Employment Law Severance Pay

1. California law does NOT require an employer to provide severance pay to a departing employee [if larger companies are going through mass layoffs, the federal WARN law may require severance pay of sorts for fired employees, in the form of advanced notice of termination or layoff. But this is NOT a severance pay program.]

2. If an employer provides severance pay, pursuant to a written or oral policy, the policy or "program" is a contract between the employer and the employee. Such understandings, contracts or agreements may be subject to federal or state regulation; otherwise, general contract law and principles apply in interpreting or enforcing severance pay programs or agreements.

3. The trend in modern times is that most employers do NOT have set or guaranteed severance programs. In other words, employers typically do NOT give employees a handbook or memo that says, for example, for each month worked you receive X amount of severance pay. The exception is that a Company going through mass or multiple layoffs may provide each individual employee an opportunity to get severance pay if a release is signed. But this is NOT the same as the old days, where an employee handbook, for example, stated a formula for severance pay that everyone would automatically be entitled to when leaving the company. Those days are long gone, along with the gold watch at retirement.

4. Typically, employers now offer severance pay to a fired or laid off employee in return for an the employee agreeing to sign a release of all claims, known or unknown, that the employee may have against the employer.

This is a fancy way of saying: in accepting the money specified in the release agreement, you agree to never, ever sue the employer for anything. If the employer is laying off a lot of employees, the severance pay offers are "individual" in the sense that it does not matter what the other departing employees do, you get to decide whether or not to accept your employer's offer of severance pay in exchange for a signed release.

5. If you don't sign the release, you don't get the money. Once signed release agreements are BINDING contracts and the Courts will enforce the terms. This makes sense when you stop to think about it. If an employer is NOT obligated to offer severance pay to laid off or fired employees, if the employer chooses to offer severance, it is free to impose whatever terms and conditions it wants in order for you to receive the money. The most common term employers impose is that you release the employer from all claims to receive the benefits specified in the agreement [typically money.] The most common condition in the agreements is that you must sign the document in order to get the money.

6. Unless addressed in the release agreement, keep in mind that although the employee agrees to never pursue a case against the employer, the employer is NOT releasing any claims it might want to pursue against the former employee. For example, if six months post-termination the employer discovers you stole Company property, it may pursue you through any means available [such as a lawsuit or by contacting law enforcement]. The employer can go after the ex-employee because the parties did not sign a mutual release.

7. Without a Mutual Release the employer has reserved the right to file any claims it may have against you; THIS IS THE MOST COMMON RELEASE SIGNED, ONE WHERE THE EMPLOYEE RELEASES THE EMPLOYER, BUT THE EMPLOYER DOES NOT RELEASE THE EMPLOYEE!

8. Severance and release agreements involve many issues about which most employees are not aware. Realistically, the departing employee understands one thing, he or she needs the money being offered for a signature on a release agreement. Most employees understand that basic concept, sign document - receive money.

9. Most employees do NOT seek the advice and counsel of an attorney BEFORE signing a release agreement. This is foolish because a review can cost as little as zero dollars up to about $350. Even at $350 it is worth checking everything out.

Example Fool: One time an employee called me and wanted to talk over the phone about his eight page severance and release agreement he was considering signing. He told me that the Agreement included the Company's obligation to pay about $500,000 in severance over the span of a year.

The Agreement spelled out numerous rights, duties and obligations between the employer and employee. I quoted him $500 to take an afternoon to meet and discuss the Agreement. The caller said that was too much as he was hoping to talk about it over the phone [that's code - looking for free advice.] I said I would not do that, he said thank you and I never heard from him again. You do the math. $500 to read over a contract concerning payment of $500,000 to the employee. A fool or no fool, you be the judge.

10. In contrast to what employees do NOT do, employers are keenly aware of the value in getting the employee to "sign off" on a release agreement. An employer typically has an attorney prepare or draft the agreement. Usually the attorney is aware of what to include and leave out in the document, this so the document favors the employer. Moreover, most company human resource personnel receive training on how to get employees to sign release agreements. Part of the training includes techniques such as:

A) Putting the employee at ease through the entire review and signing process;

B) Being especially friendly on follow-up calls asking the whereabouts of the signed agreement;

C) Waving under the employee's nose, so to speak, the check he or she will receive if the release is signed;

D) Making it appear that signing the release is merely a paperwork formality so the check can be handed over to the employee;

E) Giving the employee a stack of paper to review, with the Release buried into the pile, knowing that the more the employee has to read, the more likely the employee will not notice or read the terms of the release agreement;

F) Not reviewing nor explaining with the employee the meaning of the release/severance agreement's terms and conditions. Note: there is no law requiring an employer to go over the agreement with the employee. Pursuant to federal law for the release of certain claims only an opportunity to review the agreement is required for release of those claims.

Severance or release agreement issues include*:

1. The amount of severance money the employer will pay [warning: attorneys and clients tend to erroneously focus only on this item during negotiations. I have read about settlements going up in flames because parties focused on the money and failed to address the below issues once agreeing on a settlement amount];

2. When and how the severance will be paid, lump sum or payments? [warning: bonehead attorneys often drop the ball in making sure language does not cause delay of payments to be received, meaning check in hand. I have seen cases, not mine, where the party obligated to pay the money through various delay tactics has dragged out payment for months];

3. Taxes on severance received. For example, maybe a large payment can be made in the following year that will delay having to pay taxes. [warning: incompetent attorneys fail to address tax issues including characterization of sums received, indemnification, and assuring minimum tax liability to the client. I have seen cases, again not mine, where the client was very unhappy after receiving a $60,000 check on a $200,000 settlement, this after tax deductions and the attorney taking out his fee];

4. Confidentiality obligations; what I call a "bad mouthing" clause [warning: bonehead attorneys sometimes put the client into a worse situation by agreeing to inclusion of draconian nondisparagement clauses. In other words, where the client has free speech rights, the attorney gets the client to agree that if the client says anything bad about the employer, the Company can sue for violating the "no bad mouthing" clause];

5. Penalties, damages or remedies for breach of the agreement;

6. References and recommendation letters to be provided. To whom will reference check callers or prospective employers be routed? What information will be provided to prospective employers, for example, "your leaving the company was a voluntary resignation" [even though you were fired.]

Will the prospective employer be told you are eligible for rehire? Will, God forbid, prospective employers be told "I'll transfer you to our legal department?" Don't laugh, that has happened. And what do you think the odds of getting a job are when on a reference call the prospective employer is referred to the ex-employer's lawyers?

7. Employee retaining possession or having to return specified company property [e.g. a notebook computer; a BlackBerry phone.] Some employers let departing employees keep a notebook computer as it helps ex-employees with a transition and in a job search. Other employers demand return of all company property, down to the paper clips;

8. Noncompetition; nonsolicitation provisions; reaffirmation of prior agreements you signed [Some courts will uphold and enforce noncompete otherwise invalid noncompete provisions if an attorney represented the employee and the parties negotiated a sum of money in exchange for a noncompete clause];

9. Validity of the release of certain claims, see below;

10. "Undoing" the agreement after you have signed and received money;

11. If you already signed a release, what were the circumstances under which you signed the agreement;

12. The legality of certain terms in the agreement such as requiring signing a release to get earned wages or other illegal terms that might render a clause or the entire agreement unconscionable;

13. Choice of law and venue for resolution of disputes arising from the agreement;

14. Dispute resolution procedures, such as arbitration instead of the courts;

15. Will there be prevailing party attorney fees and costs provisions in disputes over the release;

16. Receipt of health insurance post termination; receipt of unemployment benefits despite receiving a severance payment;

17. Scope of release; WHO and what will be released; unilateral vs. mutual releases [warning: incompetent attorneys fail to address obtaining a mutual release];

18. How vacation will be calculated. For example, some employers count the months of severance pay as months employed for calculating vacation that will be paid. This might result in thousands of dollars extra severance pay;

19. How will wages be calculated, such as when commission payments might be owed if the employee had not been fired. And what about a December bonus that is paid only if one is employed in December and you are being fired in August. Can you still get the bonus?

20. How will retirement, 401K, and stock options be calculated or otherwise handled. Will the number of months the employee receives severance be counted as months employed so additional options, retirement or other benefits can be obtained?;

21. OWBPA and WCAB Compliance - This is intentionally left obscure so you can bring it up with your attorney. If your attorney does not know what these acronyms refer to or the issues they present, get a different attorney. Visitors herein can e-mail me for the answer on the significance of these two acronyms. Click here if you don't want to e-mail me.

BEFORE YOU SIGN © any agreement, you should contact an attorney to review your separation terms and proposed agreement. While an attorney can explain your rights, duties and obligations under a proposed agreement, often times the attorney can negotiate better agreement terms, including additional months of severance pay.

Bonus Tip: The attorney retained to review your agreement should be able to tell you beforehand if negotiations might result in additional severance monies. While no attorney can guarantee a specific result, experienced counsel have a general feel of how things might go should you retain his or her services. Over the years our policy has never been to take a case should we get a feeling that our efforts would not yield a better result than that which is already being offered to the employee.

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*Tip of the hat to you for reading this footnote. It is quite impressive that you read this entire page and got down this far. As I said on the main index page, you truly are a person of superior intellect.
Anyway, just want you to note that the numbered paragraphs above constitute some of the most valuable information on employlaw.com. It is a checklist of issues that I compiled after years of dealing with severance and release agreements. Many of the items listed are missed by even the most experienced lawyers. Because I am retiring from the practice of law to pursue Web ventures I am passing on the torch on to you, so to speak. Refer this list to an attorney.