Severance Agreement Basics
Understanding severance agreements is vital for both employer and employee alike. Without an understanding of the purpose of such a contract, or the consequences of signing off on it, parties will have insufficient knowledge to begin negotiating, and so the severance agreement will not enable you to move forward post-termination.
A severance agreement is a contract between the terminated employee (severant) and the employer. It is commonly used by California employers after the termination of an employee’s employment.
The purpose of the agreement is to detail the terms of the severance package being offered, including the following key points:
Signing a severance agreement means that the terminated employee is agreeing to waive his or her rights to bringing a lawsuit against the employer in exchange for the severance package. This contract may be worded in such a way that it releases the employer in general , however, in almost all jurisdictions, employees cannot waive their rights to bring typical claims for wage and hour law violations.
Severance agreements in California law differ in requirements from other states. All California severance agreements must meet the required time frame for the employee to review and to revoke it after he or she has signed the agreement. Generally, the standard period for an employee to review this contract is 21 days and then an additional 7 days to revoke it after having signed. Reconsideration after this period may be granted if the contract is deemed grossly unfair to either party or if the contract was made under coercive or fraudulent circumstances.
Important Considerations for a California Severance Agreement
When drafting a severance agreement template for a California employee, it’s important to include certain key elements to ensure the agreement is legally compliant and protects the interests of the employer.
The Terms of Payment
The agreement should clearly state the amount of severance pay the employee can expect to receive. This may be a specific dollar amount, a set number of weeks’ worth of pay, or a combination of these. If the severance pay is in exchange for a release of the employee’s legal claims against the company, it may be corrective to give the payment in installments, so as to divide it at the employee’s discretion if he or she wants to spend it all or retains a portion to survive on.
A Release of All Claims
In exchange for severance, employers almost always require departing employees to sign a "general release," which releases all legal claims the employee may have that arise out of the employment relationship. This release typically includes a waiver of all known and unknown claims, as well as any claims the employee did not know about when they signed the agreement. While some statutes prohibit an employee from releasing an employer with respect to certain claims (such as workers’ compensation claims), the general rule is that employers should be able to retain a broad release so long as the release is voluntary, knowing, and intelligent.
A Confidentiality Clause
The agreement typically requires the employee to keep the terms of the separation confidential from third parties, except as necessary to enforce the agreement or as required by law. In addition, the confidentiality clause often prohibits the employee from disparaging the company and its employees. This is designed to prevent the employee from speaking poorly of the company following their departure.
Confidential and Proprietary Information
Employer may include a section that advises the employee of his or her obligations to protect the company’s confidential and proprietary information and return any such information in his or her possession.
Severance Agreement Provisions Under California Law
In California, severance agreements must comply with federal and state law. Federal law requires that the agreement be in clear and unambiguous language, contain no false representation or misleading statements, and be consistent with the requirements of the Older Workers Benefit Protection Act (OWBPA). Specifically, any "release" of age discrimination claims must comply with the OWBPA which mandates certain procedural safeguards for any waiver of age discrimination claims. Moreover, the OWBPA provides that any waiver that fails to meet specific requirements will be unenforceable.
Thus far, federal appeals courts have held that an employee could not sue the employer for age discrimination if the employee had signed a severance agreement release with the employer that complied with the requirements set forth in the OWBPA. The DWPA also requires that an employee who is 40 years or older and waives his or her rights under the ADEA must be offered a "consideration period" in which to decide whether to sign the agreement.
The consideration period must be at least 21 days, unless the employee is covered by a collective bargaining agreement. Moreover, the waiver cannot become effective until seven days after the employee signs the release. During this seven-day period, the employee can change his or her mind and revoke the waiver. Once the seven days have passed the waiver becomes irrevocable.
The federal OWBPA requirements "apply[] only to employees . . . [and] do[] not apply to independent contractors." Consequently, an independent contractor cannot be required to waive liability in a severance agreement.
In California, different districts of the Court of Appeals have addressed whether a waiver of California state law claims of discrimination is enforceable. In the Industrial Wood & Allied Workers’ Organization v. Superior Court of Kern County case, the California Court of Appeals for the Fifth District held that an employee’s waiver of his claims for wrongful termination, defamation, and intentional infliction of emotional distress was void if the release did not contain an express waiver of the employee’s claims arising under California law. In that case, the employee could have sued his employer for wrongful termination in violation of public policy and defamation. Even if there is an express waiver of those California claims, the court may find the waiver invalid. Thus, "an ambiguous statement within a release will not constitute a clear and unambiguous waiver of California statutory rights."
However, in the Tully case, the Court of Appeal for the First District found that the employee signed a general general release, "which must be construed broadly to encompass all claims the employee may have against the employer." The court held that the waiver was valid. In the Evans case, the California Court of Appeal for the Fourth District held that the waiver of the plaintiff’s California statutory claims for sexual harassment was valid. The court in the Evans case specifically stated that the court "rejects the application of the ambiguous contract rules" and that a waiver of "every claim or rights, knows or unknown, past or future concerning [plaintiff’s] employment and its termination with [the employer]" was valid.
Consequently, the enforceability of a release of California-based statutory claims, including claims arising under the Fair Employment and Housing Act and wrongful termination in violation of public policy, likely depends on which district of the Court of Appeals the issue is before.
Drafting Considerations for a Severance Agreement
Businesses can also customize a severance agreement template to include provisions and language that meet their specific requirements. While there are a number of different severance agreements used across California businesses, they have the same goal: to protect the employer’s interests, separate and resolve any remaining obligations of the employee to the employer, and to provide a parting benefit to the employee.
Not all severance agreements should use the same template, and modification may be necessary to create a comprehensive strategy and tailored agreement for the business. Businesses should consider the following factors when preparing a severance agreement template:
Different types of severance agreements. Different needs for businesses might be best served by different types of severance agreements. A general release of all claims is not usually appropriate for employees not covered by both the California Fair Employment and Housing Act ("FEHA") and the Age Discrimination in Employment Act ("ADEA") (i.e. younger employees), as that type of release attempts the release of all claims, even those that might be applicable to the employee (e.g. false-light invasion of privacy, retaliatory termination in violation of public policy, or aiding and abetting under FEHA). Older employees cannot release claims under the ADEA without additional protections, and so if an employer also employed younger employees, it may want to include a general release provision and a separate ADEA release provision in its severance agreement template.
Employees subject to arbitration agreements. If an employee is currently subject to an arbitration agreement, the arbitration agreement may remain in full force and effect after the employee signs the separation agreement. The agreement may also state that it is subject to the arbitration provisions. The older employee may agree to arbitrate his or her FEHA and ADEA claims in exchange for extra severance pay.
Employees with more than 20 years of service. While the Older Workers Benefit Protection Act ("OWBPA") requires only 21 days for employees with less than 20 years of service to review their separation agreements, such as Jambusaria’s, employees with more than 20 years of service must be given 45 days of time to review their severance agreements. However, any waiver of rights under the OWBPA (typically occurring at the end of a long list of waivers in the final release) must be provided to the employee before the end of the 45-day period. Often, as long as the waiver is provided within the 21-day timeframe, there is no problem with compliance.
Incorporating the Employee’s Job Description and Key Performance Goals. Severances are often conditioned on the employee returning company property. Employers may therefore want to provide the employee with descriptions of the company property that must be returned in order to invoke the severance benefits (e.g., cell phone contract, company credit card, equipment, pass codes, etc.) as well as the names of individuals with whom the company can reconcile property claims. Severances often stipulate the employee’s job title and month of employment, which can be customized to the employee and company. Similarly, employees discussing severance frequently forget that they are subject to nondisclosure provisions of prior nondisclosure or confidentiality agreements with the company. Employers might want to condition their severances on the employee’s ability to comply with their previous obligations.
While these modifications may seem minimal, keeping in mind the minutiae of each case makes a difference for employers. Small details may impact whether the agreement holds up in court.
Common Exclusions in a Severance Agreement
One of the most common mistakes employers commit when drafting severance agreements is to forget that California is a two-party consent state. Under California law, an employee has a right to tap a phone conversation and use it as evidence in court. Recording a conversation without the other party’s permission is not only considered a crime it can also be grounds for a strong counter-argument against an employer who claims to have paid an employee adequate consideration for a release of claims. An overly broad confidentiality clause violates the spirit of California law on this issue and may leave the employee with no choice but to accept the agreement or risk losing his/her ability to record the conversation.
Another danger is to draft provisions so vague that they confuse employees and allow them to believe that the agreement does not apply to activity that clearly was intended to be covered. For example , an employer may type up severance agreement that mentions civil claims and then fails to mention criminal claims, thinking the term "civil" captures and refers to "criminal" claims as well. In California, all claims are civil in nature until they are prosecuted by the government as a crime. The best practice is to list all types of claims and disputes separately in order to avoid any ambiguity or confusion. Termination of the employment relationship in California generally terminates the employer’s duty to pay wages, unless the employment contract states otherwise. However, the termination date on the severance agreement should still be agreed upon before signature. Organizations should keep in mind that termination dates affect unemployment insurance benefits, assignment of a temporary disability benefit rate, taxation of wage income, and seniority for wage rates using service in lieu of hours worked.
Best Practices for a Severance Agreement
Employers often offer severance agreements to reduce the risk of litigation. Yet, the careful presentation and implementation of a severance agreement can increase, not decrease the likelihood of litigation. Employers can minimize this risk by following best practices related to the presentation and implementation of a severance agreement.
Minimum 21-day consideration period for terminations related to a reduction in force. Severance agreements in connection with a reduction in force are reasonable options to consider with respect to a company’s lay-off of employees. But there are important considerations with respect to such programs. First, under the federal Older Workers Benefit Protection Act ("OWBPA"), if an employer is terminating more than 20 employees at one time based on a unit of employment, the employer must give those employees at least 21 calendar days to consider whether to enter the severance agreement. In addition, such employers must provide the employees with a list of all job titles and ages of all the individuals eligible for the program. Importantly, the employer need not list any information about employees chosen for termination who are not eligible for the program (such as employees who receive the required 60-day notice of termination or who are terminated for cause).
The minimum 21-day period is not required if the agreement is part of an outside settlement program. The OWBPA allows employers to define the "decisional unit" in accordance with business realities. Thus, this means that employers can restrict eligibility for the program in terms of not only employees in the same position but also employees in other similarly situated positions. So long as the group eligible to participate in the severance program is large enough, the employer can define the class and limit eligibility to a subset of that class without having to notify everyone of their eligibility under the program.
If the severance agreement only applies to employees not covered by the WARN Act (i.e., under 50 people layed off), then the employer is not required to give the 21-day period. In addition, the employer can shorten the period for the employee to 14 days if that employee already had a previous severance policy giving him or her 14 days to consider the separation agreement.
The 7-day revocation period is also important to remember.
Trial periods. If an employee is given a trial period of employment after acceptance of a severance agreement, (i.e., a usually 30-day period or more of continued employment to make sure the employee is really ready to move on) the employer may not revoke the agreement. If the employee returns to employment during the trial period, the employee has the right to reconsider the severance agreement and revoke the agreement before the expiration of the original 7-day period. After expiration of that 7-day period, the employer cannot revoke the severance agreement merely because the employee returns to work.
Use of arbitartion. Employers should not use binding arbitration to resolve disputes regarding the application or interpretation of the severance agreement. An arbitration process will not satisfy the OWBPA requirements for validity of a release executed by awards to individuals covered by the OWBPA. Thus, in order to make the severance agreement acceptable to all individuals (including those covered by the OWBPA), the arbitration provisions may need to be removed and some other method could be used to resolve any disputes under the agreement. The other method cannot require the employee to pay any upfront fees. This means a grievance-arbitration procedure under a collective bargaining agreement would be valid under the OWBPA.
Common Questions California Severance Agreements
Does an employee have to sign a severance agreement?
Generally, an employee must sign a severance agreement because employment is at will in California. With few exceptions, employment in California can be terminated at any time for any reason. However, in practice, an employee may refuse to execute a severance agreement. If an employee refuses to sign, the employer has the option to terminate the employee’s employment or rehire the employee without a severance agreement if it has employment-at-will language in its employment agreement and severance policy. If the employer has an employment contract that guarantees the employee employment for a specified period of time, the employer could dismiss the employee but it will have to pay the employee any unpaid wages or benefits owed if he or she has not performed the work. An individual who refuses to sign a severance agreement may also be able to pursue a wrongful termination claim if the claim is based on the employer’s act of terminating the employee for specifically refusing to sign.
Are there groups of employees that are not entitled to severance?
No. Any employee or former employee may be entitled to a severance, unless the employer has a contractual obligation to pay a severance or a collective bargaining agreement requires the payment of a severance . To determine whether the employer has that contractual obligation, the employee or former employee should analyze his or her offer letter, employment agreement and the employer’s severance policy and practices. Another factor to consider is whether the severance is arguably a wage. If the severance is a wage, an employee cannot waive the right to that wage and the determination of what is a wage is susceptible to legal challenges. This is a complicated issue and if it is unclear whether the severance is a wage, it is best for the employee or former employee to get advice from an attorney.
What if the severance agreement is too long and difficult to understand?
If an employee or a former employee does not understand the provisions of the severance agreement, he or she should be provided an explanation or clarification by the employer. In this day and age, it is often easiest to do this electronically. The severance agreement is the result of a negotiation process between the employee and the employer and if the employee has questions or issues to address with the agreement, he or she should address the questions or issues with the employer. The employee also has the option to present the severance agreement to an attorney to review and provide advice regarding the specific terms of the severance agreement.