What Is a Severance Agreement in California?
A severance agreement is an important contract that outlines the terms of an employee’s separation from employment. A proper, legally enforceable severance agreement protects the employer and may be beneficial for the employee if the separation is negotiated amicably and with legal guidance. A well-crafted severance agreement may significantly reduce the employer’s future liability and prevent claims brought by a disgruntled former employee (or employees). Severance agreements are utilized by employers to ensure the best outcome for both employer and employee when employment is terminated. For the employer, a severance agreement can prevent claims such as wrongful termination, discrimination or harassment. It can also prevent the likelihood of litigation involving wage-losses or damages for failure to comply with numerous employment protections in California. For an employee , a severance agreement can provide immediate financial support while the employee searches for future employment. A proper severance agreement can also protect an employee by ensuring that the employer will not disparage the employee after the separation. An important component of a severance agreement is that it is supported by a "cognizable consideration," or something in exchange for the separation. This ensures that the employer and employee are equally benefited by the severance agreement. It is important to note that severance agreements in California are not a requirement or an obligation of the employer. When providing a severance payment to an employee, the employer must also comply with the minimum hours and wage requirement set forth by the California Labor Code.
Key Elements of a California Severance Agreement Template
Severance agreements are common departure tools offered to California employees. Whether you are wind-down an employees position, offering them to a departing employee in exchange for their not competing, or just a simple agreement whereby the company is dividing up the details regarding final pay, severance, post-termination issues, etc., a properly constructed California separation / severance agreement template is a must.
A California separation/severance agreement should addressed as many of the items below as applicable and based on the facts and circumstances of each situation:
- Payment and other entitlements.
- Waiver of claims.
- Confidentiality.
- Non-disparagement.
- Cooperation.
- Confidential telephone number.
- Return of company property.
- Waiver of California Civil Code section 1542.
- Most and best efforts language.
- General release of claims.
- Full integration release/settlement agreement.
- Representation that employee has had opportunity to seek legal counsel and to have agreement reviewed by an attorney.
- No reliance representation.
- Representations of experience before signing agreement.
California Law Concerning the Contents of a Severance Agreement
Employers and employees must be aware of the legal requirements and restrictions specific to California when preparing a severance agreement. When a severance agreement contains a waiver of age discrimination, as with most releases given to terminated employees, the employer must comply with federal law by satisfying the requirements of the Older Workers Benefit Protection Act (OWBPA). In California, complying with the OWBPA is in addition to complying with California’s required disclosures under California Labor Code Section 2875.
If an agreement contains a waiver of age discrimination, Employers should follow the following procedures in addition to the requirements of California Labor Code Section 2875: The severance agreement must include: a clear waiver of all rights under the Age Discrimination in Employment Act of 1967, a provision allowing the employee at least 21 days to consider the severance agreement, a provision allowing the employee at least 7 days to revoke the release after signing it (the revocation period begins again if any changes are made to the agreement before execution), and if the employee is 40 years of age or older, the employee must be provided with a list showing: (1) the ages of all individuals eligible to participate in any employment program covered by the agreement; and (2) the ages of all individuals in that group who are not eligible to participate in any employment program covered by the agreement. Employers should remember that the age disclosure portion is not required if the only waiver being made is a release of unknown claims.
Benefits of a Severance Agreement Template
Using a California severance agreement template is an effective way to ensure that you have the necessary terms and conditions in your form agreement. A severance agreement template can provide clarity and add structure to the severance agreement process, and can also help to ensure that the agreement complies with California labor laws.
Particularly for companies that frequently provide severance packages to former employees, using a proven and universal severance agreement template can limit the time and cost associated with the drafting and review process by providing a rough draft out of which to work, and a series of terms and provisions that should be included in any separation agreement. Additionally, a severance agreement template can be used as a guide for determining what types of information a company will need to have from the former employee to finalize the severance agreement.
For both employers and employees, compliance with California’s labor laws is essential to protecting against future liability and providing the greatest possibility of resolution. A severance agreement template, especially one that is specific to the position being filled, helps both parties to ensure that they are meeting their obligations and protecting their interests under the terms of the contract.
How to Personalize a Severance Agreement Template
A severance agreement template can be a good starting point for most employers. The first thing an employer should do when downloading a generic employer severance agreement template is to remove the "sample" language and fill in the proper blanks for the company. The employer should review the generic template and remove any paragraphs that will not be applicable based on current California case law. For instance, if the employer does not provide a restricted work area the employer will want to remove that paragraph. Generally speaking, employers do not need to use an attorney to draft a severance agreement. Employers can easily use an employer severance agreement sample to draft and get a jump start on what they want to offer an employee. Another place an employer can find helpful information is from the California Department of Fair Employment and Housing. The DFEH provides in its regulations a standard release of all claims language that can be modified without worry. Further , the DFEH also sets forth some suggested language on how to eliminate the employer’s liability for future claims. Both of these pieces of language are recommended when terminating an employee and paying a severance package.
Employees can also use a generic severance agreement template found online as well. Generally speaking, employees can use the same generic employer severance agreement sample and either remove any language that would not be present in their case, add language that may be present and need to be addressed, or request that language be added. Like the employer, employees should review their severance agreement for any contradictions or incorrect typographical errors. Often times one will find a severance agreement that will actually provide a benefit that is greater than what the employer intended to provide, such as 10 weeks instead of 2 weeks of pay. The employee should immediately bring this to the attention of the employer and ask that it be corrected.
Common Errors in California Severance Agreements
Mistakes made by employers and employees with severance agreements are common and can make a difference between a legally enforceable agreement and one that ends up in court. Employment lawyers attempting to draft severance agreements should be mindful of the following:
Think twice about whether the acknowledgement language is necessary. Other than requiring an employee to acknowledge they were subject to all legally required meal and rest breaks, the use of this language is rarely required. Such language is usually of little additional benefit to the employer and takes away from having the severance agreement serve as an acknowledgement.
There are several key provisions in California that apply to severance agreements. First, under Labor Code section 206.5, an employer cannot condition payment of wages upon an employee providing an acknowledgement that they received all earned wages. An employer cannot be required to give up a right it has already earned. Second, a severance agreement must comply with California Civil Code section 1668. This section applies broadly and invalidates contracts that: 1) exempt a party from future liability; and, 2) exempt a party from future violation of law. This may be a reason why some employers avoid drafting severance agreements on their own. Third, California Civil Code section 1542 requires employees to initial and understand that they are waiving the right to sue for unknown claims. We have seen numerous severance agreements that promise not to sue for all claims, without the above acknowledgement. These agreements are not worth the paper they’re written on. Fourth, an employer should be mindful of an employee’s right to seek a wage claim with the Division of Labor Standards Enforcement, which prevents the employee from waiving their right to a hearing before the DLSE. See Labor Code section 2922.
California courts have held that an employee cannot simply "pick and choose" which parts of the severance agreement they want to enforce. This means that even if you think the employee breached the agreement, the employee might allege that the entire agreement was breached in some other way and therefore the employee owed nothing to the employer. The most frequent example of this occurs when the employee is entitled to receive payments over time. If the agreement allows for the employee to dispute an alleged breach, without requiring a repayment, the employee will attempt to allege the entire agreement was breached and withhold any payments to the employer. We have had employees refuse to return laptops and other items that they freely took from the company, despite the language in the severance agreement requiring them to return the items. These problems can be dealt with in the drafting of the severance agreement (ie, there should be no disputes) or in the immunity provision in the severance agreement, which should provide a set-off for any breach of the agreement.
Employees should not sign a severance agreement with blank spaces because they may be interpreted by judges as giving rights to the employer not included in the signed portion. We’ve seen employees make out an argument that the language on the form was the right to do X, Y and Z, even though the document is incomplete and only references X. Don’t leave blanks. Fill them in, initial them, or strike them out.
When drafting a severance agreement, you should focus on the key provisions that matter most to your client. Other provisions that either have little risk associated with them, or are so standard that there is little deviation, can be omitted. This allows you to place the client’s resources where they will be of the greatest benefit.
Consulting an Attorney Before Signing a California Severance Agreement
Employers and employees should consult with a legal professional whenever they are drafting or reviewing severance agreements to ensure that they comply with all legal requirements and that the parties’ rights are protected. Severance agreements should be in writing and executed by both parties and should always contain a list of terms and conditions. Employers need to be particularly wary of additional claims including non-disparagement, release of claims, and installment payments . Specifically, the employee waiving potential claims countable against pension benefits must seek independent legal advice, especially with regard to pension and retirement benefits.
In sum, while there is no strict formula for severance packages, California has general guidelines that both businesses and employees should follow. These guidelines should be incorporated into every severance agreement between an employer and employee, to make sure that both parties are fully protected and that the proper procedures were followed in drafting the agreement.