California law does not require employers to provide severance pay or severance packages upon termination of a worker. However, many companies elect to provide severance benefits either
- as a courtesy to long-term employees,
- in exchange for a severance agreement, and/or
- as a way of minimizing their exposure to potential claims and lawsuits.
Severance pay is usually included in a standard severance package. This term refers to the pay and benefits that you 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 you with a severance payment upon termination. Unlike a severance package, the severance agreement says you will give up certain rights and relieve the employer of certain liabilities in exchange for a severance payment.
Examples of rights you may give up in a California severance agreement include your 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 you, and
- discuss the terms of the agreement with any third party.
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 you with severance payments or packages.
Here at Shouse Law Group, we have seen countless severance agreements with illegal clauses aimed at stripping our clients of their rights and earned wages. In our experience, we can usually achieve favorable financial resolutions for our clients through aggressive negotiation and without having to resort to trial.
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 – your employment.
A severance payment is meant to compensate you for immediate losses suffered from losing your 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 your regular pay, and the specific amount of a severance payment will vary. The money is usually given in a lump sum payment.
Examples that may trigger this payment include:
- you getting laid off due to downsizing or corporate restructuring (such as because of the coronavirus and the global pandemic) despite you having worked at the company for a long time.
- a business has to lay you off after it is forced to close permanently.
- you are let go after a company declares bankruptcy.
Note that severance pay is not available for furloughs, which unlike layoffs are temporary. Learn about the difference between layoffs and furloughs in California.
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. Sometimes unions require it.
An employer’s human resources department will also be able to provide information on severance pay to you.
1.2. Can I collect unemployment if you get severance pay in California?
Yes. You can collect unemployment if you get a severance package upon termination. Getting severance does not disqualify you from unemployment benefits.
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 you,
- the stock options available to you (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 your last day of work),
- if the employer will offer any type of outplacement assistance (which helps you transition into a new job),
- whether or not you can file an unemployment insurance claim (which – if approved – provides for unemployment compensation), and
- how much you 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 you. As such, any legal issues that arise we can try to resolve using California contract law.
3. How is severance pay calculated in California?
There is no one universal way that employers calculate your severance pay. This means calculation methods will vary across all employers. In our experience, though, we see a few common methods again and again.
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 your 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 you.
Unlike a severance package, however, the agreement specifies that:
- the employer will pay you a lump sum of money (like a severance payment), and
- in return, you will give up a certain right (“general release of claims”).1
Some examples of a right you 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 you,
- discuss the company’s trade secrets,
- speak negatively about the employer (non-disparagement provision)
- talk about the events causing your termination, and
- talk to any third parties about the matter of agreement reached (“confidentiality agreement” or “non-disclosure agreement” or “NDA”).
From our experience, courts will typically uphold a severance agreement as a legally binding contract if you 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, you are always encouraged to have your own employment attorney review a severance agreement before signing. We may find that it is not in your best interest to sign the agreement, especially
- if you have a legitimate legal claim against the employer, or
- if the agreement requires you to admit fault.
It may be possible for us to negotiate the severance agreement to make
- the conditions less restrictive and
- the terms more favorable for you.
Note that there are certain rights that you 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 (for example, engaging in business disparagement), and
- seek future employment (no non-compete clauses).6
Severance agreements also cannot demand you to commit a crime on behalf of the employer (such as lying under oath in testimony about the company).7 Employers cannot use
- duress (threats), or
- undue influence (coercion) to get you 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 I collect unemployment if you receive severance pay in California?
Yes. Severance pay recognizes past work. Therefore, receiving severance pay does not prevent you 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.
Just like California law, the statute restricts certain rights that you 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)
From what we have seen in our experience, employers typically include severance on your W-2 form and withhold the taxes.10
- 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 Code 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 (Supreme Court, 1987) 480 U.S. 386.
- IRS Topics 751 and 759. IRS Employer Tax Guide.