agreements is a release of claims in exchange for the payment. Colorado courts will enforce releases that identify the waived claims clearly and are backed by adequate consideration. Overbreadth is where employers get hurt.
Some rights cannot be waived by private agreement no matter how the release is drafted. The EEOC has taken the position that no severance agreement can stop an employee from filing a charge, testifying in an investigation, or participating in proceedings under Title VII, the ADA, the ADEA, or the Equal Pay Act. Language extracting those promises is void as against public policy.4U.S. Equal Employment Opportunity Commission. Enforcement Guidance on Non-Waivable Employee Rights Under EEOC Enforced Statutes A release can waive the employee’s own right to monetary recovery from a discrimination claim; it cannot block the EEOC from bringing its own action.
Future claims are also off-limits. A release only reaches conduct that occurred on or before the signing date. And as noted, earned but unpaid wages cannot be waived.
Extra Rules When the Employee Is 40 or Older
The federal Older Workers Benefit Protection Act sets a checklist that must be met for any waiver of Age Discrimination in Employment Act claims to count as knowing and voluntary:
- The agreement is written in plain language the individual employee can understand.
- It specifically references the ADEA.
- It waives only claims that existed before the signing date.
- The employee receives new consideration beyond what was already owed.
- It advises the employee in writing to consult an attorney.
- The employee has at least 21 days to consider it, extended to 45 days for group layoffs or exit incentive programs.
- The employee has 7 days after signing to revoke, and the agreement does not take effect until the revocation window closes.
Missing any one of these voids the age discrimination waiver.5Office of the Law Revision Counsel. 29 USC 626 – Recordkeeping, Investigation, and Enforcement
Group terminations trigger an additional disclosure. When the waiver is offered as part of an exit incentive or reduction in force, the employer must give the affected employees a written list of the job titles and ages of everyone selected for the program and everyone in the same job classification or unit who was not selected. The list has to be delivered at the start of the 45-day review period so employees can assess whether age factored into the selection.6eCFR. 29 CFR 1625.22 – Waivers of Rights and Claims Under the ADEA
Non-Compete and Non-Solicitation Restrictions
Colorado treats non-competes more restrictively than most states. Under C.R.S. 8-2-113, as amended in 2022, a non-compete included in a severance agreement is void by default unless it fits a narrow exception, satisfies a salary threshold, and protects a legitimate trade secret interest.
2026 Salary Thresholds
For 2026, a non-compete is enforceable only against workers earning at least $130,014 in annualized cash compensation. Customer non-solicitation agreements carry a lower threshold set at 60% of that figure: $78,008.40 per year. In both cases the restriction must be narrowly tailored to protect trade secrets.7Justia. Colorado Revised Statutes Section 8-2-113 – Unlawful to Intimidate Worker – Agreement Not to Compete The Division of Labor Standards and Statistics adjusts these figures annually, so verify the current numbers before drafting.
The 14-Day Notice Rule
Meeting the salary threshold is not enough on its own. The employer must also deliver a separate, signed notice at least 14 days before the earlier of the covenant’s effective date or the date of any additional consideration supporting it. That notice must identify the agreement by name, state in plain language that it contains a non-compete that could restrict future employment, and point to the specific sections containing the restriction.7Justia. Colorado Revised Statutes Section 8-2-113 – Unlawful to Intimidate Worker – Agreement Not to Compete
Penalties
An employer who enters into, presents as a condition of employment, or attempts to enforce a void non-compete faces a $5,000 penalty per affected worker, plus actual damages, costs, and attorney fees. The Colorado Attorney General has independent enforcement authority and can pursue additional recovery. A good-faith defense may reduce the penalty but does not eliminate liability.7Justia. Colorado Revised Statutes Section 8-2-113 – Unlawful to Intimidate Worker – Agreement Not to Compete
Scope matters too. A restriction covering an entire industry statewide will almost certainly fail even for a high earner, and durations beyond one year draw heavy judicial skepticism.
Confidentiality, Non-Disparagement, and Trade Secret Language
Confidentiality provisions protecting real trade secrets and proprietary information are routine, but three separate legal regimes constrain how they can be written.
The NLRB’s McLaren Macomb Rule
In its 2023 McLaren Macomb decision, the National Labor Relations Board held that merely offering a severance agreement with a broad non-disparagement or confidentiality clause can violate the National Labor Relations Act if the language would deter employees from exercising Section 7 rights. Section 7 rights include discussing wages and working conditions with coworkers, raising group complaints, and contacting government agencies.8National Labor Relations Board. Board Rules That Employers May Not Offer Severance Agreements Requiring Employees to Broadly Waive Labor Law Rights The Board found that presenting the agreement is itself an unfair labor practice even if the employee never signs. The rule applies across the private sector, union or not.9National Labor Relations Board. Concerted Activity
The practical fix is a carve-out: any non-disparagement or confidentiality clause should preserve the employee’s right to engage in protected concerted activity, discuss working conditions, and cooperate with government agencies.
Defend Trade Secrets Act Immunity Notice
Any severance agreement that governs trade secrets or confidential information must include a notice informing the employee of whistleblower immunity under the Defend Trade Secrets Act. Federal law protects an employee who confidentially discloses a trade secret to a government official or attorney for the purpose of reporting a suspected legal violation. An employer that leaves this notice out forfeits exemplary damages and attorney fees in any future DTSA action against that employee.10Office of the Law Revision Counsel. 18 USC 1833 – Exceptions to Prohibitions The notice can appear in the agreement itself or in a cross-referenced company policy.
Colorado’s Pay Transparency Rule
Colorado’s Equal Pay for Equal Work Act bars employers from preventing employees from discussing their pay. Any waiver of that right is automatically invalid.11Colorado Department of Labor and Employment. INFO 8 Equal Pay Part 1 A confidentiality clause covering “all employment-related information” can sweep in compensation and run afoul of the statute. Define protected information narrowly (trade secrets, client lists, proprietary processes) and expressly carve out compensation discussions.
Tax Withholding
Severance pay is taxable, and employers withhold employment taxes before distribution. The IRS treats it as supplemental wages, which lets the employer withhold federal income tax at a flat 22% rate rather than running it through the employee’s W-4.12Internal Revenue Service. Employers Supplemental Tax Guide Colorado supplemental withholding applies at 4.4%. Social Security and Medicare taxes apply the same way they would to regular wages. The agreement should say whether the stated severance figure is gross or net; employees who expect one number and see another after withholding often feel misled, and the dispute is preventable.
How Agreements Get Invalidated
A well-drafted agreement can still fall apart if the signing process was flawed. Courts look at the totality of circumstances, and certain patterns keep producing invalidations.
Voluntariness is the threshold question. Threatening to withhold earned final wages unless the employee signs, demanding a signature on the spot, or telling an employee they will lose the offer if they consult a lawyer all undercut voluntariness. The OWBPA mandates review periods for workers over 40, but Colorado has no equivalent statute setting a minimum window for younger employees. Handing someone a complex document and demanding a same-day signature is the fact pattern that leads judges to void agreements anyway.
Clarity matters independently of voluntariness. Ambiguous payment terms, undefined confidentiality obligations, and vague restrictive covenants all create enforcement problems. If a court cannot tell what the employee agreed to, it will not enforce the term. Colorado courts have severed illegal provisions and enforced the rest of an agreement, but that is not a drafting strategy. An agreement with an illegal non-compete can lose the restriction entirely while the employer remains obligated to pay the severance, leaving the company without the protection it wanted.
Treat each provision as if it has to stand alone: clear terms, real consideration, proper notice, and compliance with every applicable state and federal rule. Add the full OWBPA checklist when the employee is 40 or older. Verify the current salary threshold and follow the 14-day notice rule for any non-compete. Include the DTSA immunity notice and Section 7 carve-out anywhere confidentiality reaches. The agreement most likely to survive a challenge is the one drafted as though a challenge were coming.