Terminations and Severance: Legal Considerations and Best Practices
By Managing Attorney - David Mallen
Whether you’re an employer or an employee in California, the issue of severance may come up around terminations. As an employee, you should know your rights in this regard. And as an employer, you want to be aware of California law so you don’t commit any workplace violations. Here are some common legal concerns that frequently surface with severance pay.
Understanding the Definition and Purpose of Severance and Severance Packages
Severance is extra money beyond wages or salary paid to an employee when they are laid off. It’s intended to help them maintain financial stability until they can find another job. It may be paid in a lump sum or paid at intervals similar to the employee’s paycheck.
Companies that value their employees give severance to thank them for their services. It also helps them keep a positive public-facing image in times of downsizing, mergers, or acquisitions.
Is severance always required? Not always. However, it may be mandatory according to the terms of an employment contract. Also, an employee’s union may have negotiated severance, or a board of directors could make severance part of a merger or acquisition contract.
Sometimes, employees get a severance package. This typically includes other things besides money, like pensions, continued health insurance, company stock options, or cashing out accrued PTO.
Severance and Unemployment Insurance in California
State laws vary regarding receiving severance and unemployment simultaneously. In California, employees are allowed to get unemployment through the Employment Development Department (EDD) at the same time they are receiving severance. So, employers should not try to prevent this in any way.
Why would an employee want to take unemployment and severance at the same time? In California, severance pay is not considered wages, so it is taxed at a higher rate. The worker may need both to make up for a loss in income, as well as the relatively low amount unemployment insurance pays compared to regular payroll.
Pro tip: if as a worker you intend to receive unemployment as soon as possible after a job termination, you should apply for it as quickly as possible. It can take several weeks for EDD to process your application, and sometimes they request extra documentation or ID verification.
Federal and State Laws Regarding Severance Agreements
To receive severance, a worker may be asked to sign a severance agreement. This is typically a contract stating that the employee won’t badmouth the company when they leave (aka a nondisparagement clause).
It may also lay out the terms of returning company property, like cars, laptops, cell phones, and the like. Employees may be asked to waive future claims against the company too.
There are laws regarding the signing of severance agreements:
• All workers have at least 5 days to review the agreement before signing.
• Workers over the age of 40 have up to 21 days to review a severance agreement.
• All employees are allowed to consult with an attorney about a severance agreement.
Senate Bill (SB) 331, signed by Governor Gavin Newsom in 2021, reinforced these laws for California workers.
Additionally, new federal legislation forbids employers from enforcing punitive non-compete clauses in severance agreements. These are clauses that keep workers from taking a job with a competitor after being terminated. This contributes to a healthier job market while also protecting workers.
Employers can require former employees not to talk about proprietary information or divulge trade secrets. It is also legal for them to request in a severance agreement that employees not speak about the terms of their severance publicly.
So, if you’re a worker who has received severance, keep it confidential, lest you violate the terms of your agreement. Violation could result in you having to pay back your severance (sometimes known as a clawback). If you discuss your severance publicly in a way that paints the employer in a bad light, you could also be taken to court and possibly made to pay damages.
Labor Violations That Unscrupulous Employers Use to Cheat Workers Out of Severance
Nondisparagement clauses have limits, however. They cannot be used to keep an employee from revealing illegal acts in the workplace. For instance, if you experienced unsafe work conditions, work break violations, or harassment, you are allowed to report and speak publicly about those things.
Similarly, employers cannot intimidate, threaten, or retaliate against employees for revealing illegal work acts or unsafe workplaces. This is known as whistleblower retaliation, and it’s against the law.
Many companies know in advance if they are shutting down, merging, or being acquired by another business. There may be discussions ahead of formal terminations about severance pay. It’s wise not to use this as a cudgel against workers, who are likely already feeling anxious about job loss. Threatening to withhold severance could be construed as intimidation, which could result in citations, fines, or a lawsuit.
Some companies use unscrupulous and often illegal methods of trying to get out of paying severance, like:
- Wrongfully accusing the employee of violating their severance agreement
- Intentionally miscalculating severance to pay less than agreed
- Claiming the employee wasn’t employed long enough to qualify for severance
- Wrongfully terminating (firing) the employee for cause to avoid laying them off and paying severance
- Closing the business and cutting off communication without paying severance
- Withholding severance because the employee exposed illegal workplace acts, as described above
Fortunately, California is stricter about these violations than most other states. Employees can file an official complaint with the state and/or engage an employment lawyer to get the severance they are owed.
The Role of Employment Attorneys in Termination and Severance Cases
Most people think of employment attorneys only as a last resort when they don’t get the severance pay they are due. Of course, employment lawyers are a great resource in this scenario, helping workers get their severance and putting a stop to workplace violations around terminations. They can assist with state claims and represent workers in court should a lawsuit be the only option.
However, employment attorneys are also very helpful when it comes to reviewing and negotiating severance agreements. It’s smart for workers to consult with an attorney when presented with a severance agreement, which is a contract and may contain a lot of legal jargon or even unlawful clauses. In some cases, you may be able to get more in severance or benefits than your employer initially offers.
Whether you have not yet been given the severance you were promised or you simply want to go over a severance agreement, Employee Law Group is here to help.
Call us at 310-606-0065 or
reach out online to schedule an appointment for a contract review or discuss your case. If you believe a court case is likely, your initial consultation is free. And we don’t collect a fee unless we win on your behalf.
Managing Attorney - David Mallen
David Mallen is the managing attorney at Employee Law Group in Torrance, California, and a respected labor and employment lawyer who has represented thousands of workers since beginning his practice in 1992. He has been recognized as a Southern California Super Lawyer every year from 2004 to the present.
