Severance Pay in California – What You Need to Know

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 of employment. Some of these benefits may include

• pay for untaken vacation time,
• unemployment insurance benefits,
• payments for stock options, and
• health insurance coverage.

Like a severance package, a severance agreement (sometimes called a separation agreement) provides a terminated employee with a severance payment. But unlike a severance package, the severance agreement says the employee will give up certain rights and relieve the employer of certain liabilities 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 cannot be subject to a waiver in these agreements, such as the right to:

• bring a wage/hour lawsuit against the former employer,
• report certain crimes that the employer may have committed (such as engaging in business disparagement), and
• seek further employment.

As with California state law, there is no federal law that mandates employers to provide workers with severance payments or packages.

Below, our California labor and employment lawyers answer the following faqs:

• 1. What is severance pay?
• 2. What is a reasonable severance package?
• 3. How is severance pay calculated in California?
• 4. What is a severance agreement?
• 5. Can you collect unemployment if you receive severance pay in California?
• 6. Are there federal laws on severance payments or severance agreements?
• 7. How is severance pay taxed?

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. The money is usually given in a one lump sum payment.

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.

1.1. Is severance pay mandatory in California?

Not all California employers 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.

1.2. Can you collect unemployment if you get severance pay in California?

Yes. Terminated employees can collect unemployment if they get a severance package.

2. What is a reasonable 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 is severance pay calculated in California?

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 of employment. 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 (“general release of claims”).¹

Some examples of a right a worker may give up include the right to:

1. sue the employer for defamation, wrongful termination or harassment,
2. 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
3. sue the employer due to its failure to promote the worker,
4. discuss the company’s trade secrets,
5. speak negatively about the employer (non-disparagement provision)
6. talk about the events causing the employee’s termination, and
7. 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.

Have Legal Counsel Review The Agreement

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 future 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 

For more discussion, read our article on when not to sign a severance agreement.

5. Can you collect unemployment if you receive severance pay in California?

Yes. Severance pay recognizes past work. Therefore, receiving severance pay does not prevent employees from pursuing unemployment benefits.

6. 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.

7. How is severance pay taxed?

Similar to regular wages, severance pay runs through payroll, is subject to payroll deductions and is taxed as regular income. Specifically, severance pay is subject to the following taxes in the year it was paid:

• Social Security tax,
• Medicare tax,
• Federal income tax,
• State income withholding tax, and
• Federal unemployment tax (FUTA)

Employers typically include severance on the ex-employee’s W-2 form and withhold the taxes.¹⁰

For additional help…

For additional guidance or to discuss your case with a labor and employment lawyer, we invite you to contact our employment law attorneys at Shouse Law Group. We create attorney-client relationships in Los Angeles and throughout the state.

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