California employers may choose to provide severance pay to laid-off workers even though the law does not require it. Many severance packages also include a separation agreement where you agree to give up certain rights – such as suing for wrongful termination – in exchange for taking the pay.
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.
In this article, our Los Angeles labor and employment attorneys explain everything you need to know about California severance pay laws.
- 1. How Severance Pay Works
- 2. How much do I get?
- 3. What rights do I lose?
- 4. What rights do I keep?
- 5. Unemployment Benefits
- 6. Federal Law
- 7. Taxes
- Additional Resources
1. How Severance Pay Works
Severance pay is a way for your former employer to cushion the blow of terminating you. It is in addition to your regular pay, and it is usually given as a lump sum.
Neither California law nor federal law requires employers to provide severance pay after terminating you. However, many companies elect to provide severance benefits in exchange for a severance agreement, where you agree not to sue the employer on certain grounds. (This is discussed in more detail in Section 3.)
Your employee handbook or employment contract typically explains the terms of your severance agreement, if there is one, or you can ask the human resources department. Some unions require severance pay.
Note that severance pay is not available for furloughs, which unlike layoffs are temporary. Learn about the difference between layoffs and furloughs in California.
Severance pay refers to compensation that an employer makes to you upon your layoff.
2. How much do I get?
Every employer has their own way of determining how much severance pay to give you. In our experience, we see a few common methods again and again in California.
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 your employment agreement.
Some companies calculate your severance payment by multiplying the amount of your week’s pay by the number of years of employment. Among the most generous severance packages we have seen included:
- two weeks of pay or even one month of pay for each year employed,
- pro-rated bonuses,
- stock options,
- outplacement assistance (which helps you transition into a new job), and
- continued health insurance (though most terminated workers instantly switch to COBRA).
Typically, you get your severance pay on your last day of work along with your final paycheck.
3. What rights do I lose?
By signing a severance agreement with your employer in California, you accept certain benefits like a severance payment upon termination. In exchange, however, you give up certain rights, called a “general release of claims.”1
Each severance agreement is different, though common examples of rights you waive by signing one include:
- suing the employer for defamation, wrongful termination or harassment,
- suing the employer due to its failure to promote you,
- discussing the company’s trade secrets,
- speaking negatively about the employer (called a “non-disparagement provision”),
- talking about the events causing your termination,
- talking to any third parties about your severance agreement (called a “confidentiality agreement,” “non-disclosure agreement,” or “NDA”), and
- suing the employer for employment discrimination based on your protected characteristics (though if you are 40 or older, employers may not prohibit you from suing for age discrimination unless you have 45 days to think about the severance agreement and 7 days to revoke it).2
From our experience, courts will typically uphold a severance agreement as a legally binding contract if you voluntarily entered into the agreement.3 This is true even if the terms seem unfair, which they usually are since the employer composes these contracts.
Get Advice from a Lawyer
Before you sign a severance agreement, you are strongly advised to have your own California labor law attorney review it for you. An attorney can:
- explain to you what exactly the employer wants you to waive in return for severance pay;
- make sure you understand all the language and that the terms are not overly broad or restrictive;
- evaluate whether the severance pay offer seems fair based on your years of service, position, and the company’s finances; and
- negotiate with your employer for more favorable terms and less restrictive conditions.
Do not feel pressured to sign any contract right away – taking time to review and negotiate can lead to a better outcome.
For more discussion, read our article on when not to sign a severance agreement.
4. What rights do I keep?
In California, there are certain rights that you cannot waive in severance agreements. These include your right to:
- bring a wage/hour lawsuit against the employer, such as for overtime– or unemployment benefits,4
- report certain crimes that the employer may have committed, such as engaging in business disparagement,
- get paid owed wages prior to signing a severance agreement,5 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 Furthermore, employers cannot use
- fraud,
- 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
- go against public policy.9
A severance agreement is a contract between an employer and you.
5. Unemployment Benefits
Receiving severance pay does not prevent you from pursuing unemployment benefits in California. Severance pay recognizes past work; it is not meant to make up for future lost wages.
6. Federal Law
The Fair Labor Standards Act (FLSA), which is enforced by the U.S. Department of Labor (DOL), largely aligns with California law when it comes to severance payments.
Like California law, the FLSA does not require employers to provide severance pay. It also restricts certain rights that you may waive when entering into a severance agreement.
7. Taxes
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 California, employers typically include severance on your W-2 form and withhold the taxes.10
Additional Resources
For more information, refer to the following:
- Severance Pay – Short description by the U.S. Department of Labor.
- Severance Pay: What It Is and Why You Should Negotiate a Package Before Accepting a Job – Article by the Wall Street Journal.
- What to know about severance pay, insurance and benefits if you’re laid off from your job – Guide by CNBC.
- Severance pay laws by state 2023 – Overview by Workforce.com.
- Severance and Taxes: Is Severance Taxable? – Discussion by H&R Block.
Legal References:
- 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 BPC; see also Robinson & Wilson, Inc. v. Stone (1973) 35 Cal.App.3d 396.
- California Civil Code 1668. See also Castelo v. Xceed Financial Credit Union (Cal.App. 2023) .
- 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.