Severance Agreements in California Explained
In the context of California employment law, a severance agreement is essentially a contract between an employer and an employee designed to offer the employee additional compensation or benefits in exchange for the employee’s voluntary resignation or termination. In order to ensure the enforceability of the terms of a severance agreement, such an agreement typically is effective when signed by both the employee and the employer. The terms will then be considered implied into any contractual relationship between that employer and employee . By entering into a severance agreement, a departing employee is often relinquishing his or her right to pursue legal claims against the employer. For example, through a severance agreement an employee may be giving up the right to sue an employer for wrongful termination. While the terms and conditions of severance agreements can vary dramatically from one employer to another, such agreements are generally intended to provide the benefit of additional compensation or benefits to an employee, while providing the employer with some degree of closure with regard to a particular employment relationship.
Essential Terms for a California Severance Agreement
A properly constructed agreement should reflect the unique circumstances and the particular employee’s job position, sometimes called "role." It should also document the reasons for the termination, any company policies or agreements the employee had accepted, and it should enumerate the provisions of severance that the employer will providing. In the currently volatile business climate, employers are forced to downsize, consolidate, merge with other businesses, or relocate frequently. As a result, it is essential to have a basic form for a severance agreement that is compliant with California law. A comprehensive list of the key provisions includes:
Payment Terms – Payment can be made as a lump sum or in scheduled payments. Employers should agree on how much the employee is entitled to and should make those payments immediately in a lump sum, or over a period of time.
Benefits Continuation – Benefits may include the employer covering the premium costs of the employee’s health insurances, or providing insurance through Cobra. Employers can give employees a lump sum to enable the employees to make their own insurance arrangements.
Confidentiality – If confidential information was ever known by the employee, the employer must contract with the employee. That contract should stipulate that the employee will not divulge the confidential material.
Non-Compete Clauses – Sometimes prohibitions against competing with the company are part of severance agreements. Under California law, Non-Compete clauses and covenants not to compete are prohibited. Thus, if the agreement includes a non-compete clause, one should immediately consult a qualified employment attorney to assure that it does not violate California law.
Prerequisites and Considerations
Severance agreements are not necessarily language-heavy; however, California courts require special consideration for particular provisions. Most importantly, California Civil Code section 1542 provides that a general release by one party does not extend to claims that the other party does not currently know or suspect to exist. The problem arises because unless the general waiver in the agreement is drafted so that it reflects the requirements of the statute, parties using the standard paperwork can inadvertently have their waivers undercut. California courts have held that specific waiver language is required to override the effects of Civil Code section 1542. Thus, using the standard language may not safely preclude unknown claims.
California Civil Code section 1542 states:
"A general release does not extend to claims which the creditor does not know or suspect to exist in his or her favor at the time of executing the release and that if the creditor had known of such claims, he or she would have settled with the debtor on different terms than those embodied in the release."
To avoid this pitfall, the following language must be included:
"To the fullest extent permitted by law, I hereby waive any and all rights I may have under Cal. Civ. Code § 1542 to the following effect: a general release does not extend to claims that the releasing party does not know or suspect to exist in his favor at the time of executing the release, and that if known by him, would have materially affected his settlement with the other party."
Inasmuch as the language does not have the same flexibility, caution exercising business judgment is advised to avoid tortious interference with prospective economic advantage, defamation, and other potentially problematic provisions.
Consider whether to include an arbitration clause. Arbitration has the potential to be the panacea for both plaintiffs’ attorneys and employers. For the employer, the employer avoids costly jury trials, and it gets private proceedings (with a private resolution). For the plaintiff, he or she can avoid the lengthy appeal process faced in the superior courts, and the employment arbitration system merits discussion in terms of meaningful remedies (ban on the civil jury trial and appellate review), and the practicalities and convenience for both parties to get through the litigation system.
Complete information is essential. Thus, the employee must receive timely, accurate, complete, and easily understood information before the agreement is entered into. The Employer must be prepared to provide documentation supporting the offer to the outgoing employee, and the executive needs to understand the issues at stake.
The California courts have consistently held that a claim under Cal. Labor Code § 206.5, for payment of wages and benefits due upon termination, is non-waivable. If the employer fails to pay in full all wages due at the time of separation, including relevant employee benefits such as unused vacation pay, the employee may bring a statutory claim to enforce payment, in addition to an action for general breach of contract. As to the amount of penalties for a violation of Cal. Labor Code § 206.5, the penalties in Labor Code § 226.7 apply.
The right to engage in protected concerted activity is non-waivable. Section 7 of the National Labor Relations Act grants employees the right to engage in concerted activity for the purpose of "mutual aid or protection."
Negotiating the Severance Package
Severance agreements are not one-size-fits-all. After a reviewer has hammered out their proposed severance agreement for its basic terms – including the buyout amount, the duration of any continued benefits and considerations pertinent to the company – it is time to tailor the package to the employee.
What are the specific needs of the employee? What are did they always do at the company that they feel the company should acknowledge in the severance agreement? Are there unique lessons learned from the employee that the company feels should be specifically addressed? This is the time to ask the employee to sit down with the reviewer and consider what changes can be made to add unique value to the buyer.
A starting point for negotiations is to ask the employee for a number. Some employees will be too embarrassed and you won’t get one. But if you even get a ballpark figure, you can work backwards from there. What are their minimum needs? For instance, say the employee responds that they need $60k to make it through the next three months, but they have $70k in savings. You may want to go in at your target number of $40k, then settle at slightly below their target of $60k. However, say that employee responds that they have no savings, and are living check-to-check. In that scenario you probably will be at or above their target. You can also use their "number" as leverage when you want to demonstrate a reduction in a potential severance amount.
There are two basic ways to personalize the severance package: Provide what would essentially be an acceptable "package without a package." In other words, without anything unique or special. This is a take-it-or-leave-it offer that might be acceptable to the employee so long as he has sufficient time to review (and ideally have counsel review) his rights and obligations under the package.
The second way to personalize the package is to offer the employee a package that includes special terms, conditions or items that contain so-called "perks." That could mean giving them a job reference, giving the employee a company car or laptop, continuing health benefits or increased base pay.
The third way to personalize the package is to offer the employee the assurance that they will be part of a clean slate going forward. That means proper agreement as to non-competition, non-solicitation and non-disparagement going forward. Very few people want to feel they need to look over their shoulders at all times to see if someone from the company is following them around, or looking for that solicitation on LinkedIn that violates the non-solicitation terms.
Negotiations in labor law are unavoidably an important and growing factor in today’s corporate environment. Proper, humane and well-prepared severance agreements will often avoid not only costly litigation but also minimize your lost productivity costs when an employee is stressing about his last days and how they affect his future.
Common Pitfalls to Avoid
Employers need to avoid common mistakes when drafting a severance agreement template because the risk of litigation dramatically increases otherwise. One mistake employers commonly make is not appropriately including a general release of claims. The waiver should be as broad as possible to cover all potential legal claims against the employer, including unknown claims. It is very common in California for an employee with a potential discrimination or wrongful termination claim to allege an entirely new discrimination claim after receiving separation documents. The employer should be in position to enforce the general release against the second claim – and even more importantly it should line up with the non-disclosure and other provisions in the severance agreement.
California courts require that employee waivers be made knowingly, intelligently, and voluntarily. Courts will look at circumstances such as the employee’s age, education, and experience, an opportunity to consult with an attorney , release of claims being in plain language, and the presence of undue pressure such as a deadline or economic pressure. A waiver that includes a separation or severance package may be considered inadequate.
Essentially, the labor code in California requires that any agreement releasing a claim arising under California law must give the employee a maximum amount of time to consider the terms. The employer should provide the employee at least 21 days to review a severance agreement and 7 days to revoke acceptance of the agreement. The waiver should also clarify that the employee is accepting the release in exchange for the consideration specified in the contract. Employers should always err on the side of caution by giving an employee maxim potential time to review and consider the separation agreement. Adding language in the waiver such as "you do not need to waive any rights to receive the consideration due to you" demonstrates that the waiver was not coerced and was agreed to voluntarily.
Templates and Legal Guidance
In general, severance agreement templates can be found online that were created with the intention of being legally compliant with applicable laws. However, as no two severance agreements will ever be quite the same, it is important to consider consulting legal counsel to ensure that a particular severance agreement template contains all of the necessary elements to be enforceable if the employee with whom the employer is working accepts the severance offer— and to protect the company from future lawsuits.
Case Studies and Practical Application
To provide perspective on how severance agreements play out in the real world of California employment, let’s explore a few case studies from a variety of industries.
The Tech Company Severance
A rapidly growing tech giant implemented the use of severance agreements upon termination of employment. The standard agreement was handed to all departing employees, regardless of their level or years of service. The company had even gone so far as to cut and paste the severance agreement into its exit interview documents that were distributed to employees, and made no substantive changes to any of the templates to fit the circumstances of the individual separation. This generic template did not address what was fair and reasonable for the outgoing employee or the company. The resulting agreements left the company open to liability under the California Labor Code, as well as other statutory and common law claims. These problems might have been avoided had the company required a tailored agreement for each employee who received a severance package.
The Staffing Agency
In this case, the agency provided its temporary employees with a comprehensive termination package that included a severance agreement . However, the agreement was skewed in favor of the agency, requiring the temporary employee to release all claims without giving anything in return. The experience of the temporary worker was not considered; the company failed to treat this person like an employee. The lesson here is that the agreement should focus on the reality of the outgoing employee’s position; after all, they are the most important party in the severance agreement.
The Public Sector Separation
In another example, a large public agency was sued for breach of contract when it revoked an offer to a management candidate months after the candidate accepted the job, began calling future employers for reference checks, and resigned from their prior position. A minor staffing official at the agency acted on its own on behalf of that organization, and was later reprimanded when her employer determined that the official had misunderstood the manager candidate. The lesson here is to ensure that you always have the authority to enter into a contract with the departing employee, and that the person offering the contract has proper authority to offer it for the company.
