Employee Severance Required?

In California, there is no legal requirement that an employer pay severance to its employees upon termination of employment. However, should an employer implement a written or verbal policy regarding severance or mention a set scale for severance in its employee handbooks, manuals or company memos, then such policies and programs may be construed as a contract between the employer and its employees regarding severance.

Simply put, an employer has no obligation to pay severance, but once the employer makes the offer of severance, it becomes binding. This provides great reason for employers not to mention anything about severance in their employee handbooks, manuals or company memos. Rather, employers are best served by providing severance pay to employees on an individual, case by case, basis only.

Severance is often paid in exchange for the employee's signature on a release of claims. For such a release to be valid, there must be a bargained for exchange or consideration. Both the employer and the employee must give each other a benefit that is not required under law. For example, the employee may agree to release all claims against the employer while the employer agrees to pay a lump sum above and beyond what is legally owed to the employee.

A severance pay agreement or release of claims is unenforceable if the employer fails to provide a benefit to which the employee was not otherwise entitled upon termination. In California, employees who are discharged must be paid all wages due at the time of termination, including unused vacation pay. Consequently, a severance pay agreement or release of claims must provide the employee with an amount beyond the payment of these accrued wages. Moreover, if the employer has a written severance policy that provides a set or designated severance, the severance pay agreement or release of claims must set forth an amount beyond that designated severance. Note, there may be an exception to this rule where a written company policy specifically requires a release of claims in exchange for severance.

If the severance pay agreement is presented to an employee over the age of 40 and contains a release of claims pertaining to age discrimination, the release must be written in clear, understandable language with specific reference to the Age Discrimination in Employment Act ("ADEA"). The employee must be given 21 to 45 days to review the agreement and advised to review said agreement with the assistance of an attorney. The employee must also be provided the opportunity to revoke the agreement within 7 days after it is signed. The release does not become final until that 7 day period has passed.

Both employers and employees should be aware that certain claims involving minimum wage, overtime, unemployment benefits and workers compensation benefits cannot be released as part of a severance pay agreement. Most other claims, both known and unknown, may be released if the agreement is properly drafted and prepared by an attorney. All parties should seek the advice of a qualified attorney with experience in the field of employment.

June Yang Cutter is an Associate with Kring & Chung, LLP's Irvine office. She can be contacted at (949) 261-7700 or jcutter@kringandchung.com.