California Severance Pay Agreements
|Prepared By: Melissa C. Marsh, Los Angeles Employment Attorney
Written: October 2008
What is Severance Pay?
Severance pay, also called separation pay, termination pay and continuation pay, is money (and benefits) provided by the employer to an employee who is laid off, fired, or resigns. Absent a specific contractual obligation, an employment policy or practice, or a triggering event under the Warn Act, California employers are NOT required to provide severance pay. Many employers, however, offer a severance pay package in exchange for the employee's agreement not to sue (release of claims against the employer).
What Does A Severance Pay Agreement Typically Require?
For a severance pay agreement to be valid there must be a bargained for exchange. Both the employer and the employee must give each other a benefit not required under the law. The employee, for example, may agree to: (1) release claims against the employer; (2) continue working for a period of time; or (3) provide a certain amount of notice before quitting in exchange for a severance pay benefit. The employer, may agree: (1) to pay a "lump sum" payment, or an additional 1 week's wage for each year the employee worked for the employer; and/or (2) to provide certain benefits such as a letter of recommendation, an educational course(s), a continuation of health benefits for a specified period of time, use of the company's office to look for a new job, etc..
A Release of Claims will be unenforceable if the employer fails to provide the employee with a benefit to which the employee was not otherwise entitled upon termination. In California, employees who are discharged must be paid all wages due at the time of termination, including unused vacation pay. (California Labor Code §§ 201 and §227.3). Consequently, a severance agreement providing for the payment of accrued wages (even if in dispute) will not constitute sufficient consideration for the employee's release of claims. Similarly, if the employer has a written severance pay policy in an employment handbook that provides say one week of severance for each year of service, the severance payment offered to the employee in exchange for a release of claims must exceed that which the employee would have received under the severance pay policy (unless the written policy expressly conditioned the receipt of severance upon the employee executing a written release).
How Much and What Type of Benefits Should An Employee Expect in a Severance Pay Package?
The amount of the severance pay is typically based on the employee's length of service, but may also be based on other factors such as the company's financial state. The amount of severance pay offered by an employer is typically non-negotiable, but an employee may be able to successfully negotiate for other non-monetary benefits such as: a favorable letter of reference, the retention of certain company property (e.g. cell phone or computer), continued medical benefits for a specified time, an educational course(s), etc... Both the employer and employee should also be mindful of how the severance pay is to be paid. Severance paid in a "lump sum" manner typically won't restrict the employee's right to unemployment benefits, but severance paid over time as if the employee is still on payroll, may delay the employee's ability to collect unemployment.
What Types of Releases Will The Employer Expect In Exchange?
Typically, the employer will seek to have the employee release all non-waiveable state and federal claims the employee has, or may have, whether known or unknown, against the employer (including but not limited to claims of discrimination, harassment, wrongful termination, breach of contract, privacy violations, defamation, and intentional infliction of emotional distress). An employee's waiver of a federal claim of age discrimination, however, is NOT valid, unless: 1) the release specifically mentions the Age Discrimination in Employment Act, 2) the release is written in clear understandable language; 3) the employee is advised to see an attorney before signing the agreement, 4) the employee is given a full 21 days to consider the release (45 days in some cases), and 5) the employee is given a 7 day “cooling off” period during which the employee can change his or her mind after signing the release.
An employee may also be forced to waive “unknown” claims against the employer, which will be valid as long as the employer has properly inserted the language required under California Civil Code 1542 into the release.
What Claims Can't Be Released?
A California employer cannot ask an employee to waive claims pertaining to: (1) minimum wage; (2) overtime; (3) unemployment insurance benefits; or (4) Workers' Compensation benefits. A severance agreement containing a general release of claims including any of the above is not enforceable.
Additional Standard Provisions Contained In A Severance Pay Agreement.
- Classification. How the employer classifies a departing employee's severance (as a layoff, termination, resignation or reorganization) can make a big difference in the employee's ability to obtain unemployment benefits, and in some cases future employment.
- Taxes. It is possible to allocate, some or all of a severance payment to non taxable claims. If taxes can be eliminated, both the employer and the employee win. The agreement should set forth how the employer will allocate the severance payment(s), and whether or not a W 2 or 1099 form will be submitted.
- Date of Termination. The employee’s last day of work must be clearly specified. The employee may be asked to leave work immediately, to stay on for a period of time, to remain available if needed, to provide consulting services, as a condition to receiving severance pay.
- Confidentiality Clause. Most severance pay agreements contain a confidentiality clause, whereby the employee agrees to preserve the confidentiality of trade secrets and not to take away documents or lists belonging to the employer.
- Non-Disparagement Clause. Many employers will request, and have included, in a severance pay agreement a clause requiring the departing employee not to disparage the Company, its products, or management.
- Non-Competition Clause. Inclusion of a non competition clause can invalidate a severance pay agreement. Employers should avoid insertion of such a clause.
- Statement of Non-Coercion. Most severance pay agreements advise the employee to seek the advice of an attorney prior to signing the agreement and further contain a statement that the employee is knowingly and voluntarily entering into the severance pay agreement and the release of claims.
- Miscellaneous Clauses. Other provisions commonly set forth in a severance pay agreement include: (1) a No Rehire Provision may be inserted if the employer never wants the employee to reapply for a position; (2) a Return of Company Property may be inserted if the company provided keys, a cell phone, a computer or a car; (3) a No Admission of Liability Clause is typically inserted; and an (4) Entire Agreement Clause is typically inserted so the employee cannot later claim to have been promised rights or benefits not included within the agreement.
Employers would be wise to consult with an attorney before presenting a Severance Pay Agreement to ensure the agreement is valid and enforceable. Similarly, employees would be wise to consult an attorney if presented with a severance pay agreement to ensure they are getting what they deserve. If the soon to be former employee does have a valid wrongful termination claim, but prematurely accepts a severance package, the employee could be making a big mistake.
If you would like the assistance of a Los Angeles, California employment law attorney to assist you with either preparing a severance pay package, or reviewing a severance pay agreement, please call 818-849-5206, or if you would like Melissa Marsh to thoroughly review your severance pay agreement, explain its terms, and propose modifications Send Ms. Marsh an Email and attach a copy of your severance pay agreement. Be sure to include your full name and telephone number so Ms. Marsh can call you back with an accurate price quote (which is often less than $350).
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California employment lawyer, Melissa C. Marsh, is based in Sherman Oaks and West Hollywood, and serves individuals and businesses throughout Los Angeles County, including: West Hollywood, Miracle Mile, Beverly Hills, Century City, Santa Monica, Burbank, North Hollywood, Valley Village, Toluca Lake, Studio City, Sherman Oaks, Van Nuys, Encino, and Woodland Hills.
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