Severance pay is an additional payment made to a terminated or laid off employee; usually in the event of a company downsizing, declaring bankruptcy, or closing. These payments are generally made to long term employees as a way to help compensate for the sudden loss of income. The actual amount of the payment varies depending on the details of the situation and is generally given all at once as a lump sum payment. The federal government and the state of California do not currently have any laws requiring employers to provide severance pay, and not every employer does.
Is Severance Pay Required by Law?
The only times an employer must pay a severance is when they have a pre-existing contract with the employee that says they will, or if there is a union involved that has negotiated for it. Outside of such circumstances, there is no state employment law that regulates it. Severance pay is a matter of contract law in California.
What is a Severance Package vs a Severance Agreement?
When an employee is laid off from a job, they may receive additional payment and benefits beyond their final paycheck. This is known as a severance package. It may include stocks or the next few paychecks the employee would have earned. Legally, employers are not required to provide severance packages. However, many do in order to get their now former employee to sign a severance agreement, which is a contract binding the employee to certain terms in exchange for the payment and benefits.
Because employees are not entitled to severance pay, employers can refuse to provide that payment unless the employee agrees to their terms. Severance agreements are drafted to have the employee sign away some of their rights in exchange for the severance pay. Most agreements involve:
- A guarantee not to sue the former employer for discrimination, harassment, or wrongful termination.
- An agreement not to discuss the details of their termination, the terms of the agreement, or information about the company.
There are also some things that an employer is not permitted to have an employee sign away such as their right to sue for wage violations, reporting crimes committed by the company, and seeking further employment.
In many cases, an employee can negotiate the terms of their severance agreement before signing. Depending on how much the employer is concerned about the risk of a lawsuit or bad press, they may be more willing to negotiate. Departing employees may be able to secure insurance coverage, more money, and even help finding a new job.
What to Look for in a Severance Agreement
A severance agreement is a binding contract. After it is signed, there is no going back. This is why it is important to carefully read the entire agreement and be certain that you completely understand all of the terms and conditions. Always remember that contracts such as severance agreements are drafted to benefit the person who drafted them, and you should be mindful of preserving your own best interests. Negotiating severance package terms is recommended with the help of a qualified severance package lawyer.
What Does the Employer Gain in a Severance Agreement?
Severance payments may seem enticing, but there are occasions where they are not worth what the employee is actually exchanging. Sometimes, an employer offers a sum of money in exchange for the employee agreeing not to sue because the employer knows that the employee could reasonably be awarded much more money in a lawsuit. There are many circumstances where an employee may want to seek guidance from an attorney before signing the agreement such as:
- If the employee feels that they were wrongfully terminated
- If the employee was subjected to harassment, discrimination, or retaliation
- If the agreement includes non-compete and/or non-disclosure clauses or any other limitations to the employee’s future job options
- If the employee is being asked to take blame or admit fault, particularly in situations where the employee was not actually at fault
- If the employee was witness to the company violating labor laws or other infractions
What Severance Package Benefits Does the Employee Receive?
In exchange for agreeing to the employer’s terms, the employee may be offered or can negotiate for many different benefits such as:
- The value of future salary payments for an agreed amount of limited time
- Continuation of insurance benefits including COBRA premiums
- Not contesting the employee’s eligibility for unemployment benefits
- Providing the employee with help finding new employment
- Providing the employee with positive references for future employment
- Ownership of company property such as a phone, computer, or car
- Additional perks and benefits related to the job such as prorated bonuses
How is Severance Pay Calculated?
Because there are no legal standards for severance pay, there is no universal method for calculating how much an employer might offer. Some employers may determine how much is fair for an individual employee on a case-by-case basis. Some may have a set amount offered in the initial employment agreement. Some may offer a certain number of paychecks based on the length of employment such as one week for each year worked. Others may offer a set value in addition to any unused paid time off.
Planning for Your Severance Package
It is good practice to have a plan for the unfortunate possibility of losing your job. A trying and difficult time can be made easier by adequate preparation. The time to start planning is when searching for a new job in the first place. Asking questions about a potential employer’s severance policies is a good way to make an informed decision going in, and it is important to keep informed on any updates to those policies. Throughout the course of your employment, keep copies of positive performance reviews and records of your value as an employee. This can give you an advantage if you need to negotiate a severance package.
Oftentimes, larger companies will have official severance policies mapped out and available for employee reference. If your employer is one such company, the policy will likely be printed in the employee handbook, or available on request. These policies generally explain:
- Purpose – The severance agreement may specify why the company has chosen to offer it. They may also provide information on additional resources to help the employee transition to a new job.
- Terms and Conditions – The actions the employee must take in order to receive payment, and actions the employee must agree not to take in order to receive payment.
- Eligibility – Since there is no legal requirement for employers to offer severance packages, companies can pick and chose the qualifications needed to receive one. A company might offer severance only to salaried employees, administrative staff, or full time workers.
- Legal Releases – Forms and documents the employee will need to sign in order to receive payment.
- Possible Modifications – Many companies will reserve the right to modify or eliminate their severance policy for any reason.
- Calculations – Since there are no legal guidelines for severance packages, the amount of money and type of benefits offered are up to the discretion of the employer. The agreement may lay out how they came to those decisions such as multiplying paychecks or utilizing unused paid time off.
- Payments – The agreement may specify how the money will be received, such as a lump sum or regular payments. This is important to know as it can impact unemployment eligibility and taxes.
Steps to Take Once Laid Off
When an employee is terminated, it is advisable to document what is said during the meeting or conversation and to ask for time to review the severance agreement before signing. Many companies will offer one to three weeks for an employee to look over the documents. It may be a good idea to have a severance pay attorney go over the agreement with you to be sure that it is fair and that you are not signing away a valid right to a lawsuit. It can also be helpful to research how long it would reasonably take for you to find new employment so that you can be sure the amount offered is enough to cover that timeframe.
Negotiating Severance Package
Most companies will allow their employees to negotiate the terms and benefits of their severance agreement. This may be something that the employee can handle on their own, or they may seek the help of an attorney. Regardless of whether or not you negotiate the agreement, it is a good idea to take as much time as possible to review it and understand exactly what you’re agreeing to. There are many aspects of a severance agreement that may be up for negotiation such as:
Amount of Pay – The monetary severance pay offered by the employer. This is usually calculated by multiplying the value of one paycheck by the number of years the employee worked. Employees may negotiate to increase that to one month’s pay for each year worked. Depending on the amount of money being offered, it is also important to understand how the payments may impact unemployment eligibility and taxes.
Departure Announcement – It is recommended that the employee requests to write their own announcement of departure and any recommendation letters. This way you can control the narrative and paint yourself in the best light.
Insurance – Unless you have a spouse or parent who can take you onto their insurance, you’ll want to extend your benefits as long as possible. COBRA is the Consolidated Omnibus Budget Reconciliation Act which gives an employee the right to extend their insurance coverage for a year and a half after the end of their employment. The downside to this is that the employee becomes responsible for the entire premium. When negotiating a severance package, it might be a good idea to ask for the employer to continue paying some if not all of their share of the premium for a length of time.
Liability Release – Almost all employers who offer severance packages will include an agreement for the employee to waive any right to sue the employer. This is an important part to have a lawyer take a look at to be sure that your best interests are protected.
Non-Disclosure – Companies may ask the employee to keep the details of their termination and the severance agreement completely confidential. This can be negotiated to make certain exceptions.
Non-Disparagement – It is common for employers to have their soon to be former employee agree not to say anything negative about them going forward. Employees can also ask that this clause go both ways.
Outplacement Services – Employers often offer outplacement assistance and employees may negotiate the offer or even ask for the financial value of the services in order to hire someone else.
Pensions and Stocks – There are laws regarding retirement plans, pensions, and stock options that vary from state to state. It is important to review those laws before entering severance negotiations.
Perks and Property – If your employment involved the use of a company phone, computer, car, or other personal equipment, you might be able to negotiate transferring ownership to you. There may also be things like parking passes, gym memberships, and discounts that you might be able to extend your use of.
Important Severance Package Considerations
There are several things to remember about severance agreements before entering into one. Be sure to understand all of the following elements to ensure that a severance agreement is written in the employee’s best interest.
Do You Understand the Severance Agreement?
Some companies might overuse complex language to make it difficult for employees to fully understand what they are agreeing to. Never sign a contract you don’t understand. If needed, you can hire an employment lawyer to go over the agreement with you and explain everything.
If a severance agreement contains a mitigation offset clause, the employee will be forced to pay back the severance amount if they obtain new employment within a certain time period. When negotiating your agreement, you should be on the lookout for these clauses and ask that they be removed.
In the state of California, it is not legal for an employer to have an employee sign a non-compete agreement. Some employers still try and even if signed, the agreement is not enforceable. When reviewing and negotiating a severance agreement in California, it is best to just have this part removed if it is included.
Common Rights Waived
There are many rights that an employee has once that employment has been terminated. It is often in the employer’s best interest to have the employee waive those rights. This often includes:
- The right to sue for discrimination, harassment, defamation, or wrongful termination
- The right to discuss the reasons for termination or the terms of the severance agreement
- The right to divulge company trade secrets
- The right to speak poorly about the employer
- The right to sue for any other civil matters
There are many things that an employer may be tempted to include in a severance agreement that are not enforceable. This may include:
- Waiving the right to sue for wage and hour violations
- Waiving the right to report illegal activity committed by the employer
- Waiving the right to seek future employment
- Refusing to pay earned wages until the agreement is signed
- Requiring the employee to do anything illegal
- Prohibiting an employee from working with a competitor
An employer is only permitted to have an employee waive their right to sue for age discrimination if an employee is 40 or older and they give the employee at least 45 days to sign and another 7 days to revoke that signature.
When Can a Severance Package Void?
An employee’s severance agreement can be nullified under certain circumstances:
If an employee is manipulated into signing a severance agreement by an employer’s fraudulent actions, that agreement is unenforceable. Fraud refers to actions such as making promises they will not fulfill, concealing important information, or lying about important information.
If an employee is forced to sign a severance agreement under duress, that agreement is unenforceable. An employee is under duress when their employer threatens them in order to get them to sign. These threats generally need to be illegal in nature in order to qualify as duress.
If an employee is coerced into signing a severance agreement by an employer imposing undue influence on them, that agreement is unenforceable. Undue influence is defined as excessive pressure applied on an employee that exploits their weaknesses.
If the terms of a severance agreement are considered unconscionable, then not only are those terms unenforceable, but the entire agreement may be declared unenforceable as well. There are two types of unconscionability: procedural and substantive.
Procedural unconscionability – When one side of the agreement has significantly more bargaining power than the other, or if the situation was unfair.
Substantive unconscionability – When the terms of the agreement are too harsh or one sided.
How Can an Employment Lawyer Help
Employees are under no legal obligation to sign an offered severance agreement. It is a contract like any other and the employee has the right to have an attorney go over it with them. Some employers may take advantage of an employee’s fraught emotional state at the time of termination and convince them to sign an agreement they don’t understand. Speaking with an employment lawyer can help you identify unfavorable terms, clear up complicated language, and determine if it would be more favorable to exercise the rights you are being asked to sign away.
There are many factors that may indicate that you should consult with an attorney:
- If the language of the agreement is complex or vague
- If the employer is trying to pressure you to sign it right away
- If the employer is unwilling to negotiate the terms
- If the employer is aware of your financial situation
- If the agreement is one sided or unbalanced
- If you believe your employer is being dishonest
- If your employer tells you not to speak with an attorney
Contact Mesriani Law Group to Help Negotiate a Severance Package
The unexpected termination of a job can be a stressful and emotional time and you may not be in the best state of mind to be making legal decisions. A severance agreement is a contract, and it is important to be sure that the terms are in your best interest. An employment lawyer can help review the agreement and explain the terms as well as advise you on areas you may want to negotiate. If you have been terminated from your job and your employer is offering you a severance package and asking you to sign an agreement, call Mesriani Law Group today.
Severance Pay FAQ
How is severance pay determined?
There is no set legal standard for calculating the amount of severance pay an individual employee may receive. This is up to the discretion of the employer and whatever they decide to offer. That said, most employers will take the value of the employee’s weekly or biweekly paycheck and multiply that by the number of years the employee worked for the company. Severance pay can often include the value of unused paid time off as well.
Why do you get severance pay?
The optimistic perspective of severance pay is that when an employee is terminated through no fault of their own, the employer may wish to make the transition easier and give them a cushion to fall back on while they seek new employment. A more cynical perspective may suggest that the point is to entice employees into signing away their rights to sue, discuss their termination, or speak ill of the company.
Who qualifies for severance?
Both federal and California employment law do not require employers to offer severance pay to any employees. The qualifying factors for who receives severance is up to the individual employers. Some companies may not offer it at all. Others may only offer it to salaried employees, full time employees, or just upper management. Some companies may include details about severance in their employment contracts and handbooks.
What is the difference between severance pay and separation pay?
Severance pay and separation pay are actually the same thing. Both terms refer to the amount of money an employer may offer when terminating an employee. Severance pay may be part of a severance package that includes other benefits and perks as well. In order to receive all of this, the employee may be asked to sign a severance agreement that holds them to certain terms and conditions.