Severance Agreements in California: A General Overview

Overview

A severance agreement is a contract between an employer and a departing employee that typically provides the employee with compensation or benefits beyond what is legally required, in exchange for the employee's agreement to release (waive) legal claims against the employer. Severance agreements are not required by California or federal law in most circumstances, but they are commonly used when the employment relationship ends.

Severance agreements serve different purposes for each party. For the employer, the agreement provides a measure of finality and reduces the risk of future litigation. For the employee, it provides financial support during the transition to new employment and, in some cases, other benefits such as continued health insurance or a neutral employment reference.

This guide provides a general overview of severance agreements under California law. It does not constitute legal advice.

Are Employers Required to Offer Severance?

In most situations, California law does not require employers to provide severance pay upon termination. Severance is generally a matter of agreement between the employer and the employee, or may be provided under an employer's policies, practices, or an employment contract.

There are limited exceptions. For example, the federal Worker Adjustment and Retraining Notification (WARN) Act and California's equivalent statute (Labor Code Sections 1400 - 1408) require covered employers to provide advance notice of certain mass layoffs and plant closings. Failure to provide the required notice may result in liability for back pay and benefits for the notice period - though this is not technically "severance."

Common Terms in Severance Agreements

While the specific terms vary widely, severance agreements commonly include some or all of the following provisions:

Severance Pay

The amount, timing, and form of severance pay are negotiable. Severance may be paid as a lump sum or in installments. Common formulas include a set number of weeks or months of pay, pay based on years of service, or a negotiated flat amount.

Release of Claims

The core component of most severance agreements is the employee's release of legal claims against the employer. A release may cover a broad range of claims, including claims for wrongful termination, discrimination, harassment, retaliation, wage and hour violations, and breach of contract.

The scope of the release is a critical term. Some releases are narrow, covering only claims arising from the termination itself, while others are broad, covering all claims that arose during the course of employment.

Non-Disparagement Clauses

Many severance agreements include mutual or one-sided non-disparagement clauses, which prohibit one or both parties from making negative public statements about the other.

Confidentiality

Employers often include a confidentiality provision requiring the employee to keep the terms of the agreement (including the severance amount) confidential.

Non-Compete and Non-Solicitation

California has a strong public policy against non-compete agreements. Under Business and Professions Code Section 16600, as reinforced by AB 1076 and SB 699 (effective January 1, 2024), non-compete provisions in employment agreements are generally void and unenforceable in California, with very limited exceptions (such as the sale of a business). Non-solicitation provisions that effectively function as non-compete agreements may also be unenforceable.

Return of Property and Cooperation

Severance agreements commonly require the employee to return company property and may include a cooperation clause requiring the employee to assist with pending or future litigation or investigations.

Neutral Reference

Some agreements include a provision specifying the information the employer will provide in response to reference inquiries.

Important Legal Considerations

Waiver of Known and Unknown Claims

California Civil Code Section 1542 provides that a general release does not extend to claims that the releasing party does not know about at the time of the release. For a release to cover unknown claims, the agreement must include a specific waiver of the protections of Section 1542. This waiver is typically included as express language in the severance agreement, often quoting the statute directly.

Protections for Older Workers (OWBPA)

The federal Older Workers Benefit Protection Act (OWBPA), an amendment to the Age Discrimination in Employment Act (ADEA), imposes specific requirements for a valid waiver of age discrimination claims by employees age 40 and older. These requirements include:

• The waiver must be written in a manner that is easily understood
• The waiver must specifically refer to rights or claims under the ADEA
• The employee must be advised in writing to consult with an attorney before signing
• The employee must be given at least 21 days to consider the agreement (or 45 days in the case of a group layoff or exit incentive program)
• The employee must be given at least 7 days after signing to revoke the agreement
• The waiver must be supported by consideration beyond what the employee is already entitled to receive
• In the case of a group layoff, the employer must provide specific information about the job titles and ages of employees selected and not selected for the program

Failure to comply with the OWBPA requirements may render the age discrimination waiver unenforceable.

Claims That Cannot Be Waived

Certain claims and rights generally cannot be waived in a severance agreement under California law, including:

• The right to file a charge or complaint with administrative agencies such as the CRD, EEOC, or Labor Commissioner (though the agreement may waive the right to recover monetary damages from such a charge)
• Workers' compensation benefits for injuries that have already occurred
• Unemployment insurance benefits
• Indemnification rights under Labor Code Section 2802
• Rights under PAGA (to the extent they are non-waivable)

SB 331 (STAND Act) Restrictions

California SB 331, effective January 1, 2022, places restrictions on severance and separation agreements. Among other provisions:

• Agreements may not prevent an employee from disclosing information about unlawful acts in the workplace, including harassment and discrimination
• The agreement must notify the employee of their right to consult an attorney and provide at least five (5) business days to do so (though the employee may sign sooner if they choose)

Negotiating a Severance Agreement

Severance agreements are generally negotiable. Factors that may affect the negotiation include:

• The strength of any potential legal claims the employee may have
• The employer's motivation for offering severance (risk reduction, policy, goodwill)
• The employee's tenure, position, and compensation level
• Industry norms and the employer's standard severance practices
• The breadth of the release being requested
• The inclusion of restrictive covenants or confidentiality requirements

Employees are not obligated to accept a severance offer, and in many cases, the initial offer may be subject to negotiation.

Tax Considerations

Severance pay is generally treated as taxable income for federal and state income tax purposes. It is also generally subject to FICA taxes (Social Security and Medicare). The tax treatment of specific components of a severance package - such as payments for emotional distress or payments characterized as compensatory damages - may vary depending on how they are structured. Tax treatment is a factual and legal question that should be directed to a tax professional.

Conclusion

Severance agreements are important documents that can significantly affect the rights of both employers and employees. The terms of these agreements are negotiable, and the legal requirements - particularly with respect to the release of claims, protections for older workers, and restrictions on confidentiality provisions - are detailed and specific. Individuals who are offered or are considering offering a severance agreement are encouraged to consult with a qualified attorney before signing.

This guide is provided for general informational and educational purposes only. It does not constitute legal advice, and no attorney-client relationship is created by reading this material. Laws and regulations may change, and the application of law depends on the specific facts of each situation. Consult a qualified attorney for advice regarding your particular circumstances.