Severance pay is compensation an employer pays its employees upon getting laid off. California employment laws do not require severance pay. Companies that offer severance pay typically give only to long-term employees.
Severance pay is usually included within a severance package. This term refers to the pay and benefits that an employee may be entitled to upon termination from work. Some of these benefits may include pay for untaken vacation time, unemployment benefits, payments for stock options, and health insurance coverage.
Like a severance package, a severance agreement provides a terminated employee with a severance payment. But unlike a severance package, the agreement says the employee will give up certain rights in exchange for a severance payment. Examples of rights employees may give up in a California severance agreement include their right to:
- sue the employer for wrongful termination or harassment,
- sue the employer for employment discrimination, including discrimination on the basis of age, race, gender, religion, or sexual orientation,
- sue the employer due to its failure to promote them, and
- discuss the terms of the agreement with any third party.
But note that there are certain rights that a worker cannot waive in these agreements, such as the right to:
- bring a wage/hour lawsuit against the employer,
- report certain crimes that the employer may have committed (such as engaging in business disparagement), and
- seek further employment.
As with California law, there is no federal law that mandates employers to provide workers with severance payments or packages.
Below, our California labor and employment lawyers discuss:
- 1. What is severance pay?
- 2. What is a severance package?
- 3. How does an employer calculate severance pay?
- 4. What is a severance agreement?
- 5. Are there federal laws on severance payments or severance agreements?
1. What is severance pay?
Severance pay refers to a payment made by an employer to a former employee. The payment is made when the employer terminates – or severs – the worker’s employment.
A severance payment is meant to compensate a worker for immediate losses suffered from losing a job. The pay is typically reserved for employees that have worked at a business for a long period of time.
The pay is in addition to a worker’s regular pay, and the specific amount of a severance payment will vary (see Section 3 below). Note that the pay is usually given in one lump sum.
Examples that may trigger this payment include:
- a long-time employee getting laid off due to downsizing or corporate restructuring (such as because of the coronavirus and the global pandemic).
- a business has to lay off employees after it is forced to close permanently.
- an employee is let go after a company declares bankruptcy.
Not all companies offer severance pay, and California’s employment laws do not impose a legal requirement for companies to offer severance pay.
An employee handbook or an employee’s employment contract usually discusses whether the employer offers this pay. Some pre-employment contracts mention severance pay. And sometimes unions require it.
An employer’s human resources department will also be able to provide information on severance pay for a terminated employee.
2. What is a severance package?
A severance package is severance pay plus other severance benefits. A severance package may address and discuss the following:
- the specific amount of severance pay the employer will provide to the employee,
- the stock options available to the employee (if applicable),
- whether the employer will continue to provide health insurance (terminated workers often rely on COBRA for the costs of health care),
- when the employer will make the severance payment (typically on the employee’s last day of work),
- if the employer will offer any type of outplacement assistance (which helps the worker transition into a new job),
- whether or not the terminated employee can file an unemployment insurance claim (which – if approved – provides for unemployment compensation), and
- how much the employee may get paid for any untaken vacation time.
This is just a sampling of unemployment benefits that a severance package may address. A specific employer may include others as well.
Note that severance packages and severance agreements (discussed below) are – legally speaking – contracts between the employer and the employee. As such, any legal issues that arise are resolved using California contract law.
3. How does an employer calculate severance pay?
There is no one universal way that employers calculate a worker’s severance pay. This means calculation methods will vary across all employers.
A few common methods, though, do exist.
For example, some employers may simply decide on an amount that they believe is fair under the circumstances.
Others will provide compensation in an amount that was set forth in an employment agreement. Still others may calculate the amount of payment by multiplying the amount of an employer’s week’s pay by the number of years he/she worked for. Some packages offer two weeks of pay or even one month of pay for each year employed, plus health insurance and pro-rated bonuses.
4. What is a severance agreement?
Like a severance package, a severance agreement is a contract between an employer and one of its employees.
Unlike a severance package, however, the agreement specifies that:
- the employer will pay a worker a lump sum of money (like a severance payment), and
- in return, the employee will give up a certain right.1
Some examples of a right a worker may give up include the right to:
- sue the employer for defamation, wrongful termination or harassment,
- sue the employer for employment discrimination, including age discrimination and discrimination on the basis of race, gender, religion, or sexual orientation (however, employers may be barred from prohibiting people age 40 and older from agreeing not to sue for age discrimination unless they have 45 days to think about it at 7 days to revoke it),2
- sue the employer due to its failure to promote the worker,
- discuss the company’s trade secrets,
- speak negatively about the employer (non-disparagement provision)
- talk about the events causing the employee’s termination, and
- talk to any third parties about the matter of agreement reached (“confidentiality agreement” or “non-disclosure agreement” or “NDA”).
Courts will typically uphold a severance agreement as a legally binding contract if the parties voluntarily entered the agreement.3 This is true even if the terms seem unfair, which they usually are since the employer composes these contracts.
Therefore, employees are always encouraged to have their own employment attorney review a severance agreement before signing. Maybe it is not in the employee’s best interest to sign the agreement, especially if the employee has a legitimate legal claim against the employer, or if the agreement requires the employee to admit fault. It may be possible to negotiate the severance agreement to make the conditions less restrictive and the terms more favorable for the employee.
Note that there are certain rights that a worker cannot legally waive when entering into these agreements.
Some examples include the right to:
- bring a wage/hour lawsuit against the employer (such as for overtime- or unemployment benefits),4
- get paid owed wages prior to signing a severance agreement,5
- report certain crimes that the employer may have committed (e.g., engaging in business disparagement), and
- seek further employment (no non-compete clauses).6
Severance agreements also cannot demand employees commit a crime on behalf of the employer (such as lying under oath in testimony about the company).7 Employers cannot use fraud, duress (threats), or undue influence (coercion) to get employees to sign.8
Finally, the terms of the contract may not be unconscionable. Procedural unconscionability refers to the unfairness of making the contract, such as uneven bargaining power. Substantive unconscionability refers to terms that are too one-sided to be enforceable by law or that go against public policy.9
5. Are there federal laws on severance payments or severance agreements?
The Fair Labor Standards Act (FLSA) is the federal statute that sets forth many of the federal employment laws in the United States. These laws are enforced by the U.S. Department of Labor (DOL).
The FLSA, however, does not say anything different than California law when it comes to severance payments.
The statute does not mandate employers to provide severance payments and packages.
And just like California law, the statute restricts certain rights that an employee may waive when entering into a severance agreement.
For additional help…
For additional guidance or to discuss your case with a labor and employment lawyer, we invite you to contact our employment attorneys at Shouse Law Group. We create attorney-client relationships in Los Angeles and throughout the state.
- See, for example, Perez v. Uline, Inc. (2007) 157 Cal. App. 4th 953. See also Gov. Code § 12940. See also Murphy v. Kenneth Cole Productions, Inc. (2007) 40 Cal.4th 1094. See also Skrbina v. Fleming Cos. (1996) 45 Cal.App.4th 1353. See also Labor Code sections 201, 202 and 2699. See also U.S.C. § 216(b). See also Smith v. Occidental & Oriental S.S. Co. (1893) 99 Cal. 462.
- 29 U.S.C. § 626(f)(1).
- California Civil Codes 1541 CC, 1542 CC and 1688 CC. See also Shaw v. City of Sacramento (9th Cir. 2001) 250 F.3d 1289. See also Sanchez v. County of San Bernardino (2009) 176 Cal.App.4th 516.
- Singh v. Southland Stone, U.S.A., Inc. (2010) 186 Cal.App.4th 338. Labor Code 203.
- Labor Code 206.
- California Business and Professions Code 16600 BC; see also Robinson & Wilson, Inc. v. Stone (1973) 35 Cal.App.3d 396.
- California Civil Code 1668.
- Civ. Code, § 1570 & 1569. See also Perez v. Uline (2007) 157 Cal.App.4th 953; Walter E. Heller Western, Inc. v. Tecrim Corp. (1987) 196 Cal.App.3d 149; Lazar v. Superior Court (1996) 12 Cal.4th 631; Lewis v. Fahn (1952) 113 Cal.App.2d 95; Holt v. Thomas (1894) 105 Cal. 273; Chan v. Lund (2010) 188 Cal.App.4th 1159; Odorizzi v. Bloomfield Sch. Dist. (1966) 246 Cal.App.2d 123; Keithley v. Civil Service Bd. (1970) 11 Cal.App.3d 443; McDougall v. Roberts (1919) 43 Cal.App. 553.
- Civ. Code, § 1670.5. See also A & M Produce Co. v. FMC Corp. (1982) 135 Cal.App.3d 473; Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal.4th 83; Gutierrez v. Autowest, Inc. (2003) 114 Cal.App.4th 77; Morris v. Redwood Empire Bancorp (2005) 128 Cal.App.4th 1305; Town of Newton v. Rumery (1987) 480 U.S. 386.