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Severance Packages: Why Employers Need to Consider Them

Both employers and employees can benefit from severance pay or severance packages in California.

During the course of business, employers inevitably have to let employees go. In some cases, business just isn’t going well; in other cases, there may be a problem with a specific employee.

Whatever the case, employment sometimes must be terminated and employers need to consider how they should go about doing that. The most important question faced by any California employer is whether they should offer the employee a severance pay or a severance package.

A severance package is a payment by an employer to an employee at the time of the employee’s termination. It is usually given in exchange for a written promise from the employee that they will not file a lawsuit against the employer.1 This written promise is usually called a severance agreement.2

Most employees do not have a legal right to receive a severance package when their employment is terminated. But because severance agreements can help reduce an employer’s legal liability, many companies offer severance packages regardless of whether they are required to do so.

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Chapter 1

Why are severance packages a good idea?

Employer Offering a California Employee a Severance Agreement

Even if an employer hasn’t done anything wrong, severance pay can help them from a legal, social, and economic standpoint.

Legal Benefits

From a legal standpoint, severance pay is a routine way to prevent potentially litigious employees from suing down the road. It’s often impossible to tell what kind of grievances an employee might have and how legitimate those grievances might be.

For example, an employee might have been assigned too much work and they kept working off the clock without telling anyone. They might have been sexually harassed and not reported it. Or they might feel like the termination is based on a discriminatory motivation. In each of these situations, an employee might have a lawsuit and the employer wouldn’t even know about it. It is also possible that the employee might just dislike the employer and be willing to make up a story to bring a lawsuit.

So many, if not most, employers will err on the side of caution and provide terminated employees with a severance package.

Other Benefits

Beyond just the legal benefits, severance pay can help ensure a smooth transition. Employees that receive a severance package are less likely to be angry at their employer. Along with that, they’re less likely to badmouth their employer to clients, friends, customers, or other employees.

If other employees find out about the circumstances of the termination, they may feel more secure in their job if they know that severance pay was provided. Severance indicates to existing employees that their employer respects them, even after they leave. It also demonstrates that their employer values their commitment to the business. In that way, severance pay could serve to increase employee loyalty.

Finally, from a moral standpoint, severance pay can help alleviate any guilt an employer might feel because they’ll know that the employee will have money to survive while they find a new job.

Imagine for a moment that you’ve just been fired. You’re upset, of course, but what are your first thoughts? You might initially think about your family, your mortgage, or your bills. If you have no savings, you might even be worried about what you’re going to eat. If these fears are going through your head, your first reaction might be to blame your employer. But if your employer just offered you a nice severance package, it’s a lot harder to be angry at them. Also, you’re a lot less likely to feel helpless or angry if you have enough money to survive until you find a new job.

Overall, severance pay is just the right thing to do.

Chapter 2

Are there any risks in offering severance pay?

Employer Calculating Final Wages and Severance Pay

As with any business deal, there are risks. Offering a severance package could indicate to the employee that the employer is concerned about being sued. It could also remind an employee about potential lawsuits that they hadn’t planned on pursuing.

The most common risk is that an offer of severance pay incentivizes an employee to contact a lawyer to negotiate a higher severance package. The difficulty in measuring these risks, however, is that it’s impossible to tell whether the employee would have contacted a lawyer anyway.

The likelihood, however, is that an overly litigious employee will react the same way to being terminated no matter what. Other employees, on the other hand, might be dissuaded from pursuing legal remedies if they’re offered severance. So most people that carefully consider the issue of severance packages end up deciding in favor of offering severance.

Additionally, California’s evidence code prohibits an offer of severance from being used to prove liability.3 So, even if employers run the risk of reminding employees that they might have a potential lawsuit, the offer itself cannot be used against the employer.

Chapter 3

Are employers required to provide severance pay?

Required Payment in Final Wages in California

An employer is not required to provide severance pay. Even if it is in the employer’s best interest to do so, there is usually no legal requirement that they offer any sort of severance package.

The exception to this rule is where an employment contract or other agreement provides for severance or other types of benefits on termination, retirement, or discharge. In these kinds of situations, the employer may be contractually bound to pay severance at the time of termination. The kinds of packages, however, are often reserved for executive or other high-profile employees.

Chapter 4

How much severance pay should be provided?

Calculation of Severance Pay in California

The costs of severing employment.The answer to this question changes in every case. From a purely pragmatic standpoint, the employer should consider: how much is necessary to convince the employee to sign the severance agreement? Some employees may need the money more than others and may be willing to sign for less.

At the same time, the employer should consider how much is fair. If the employer is concerned about the employee saying bad things to clients or other employees, providing a fair severance offer could help ensure that the employee walks away from their job satisfied.

The employer should adopt some ascertainable standard for determining what kinds of severance packages to offer. For example, an employee may find out that a different employee was offered a severance substantially different from the one they are being offered. If the severance offers are not fair and relatively consistent (based on an ascertainable standard), the employee may reject their offer or even be offended by it. If the employer adopts a standard on which to base their severance offers, this problem can be avoided somewhat.

One standard that many employers adopt is based on how long the employee has been with the company. Employers using this kind of standard might offer two weeks of severance pay for every year the employee has been with the company. The employer may also keep the employee’s health insurance active during this time.

Chapter 5

Common Rights That May Be Waived

A closer look at severance agreement rights in California

Only claims for civil violations—not crimes—can be legitimately waived in a severance agreement.4 While it is possible that many legal rights can be waived, these are the most commonly seen in severance agreements:

  • The ability to sue for wrongful termination, harassment, or defamation.5
  • The ability to sue for unlawful discrimination on the basis of the employee’s gender, race, sex, age, religion, sexual orientation, etc.
  • The right to discuss the terms of the severance agreement or other matters with third parties (this is called a confidentiality provision).
  • The right to discuss the employer’s trade secrets.
  • The right to say negative things about the employer (this is called a non-disparagement provision).
  • The ability to openly talk about the situation leading up to the employee’s termination.6
  • The ability to sue for other known and unknown claims.7

Of course, there are many other potential issues an employer might ask for employees to waive.

Chapter 6

Are there any claims that cannot be waived?

Image Illustrating Limitations on Severance Agreements in California

Yes. There are several types of claims that cannot be waived in a severance agreement. The most common examples include the following:

  • A waiver of the employee’s right to pursue violations of California’s wage and hour laws—like their right to claim earned wages, unemployment insurance, minimum wage, or overtime pay.8
  • An employer may not require an employee to sign a severance agreement before paying owed wages.9 Employers must pay their workers any owed wages whether or not they agree to the severance agreement.
  • A waiver of the employee’s right to report crimes.
  • Any promise that would require the employee to break the law (like committing perjury if called to testify against the company in court).10
  • An agreement that unlawfully restricts an employee from working for the former employer’s competitors (often called a “non-compete clause”).11
  • Waivers so broad or vague that they would bar the employee from exercising their right to seek employment.12
  • If the employee is 40 years or older, the employer will sometimes be prohibited from requiring the employee to waive claims related to age discrimination unless the employee is given at least 45 days to consider the waiver (and at least 7 days to revoke it).13

In addition to these rules, an employer may not induce an employee to sign a severance agreement through fraud, duress, or undue influence.14 Nor may a severance agreement provide terms that are unconscionable. Each of these words have a specific legal meaning, which are explained below.

Fraud

Fraud can occur where the employer deceives the employee about an important fact, or where they make a promise they have no intention of keeping. It can also occur when the employer conceals an important fact, if the employer has a duty to disclose it.15

A severance agreement will often be unenforceable if it was signed as a result of the employer’s fraudulent misrepresentations.16

Duress

Duress occurs when an employer threatens an employee in some way that compels the employee to sign the severance agreement out of fear.17 The employer’s threat usually must be an unlawful one to meet the standard of duress.18

A severance agreement that is entered into under duress can sometimes be rescinded by the employee.19

Undue Influence

Undue influence is a legal phrase used to describe a type of coercive persuasion.20 It occurs where an employer exerts excessive pressure on an employee to sign a severance agreement, which exploits the employee’s mental, moral, or emotional weaknesses.21

An employee that has been induced to sign a severance agreement by undue influence can sometimes rescind the agreement.22

Unconscionability

The legal doctrine of unconscionability is somewhat complicated. In general, courts look at two aspects of a severance agreement to determine whether it is unconscionable:23

  • Procedural Unconscionability. If one party has significantly more bargaining strength, or the circumstances of the agreement were unfair to the employee, the severance agreement is more likely to be viewed as unconscionable.24
  • Substantive Unconscionability. If one or more promises in the contract are one-sided or harsh, a court might find them to be substantively unconscionable.25

When a contract is unconscionable, courts have the power to refuse to enforce all or part of it.26

Additional Concerns

Beyond these requirements, there may be other legal limitations. For example, there are special rules for severance agreements that cover claims of age discrimination.

Likewise, severance agreements may be unenforceable if they are shown to violate public policy.27

If you are unsure whether the waivers in your severance agreement are valid or legally-enforceable, discuss the terms of the agreement with an experienced California employment or contract lawyer.

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  1. See, e.g., Skrbina v. Fleming Cos. (1996) 45 Cal.App.4th 1353, 1366 [“In general, a written release extinguishes any obligation covered by the release’s terms, provided it has not been obtained by fraud, deception, misrepresentation, duress, or undue influence.”]; Hill v. Kaiser Aetna (1982) 130 Cal.App.3d 188 [discussing severance pay].

    Footnote 1
  2. Skrbina v. Fleming Cos. (1996) 45 Cal.App.4th 1353, 1358 [discussing a situation where an employee signed a written release agreement in exchange for $8,000 in severance benefits].

    Footnote 2
  3. Evid. Code, § 1152.

    Footnote 3
  4. Civ. Code, § 1668 [“All contracts which have for their object, directly or indirectly, to exempt anyone from responsibility for his own fraud, or willful injury to the person or property of another, or violation of law, whether willful or negligent, are against the policy of the law.”].

    Footnote 4
  5. See, e.g., Shaw v. City of Sacramento (9th Cir. 2001) 250 F.3d 1289 [even though the jury found the employer liable for employment discrimination, the employee was barred from recovery because he waived his right to sue for all discrimination claims].

    Footnote 5
  6. Sanchez v. County of San Bernardino (2009) 176 Cal.App.4th 516, 528 [“[I]t is possible to waive even First Amendment free speech rights by contract.”].

    Footnote 6
  7. Civ. Code, § 1542.

    Footnote 7
  8. Singh v. Southland Stone, U.S.A., Inc. (2010) 186 Cal.App.4th 338, 365 [“an employer is required to timely pay wages due under Labor Code section 201 or 202 unconditionally and cannot require an employee to sign a waiver as a condition of payment.]; see also Labor Code, § 203.

    Footnote 8
  9. Labor Code, § 206, subd. (a) [“In case of a dispute over wages, the employer shall pay, without condition and within the time set by this article, all wages, or parts thereof, conceded by him to be due, leaving to the employee all remedies he might otherwise be entitled to as to any balance claimed.”].

    Footnote 9
  10. Civ. Code, § 1668.

    Footnote 10
  11. Bus. & Prof. Code, § 16600 [“Except as provided in this chapter, every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.”].

    Footnote 11
  12. Robinson & Wilson, Inc. v. Stone (1973) 35 Cal.App.3d 396, 407 [a contract must contain discernible duties and limits].

    Footnote 12
  13. 29 U.S.C. § 626(f)(1).

    Footnote 13
  14. Perez v. Uline, Inc. (2007) 157 Cal.App.4th 953, 960.

    Footnote 14
  15. Civ. Code, § 1570; Walter E. Heller Western, Inc. v. Tecrim Corp. (1987) 196 Cal.App.3d 149, 160 [“Actual fraud occurs when a party to the contract intends to deceive another party to the contract or to induce another party to enter into the contract on the basis of a promise made without any intention of performing it or any other deceitful act.”].

    Footnote 15
  16. Lazar v. Superior Court (1996) 12 Cal.4th 631, 645 [“[I]t has long been the rule that where a contract is secured by fraudulent representations, the injured party may elect to affirm the contract and sue for the fraud.”].

    Footnote 16
  17. Civ. Code, § 1569; Lewis v. Fahn (1952) 113 Cal.App.2d 95, 98–99.

    Footnote 17
  18. Holt v. Thomas (1894) 105 Cal. 273, 276-277 [“It is not legal duress to threaten to or actually take advantage of the usual remedy for the enforcement of a debt or obligation.”].

    Footnote 18
  19. Chan v. Lund (2010) 188 Cal.App.4th 1159, 1174 [“A party whose consent to a contract has been obtained by economic duress may rescind the contract under certain circumstances.”].

    Footnote 19
  20. Odorizzi v. Bloomfield Sch. Dist. (1966) 246 Cal.App.2d 123, 130 [“Undue influence, in the sense we are concerned with here, is a shorthand legal phrase used to describe persuasion which tends to be coercive in nature, persuasion which overcomes the will without convincing the judgment.”].

    Footnote 20
  21. Keithley v. Civil Service Bd. (1970) 11 Cal.App.3d 443 [“In essence, undue influence consists of the use of excessive pressure by a dominant person over a servient person resulting in the apparent will of the servient person being in fact the will of the dominant person.”]; Odorizzi v. Bloomfield Sch. Dist. (1966) 246 Cal.App.2d 123, 130 [“The hallmark of such persuasion is high pressure, a pressure which works on mental, moral, or emotional weakness to such an extent that it approaches the boundaries of coercion. In this sense, undue influence has been called overpersuasion.”].

    Footnote 21
  22. McDougall v. Roberts (1919) 43 Cal.App. 553, 556 [“Prompt rescission and offer of restitution are essential to a recovery on the ground of undue influence.”].

    Footnote 22
  23. A & M Produce Co. v. FMC Corp. (1982) 135 Cal.App.3d 473, 486 [“[U]nconscionability has both a ‘procedural’ and a ‘substantive’ element.”].

    Footnote 23
  24. Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal.4th 83, 113; Gutierrez v. Autowest, Inc. (2003) 114 Cal.App.4th 77, 87 [“Where the parties to a contract have unequal bargaining power and the contract is not the result of real negotiation or meaningful choice, it is oppressive.”].

    Footnote 24
  25. Morris v. Redwood Empire Bancorp (2005) 128 Cal.App.4th 1305, 1322.

    Footnote 25
  26. Civ. Code, § 1670.5, subd. (a) [“If the court as a matter of law finds the contract or any clause of the contract to have been unconscionable at the time it was made the court may refuse to enforce the contract, or it may enforce the remainder of the contract without the unconscionable clause, or it may so limit the application of any unconscionable clause as to avoid any unconscionable result.”].

    Footnote 26
  27. Town of Newton v. Rumery (1987) 480 U.S. 386, 392.

    Footnote 27
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