3 Hidden Clauses in Employment Contracts That Reduce Severance Pay Without You Knowing

Introduction: The quiet ways severance shrinks

Severance looks straightforward—until it isn’t. Buried in many offer letters and handbooks are short phrases that quietly narrow what “pay” means, let employers deduct what you receive later, or even snatch back your package after the fact. Think of your contract like a suitcase: it looks roomy, but three invisible zippers inside can make the usable space much smaller. Today, we’ll decode those zippers—the hidden clauses—so you can keep what you’ve earned.

How severance usually works (in plain English)

How to Reduce Severance Pay Through Contract Clauses

Most companies calculate severance using a formula—often weeks of base salary per year of service. The headline number sounds generous. But the fine print defines what counts as pay, what can be deducted, and what can be clawed back. That fine print is where value leaks.

Hidden Clause #1: Discretionary Pay Exclusions

Two words—“discretionary” and “exclude”—do heavy lifting. Contracts frequently state that severance is calculated on base salary only and that discretionary bonuses, commissions, equity, allowances, or overtime are excluded. Even if a “bonus” has paid every year, labeling it discretionary can keep it out of the severance formula.

Typical language to watch for

• “Severance is calculated on base salary only and excludes bonus, commission, equity, and allowances.”
• “Bonuses are at the company’s sole discretion and do not form part of wages for any purpose, including severance.”

Why this matters

If 25–40% of your annual pay comes from bonuses or commissions, a base-only formula slashes your severance. Sales, trading, and startup roles are especially exposed.

What to negotiate instead

• Swap in “total cash compensation averaged over the last 12 months.”
• Add a clause that pro-rates current-year bonus if termination is without cause.
• Define “bonus” as non-discretionary if tied to measurable targets.

Hidden Clause #2: Set-Off & Mitigation Traps

Set-off lets an employer deduct amounts you receive from new work, side gigs, or unemployment benefits during the severance period. Mitigation requires you to find new work promptly—otherwise payments may pause or end. Together, they turn severance into a moving target.

What it looks like

• “Payments are subject to set-off for any income earned from subsequent employment during the severance period.”
• “Employee shall mitigate damages by using reasonable efforts to secure comparable employment.”

How you lose money

If you land freelance projects or a new job quickly (good news!), set-off can reduce or even zero out the remaining severance. In salary continuation plans, each new paycheck can shrink the next severance check.

Better language to request

• “Severance is a fixed lump sum, not subject to set-off or mitigation.”
• “Income from consulting, part-time, or self-employment does not reduce severance.”
• “Unemployment benefits shall not be deducted from severance.”

Hidden Clause #3: Conduct-Based Clawbacks

Clawbacks reclaim paid severance if you allegedly breach confidentiality, non-disparagement, non-compete, or return-of-property obligations. The risk is that “breach” can be vaguely defined and enforcement is one-sided.

Common triggers

• Posting critical comments online (broad non-disparagement)
• Talking about pay or terms to coworkers (if not carved out for legally protected activity)
• Taking a role that’s arguably “competitive” due to an expansive definition

How to defang a clawback

• Add a cure period: you’re notified of an alleged breach and given 10–15 days to fix it.
• Limit clawback to material, willful breaches determined by a neutral arbiter.
• Carve out protected rights (whistleblowing, reporting unlawful conduct, discussing wages as allowed by law).

Where these clauses hide in your paperwork

• Offer letter & compensation addenda: definitions of pay, bonus, commission.
• Employee handbook: policies incorporated “by reference.”
• Severance plan: separate document with formula and exclusions.
• Separation agreement: the final terms you sign at exit—often the most important.

Plain-English red flags (copy this list)

The simple math: small words, big cuts

Scenario: $120,000 base + $30,000 bonus average. Severance = 8 weeks per year × 4 years = 32 weeks.
Base-only: 32/52 × $120,000 = $73,846.
Total cash: 32/52 × $150,000 = $92,308.
Difference: $18,462 lost to two words: “base only.”

How to negotiate before you sign

Targets to improve

• Change “base salary” to “total cash compensation (12-month average)”.
• Ask for lump-sum severance not subject to set-off or mitigation.
• Define “cause” narrowly and add a cure period for minor issues.
• Limit clawbacks to material, intentional breaches decided by a neutral.
• Include a pro-rated bonus for without-cause termination.

Use outside leverage

If you have another offer or a track record of measurable results, say so. Negotiations are easier when you show how your performance directly ties to revenue or savings.

What to do after termination (without losing leverage)

1. Pause and read: Don’t sign the separation agreement on the spot.
2. Collect facts: Offer letter, plan docs, emails promising bonus/OTE, policy PDFs.
3. Compare versions: What you signed vs. what’s in the final agreement.
4. Ask for edits: It’s normal to redline definitions, set-off, clawbacks.
5. Time your income: If set-off remains, consider lump sum or start date timing.

Copy-and-paste lines you can use

On base vs. total compensation

“To reflect how my pay is structured, please calculate severance using total cash compensation averaged over the last 12 months, including commissions/bonuses tied to targets.”

On set-off/mitigation

“Please confirm severance will be a fixed lump sum, not reduced by future income or unemployment benefits. If that’s not possible, let’s remove set-off for consulting income.”

On clawbacks

“Let’s add a 10-day cure period and limit clawbacks to material, willful breaches as determined by a mutually agreed neutral.”

10-point checklist before you sign

• Is severance based on total cash or base only?
• Is the bonus pro-rated for without-cause termination?
• Is there any set-off for new income?
• Does the plan mention mitigation duties?
• Are clawbacks limited to material, intentional breaches?
• Do you have a cure period for alleged breaches?
• Is the severance paid as a lump sum?
• Is “cause” narrowly defined with examples?
• Are handbooks/policies incorporated “by reference” with change-at-will language?
• Are equity and benefits addressed (vesting, COBRA stipend, PTO payout)?

Common mistakes that cost thousands

• Signing a separation agreement the same day it’s presented.
• Assuming “bonus” always means payable—discretionary often means “excluded.”
• Ignoring set-off in salary continuation plans.
• Overlooking broad non-disparagement that chills normal networking.
• Not asking for a neutral reference clause when leverage is highest.

Mini case studies (names & details simplified)

Sales Director: recovered $20k with a definition fix

Her contract said “base only.” By showing that 35% of her pay was quota-tied and non-discretionary, she negotiated severance on total cash average—adding roughly $20k.

Engineer: turned set-off into lump sum

Continuation plan would have zeroed out once he took a new job. He proposed a lump sum at a modest discount; employer agreed to avoid admin hassle.

Manager: defused a clawback

Broad non-disparagement threatened severance if she posted about her layoff. Counsel added a cure period and carved out legally protected speech.

Conclusion: Small edits, big protection

Severance isn’t just a number—it’s a definition, a set of conditions, and a few booby traps. If you remember nothing else, remember this: expand what counts (total cash), lock in what’s paid (lump sum, no set-off), and limit why it’s taken back (narrow clawbacks with a cure period). Those three moves turn a fragile promise into real money when it matters most.