Severance Pay in California Explained

30 Aug 2018

Picture this, your supervisor walks into your office notifying you that the company will be parting ways with your services beginning next week. An anxious feeling sinks into the pit of your stomach as you begin to think about gathering your belongings and updating your resume. Sometime later that day the company’s human resources department drops off a stack of papers labeled “severance package.” A string of thoughts start running through your head: what is severance pay in California? Is this a good or bad thing? What’s the catch? Keeping reading because you are about to learn answers about all these questions in this free article.

What is a Severance Package?

In simple terms a severance agreement is an enforceable contract that an employer provides to an employee upon termination whereby the employer provides the parting employee money in exchange for the employee releasing/waiving his or her right to sue the employer. Often severance agreements can include waivers of other rights, or may have confidentiality provisions to ensure the employee keeps his or her mouth shut.

These agreements are often provided subsequent to conflicts arising in the workplace. Employers may sense a dicey situation and seek to defuse it to prevent potential fallout. Other times they may be provided in an employment contract from the outset as an incentive to lure high profile executives and other in demand workers. The intent often depends on each unique circumstance and the facts leading to the termination.

Is Severance Mandatory?

Generally speaking, employers in California are not required to provide layoff or severance pay to their employees. In fact, no state or federal law actually requires employers to pay severance to employees when they are discharged (the Division of Labor Standards Enforcement is authorized to accept severance pay claims pursuant to Labor Code 96(h)). However, if layoff or severance pay is set forth in the employer’s handbook or a layoff notice, it would constitute a promise that must be honored. (See Blau v. Del Monte Corp. (9th Cir. 1984) 748 F.2d 1348, 1352–56). Similarly, if severance pay was negotiated and agreed upon by the parties as part of the employment contract, or otherwise, the employer would be obligated to provide it at the time of termination.

Severance packages may be more prevalent than you would think. A recent study by Lee Hecht Harrison and Compensation Resources Inc, a human resources consultancy firm, surveyed three hundred and fifty senior human resources leaders at major U.S. companies. The findings of the study were astonishing: ninety-seven percent of the respondent companies offered some sort of severance benefit. Fifty-five percent of those same companies had formal policies, with the majority communicating the terms through emails or bulletins, and only twenty-one percent including them in employee handbooks. Further fifty-nine percent of the companies said that existence of severance or terms were not included in formal employment contracts.

Could I Be Waiving My Rights?

So here is the deal: there is no such thing as a free lunch. Most employers typically offer severance agreements in exchange for a full and final general release being signed by an employee. In fact, in the study referenced above, nearly ninety-two percent of the responding companies that had been surveyed required a release from employees in exchange for severance. Further, sixty-two percent cited involuntary termination as the basis for the circumstance in which they actually paid severance to their employees. Although it is not always the case, it is common for employers to require an employee to sign off and release their right to bring a lawsuit against the employer, or various other rights, in exchange for the benefit of severance.

Therefore, there may be an underlying strategic reason for why severance is being provided to begin with. For example, the employer and employee may have had a dispute over wages, and the employer may have decided to provide severance to get closure on the dispute and ensure that no further litigation would arise in the future. Employers cannot, however, condition payment of wages that they have admitted to owe on the employee signing a release. (Lab C §§206, 206.5). If a bona fide dispute exists over the alleged wages, a valid release can cover the claims. (Chindarah v Pick Up Stix, Inc. (2009) 171 CA4th 796). Similarly, federal wage claims pursuant to the Fair Labor Standards Act require that releases be supervised and approved by the Department of Labor or a court. (29 USC §216(c)).

Tip: if your employer provides you with a severance package and requests that you sign a release it is imperative that you have a labor lawyer review the document before signing it. You may be releasing away important claims with values much greater than what is being offered.

Can I Get Penalties If I’m Denied Severance?

First and foremost, it is important to note that in California Severance pay constitutes “wages” for purposes of the Labor Code. (Triad Data Services, Inc. v. Jackson (1984) 153 CA3d Supp. 1, 7, 200 CR 418, 421). California Labor Code 203 requires an employer to pay all wages earned by an employee on his or her final day if they are discharged or within 72 hours if they voluntarily resigned without providing 72 hours prior notice. The code section provides penalties in the form of one day’s wages for every day the employer is late in paying the final check. Therefore, if an employer fails to provide unconditional severance pay pursuant to an employment agreement, they may be required to pay waiting time penalties for failing to pay all wages immediately upon discharge or within 72 hours of a voluntary resignation. These penalties can quickly add up to a substantial sum of money, especially if a particular worker has a very high salary or high hourly rate. You can learn all about waiting time penalties here.

Extra Protections for Employees Over 40

You probably didn’t know this but employees over the age of forty are protected by the Older Workers Benefit Protection Act which requires that enforceable settlements of age discrimination claims follow specific statutory standards. As mentioned above employers often require that employees release rights to bring certain claims in exchange for receiving severance. The whole purpose of this act is to safeguard those over the age of forty by making sure that waivers related to age discrimination claims are knowing and voluntary (age discrimination claims are very concerning to employers). (29 USC § 626(f)(1)). The act mandates the following:

  • An employee who has not filed a lawsuit must be given twenty-one (21) days to consider the release, and an additional seven (7) days to revoke after it has been signed. If a lawsuit has been filed then the protections are lessened, no fixed time period for review and consideration of the release, only that the time period be “reasonable. In additionally if a lawsuit has been filed the is no revocation period required;
  • The release must be in writing, understandable to the average person, must be supported by new consideration, and must refer to specific rights under the Age Discrimination in Employment Act of 1967) (“ADEA”).
  • The written release should encourage the employee to seek legal assistance in reviewing the settlement that is being proposed.

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