Severance pay is a significant issue in California employment law. For both employers and employees, understanding when severance is required, how it works, and the legal risks involved is critical. While many people assume severance pay is a standard entitlement, California law does not require employers to provide severance in most situations.
Former prosecutor and mediator, and now a leading Southern California trial attorney, Paul P. Cheng, recently discussed key legal considerations surrounding severance pay in California to help employers remain compliant and employees protect their rights.
What Is Severance Pay?
Severance pay is compensation an employer may offer to an employee who is terminated or laid off, typically as a lump-sum payment. Its purpose is to help ease the employee’s financial transition while seeking new employment. In addition to cash, severance packages may include continued health insurance coverage, outplacement services, or other benefits.
California’s Legal Position on Severance Pay
In most cases, California law does not require employers to provide severance pay. However, employers may be obligated to do so under certain circumstances, including:
- Employment contracts or company policies
If an employment agreement, offer letter, or written company policy (such as an employee handbook) promises severance pay, that promise may be legally enforceable.
- Statutory requirements
Under laws such as the California Worker Adjustment and Retraining Notification Act (Cal-WARN Act), employers may be required to provide severance or similar compensation in cases involving mass layoffs or plant closures.
- Settlement of legal claims
Severance pay is often offered as part of a settlement to resolve potential employment disputes, such as wrongful termination claims.
Attorney Cheng notes:
“Many employees mistakenly believe severance pay is a guaranteed legal right. In reality, it usually arises from contractual agreements or as a way to manage legal risk. Carefully reviewing employment documents and severance agreements is the first step in protecting your interests.”
Key Factors That Influence Severance Pay Amounts
There is no universal formula for calculating severance pay. The amount typically depends on several factors, including:
Length of service
A common approach is one week or one month of pay for each year of employment.
Position and compensation level
Executives and senior employees often negotiate more favorable severance packages.
Company policy and financial condition
Larger organizations or those with formal severance policies are more likely to offer standardized packages.
Reason for separation
Employees laid off due to restructuring or downsizing are more likely to receive severance than those terminated for misconduct.
Negotiation and leverage
Employees may have room to negotiate severance terms, especially if potential legal claims exist.
Severance Agreements and Waivers of Legal Rights
When employers offer severance pay, they typically require employees to sign a severance agreement that includes a release of claims, meaning the employee agrees not to sue the employer.
1) Legal Requirements for a Valid Waiver
California law imposes strict requirements to ensure fairness. A valid waiver generally must:
- Provide adequate consideration, meaning the employee receives something of value beyond what the employer already owes.
- Give the employee a reasonable review period (commonly at least five business days under California law, and longer in some situations).
- Encourage or allow the employee to consult with an attorney.
- Be written in clear, understandable language, especially regarding the rights being waived.
2) Common Legal Pitfalls
Employees should be especially cautious of agreements that:
- Attempt to waive future or unknown claims, which are often unenforceable.
- Violate public policy, such as waivers of claims involving discrimination, harassment, retaliation, or unpaid wages.
- Are signed under pressure, coercion, or misrepresentation, which may render the agreement invalid.
Attorney Cheng emphasizes:
“Before signing a severance agreement, it is essential to understand exactly what rights you are giving up. What looks like a generous severance payment may come at the cost of permanently waiving serious legal claims, such as discrimination or retaliation. We strongly recommend having an experienced employment attorney review any severance agreement before you sign.”
Special Situations Involving Severance Pay
Constructive discharge
If an employer creates intolerable working conditions that force an employee to resign, the law may treat the resignation as a termination, potentially entitling the employee to severance-type compensation.
Wrongful termination
If an employee is terminated for unlawful reasons, such as discrimination or retaliation, legal claims may include not only lost wages or severance, but also emotional distress damages, punitive damages, and attorneys’ fees.
How to Protect Your Severance Rights
To safeguard your interests, consider the following steps:
- Review all employment documents, including contracts, offer letters, and employee handbooks.
- Communicate in writing with your employer whenever possible to preserve a clear record.
- Gather and retain evidence, such as pay stubs, performance reviews, emails, and company policies.
- Consult an employment attorney early, before signing any severance agreement or accepting an offer.
Navigating Severance Pay in California
Severance pay in California is a complex and often negotiable area of employment law. Whether an employer is seeking to structure a lawful severance package or an employee is facing termination and wants to ensure fair treatment, experienced legal guidance is essential.
PPRCLaw: Your California Employment Law Advocate
If you are facing wrongful termination, denial of severance pay, workplace discrimination, harassment, or retaliation, you do not have to navigate the process alone. PPRCLaw’s employment law team has extensive experience handling California labor and employment disputes for both employees and employers.
We are committed to providing client-focused representation, clear legal strategy, and vigorous advocacy. If you have questions about severance pay or any employment law issue, contact us today for professional legal guidance.