May 5, 2020

Under California law, employers are not required to provide severance pay to employees at the conclusion of the employment relationship.  However, many employers do offer severance pay, either as a standard practice or in individual situations as part of a settlement offer or in recognition of an employee’s service.

Sometimes an employer will have a standard policy for providing severance pay if the employment relationship ends “without cause” (such as a layoff or business closure), as stated in an employee handbook or other document, or severance pay may be negotiated and agreed upon as part of an employment contract.  In such instances, the right to receive this severance pay is enforceable under contract law.  [See 1 Witkin, Summary of California Law (11th ed. 2019) Contracts, § 210; Chinn v. China Nat. Aviation Corp. (1955) 138 Cal.App.2d 98, 99-100; Blau v. Del Monte Corp. (9th Cir. 1984) 748 F.2d 1348, 1352-1356.]

Where an employment agreement provides for unconditional severance pay, employees may argue that it constitutes “wages” which must be paid immediately upon discharge (or within 72 hours after resignation), or else employers will be subject to waiting time penalties which can quickly add up.  [Triad Data Services, Inc. v. Jackson (1984) 153 Cal.App.3d Supp. 1, 10, disapproved on other grounds by Smith v. Rae-Venter Law Group (2002) 29 Cal.4th 345, 370.]

However, severance pay is not considered wages for unemployment purposes – it is considered payment for recognition of past service – so it will not count against an employee’s ability to collect unemployment benefits, regardless of whether it is paid out in installments or as a lump-sum distribution.

Something to be aware of is that an ongoing employer policy of severance payments, even if informal, may be considered an “employee welfare benefit plan” subject to the Employee Retirement Income Security Act of 1974 (ERISA), which may preempt state-law claims.  Generally, a fixed, lump-sum payment triggered by a single event will not constitute an ERISA plan, nor will an employment contract establishing non-discretionary conditions on which payment of severance benefits depends with no need for administration by the employer.  However, an ERISA plan does exist (and thus preempts state-law claims) where payment of severance benefits is discretionary or based on criteria applied on a case-by-case basis.  [Chin, et al., Cal. Practice Guide Employment Litigation (The Rutter Group 2019) ¶¶ 15:365-15:368.]

Employers often offer severance pay in exchange for employees releasing claims and agreeing not to sue (such as for wrongful termination, discrimination, etc.).  In such circumstances, employees should carefully consider what claims, if any, they would be releasing if they choose to sign a severance agreement and accept the severance pay.  While it might just be standard for employers to have all terminated employees sign severance agreements, if employees believe they have potential claims relating to their employment, they should seek legal advice before signing any severance agreement.  Employers cannot, however, condition the payment of any wages already agreed owing to an employee on the employee signing a severance agreement and release of claims.  [Lab. Code §§ 206, 206.5.]

Other things to consider before signing a severance agreement include checking to see if the employer has a written severance pay plan and/or severance pay formula, what other employees have been offered in similar circumstances, and the tax consequences of receiving severance pay as a lump-sum distribution vs. ongoing payments.  If payments are to be made over time, rather than a lump-sum payment, other things to consider are whether there is a risk of employer insolvency (which might jeopardize future payments), whether the former employee might breach the severance agreement before all payments are made and lose any unpaid severance amounts, and whether extending the time for payments might extend the separation date for purposes of health insurance or pension rights.

If you would like assistance with preparing and/or reviewing a severance agreement or severance pay package, Eskridge Law is here to help.

Need more information?
ESKRIDGE LAW may be contacted by phone (310/303-3951), by fax (310/303-3952) or by email (geskridge@eskridgelaw.net).  Please visit our website at eskridge.hv-dev.com.

This article is based on the law as of the date posted at the top of the article.  This article does not constitute the provision of legal advice, and does not by itself create an attorney-client relationship with Eskridge Law.