Severance Pay in California

Severance pay refers to compensation that an employer makes to an employee upon his or her termination from work (that is, upon getting laid off or terminated for cause). A severance payment is often limited to employees that have worked for an employer for a long period of time. The pay is not required under California’s employment laws.

Severance pay is usually included within a “severance package.” The 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. Unlike a severance package, though, the agreement says:

1. an employer will pay the worker a severance payment, and
2. in return, the employee will give up a certain right.

Some examples of a right that an employee may give up in a severance agreement include his/her 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 the worker, and
• discuss the terms of the agreement with any third party.

Note, though, that there are certain rights that a worker cannot waive in these agreements. Some examples include the right to:

• bring a wage/hour lawsuit against the employer,
• report certain crimes that the employer may have committed (e.g., 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.

Our California labor and employment lawyers will highlight the following in this article:

• 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?

Severance pay refers to compensation that an employer makes to an employee upon his or her termination from work.

1. What is severance pay?

Severance pay refers to a payment made by an employer to an 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 in light of downsizing or corporate restructuring (perhaps, for example, 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 them to do so.

An employee handbook or an employee’s employment contract will often inform as to whether an employer offers this pay.

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?

Severance pay is often given with other severance benefits. The pay plus all the specific employee benefits involved is referred to as a severance package.

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 employment),
• 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 not 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.

A severance agreement is a contract between an employer and one of its employees.

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:

1. sue the employer for wrongful termination or harassment,
2. sue the employer for employment discrimination, including age discrimination and discrimination on the basis of race, gender, religion, and sexual orientation,
3. sue the employer due to its failure to promote the worker,
4. discuss the company’s trade secrets,
5. talk about the events causing the employee’s termination, and
6. talk to any third parties about the matter of agreement reached.

Courts will typically uphold a severance agreement as a legally binding contract if the parties voluntarily entered the agreement.²

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,³
• report certain crimes that the employer may have committed (e.g., engaging in business disparagement), and
• seek further employment.⁴

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.

In addition, just like California law, the statute restricts certain rights that an employee may waive when entering into a severance agreement.

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