Although severance pay is not required under California law, employers facing disputes with exiting employees should consider offering severance pay in exchange for a release of claims in order to preempt potential litigation. If an employee is at-will and either the employer or the employee decides to end the employment relationship, unless there is a contractual agreement, the employer is not required to provide severance to the employee. However, severance agreements should be utilized by employers in certain circumstances to avoid potential costly litigation. While there are many aspects to consider about severance agreements (which cannot be covered in one article), here are five issues employers need to understand about severance agreement terms:
1. Release of claims
The idea of the severance agreement is to have some certainty that there will not be litigation following the employee’s separation from the company. Employers may seek a general release of known and unknown claims if it is specific and easy to understand. Courts have held that “a written release extinguishes any obligation covered by the release’s terms, provided it has not been obtained by fraud, deception, misrepresentation, duress, or undue influence.” Skrbina v. Fleming Cos. (1996).
Release of Unknown Claims
The employee (and employer for that matter) can waive all known claims. However, in California, for any party to release unknown claims, the agreement needs to be clear and advise the party that they are releasing unknown claims. Ideally, the agreement should set forth that the employee is waiving all rights under California Civil Code section 1542, and to specifically quote section 1542 in the agreement, which provides:
A general release does not extend to claims that the creditor or releasing party does not know or suspect to exist in his or her favor at the time of executing the release and that, if known by him or her, would have materially affected his or her settlement with the debtor or released party.
2. Choice of law and venue
California Labor Code section 925 prohibits employers from requiring an employee who primarily resides and works in California, as a condition of employment, to adjudicate claims outside of California that arose in California and deprive the employee of “substantive protection of California law.” Section 925 does not apply to any contracts negotiated when the employee is represented by legal counsel. Section 925 only applies to contracts entered into, modified, or extended on or after January 1, 2017. However, since a severance agreement is being entered at the end of the employment relationship, employers may have the argument that section 925 does not apply to severance agreements because it is not being entered into “as a condition of employment.” Employers should approach this issue carefully, and to the extent there is a need to provide for a state other than California’s law to apply to the severance agreement, or for the venue to be set outside of California, employment counsel needs to be consulted.
3. No re-hire
Beginning January 1, 2020, an employer may not include a no re-hire provision in the severance agreement under certain circumstances. Code of Civil Procedure section 1002.5 prohibits and invalidates any provisions in settlement agreements entered into on or after January 1, 2020 that prevent workers from obtaining future employment with the settling employer or its affiliated companies.
The law applies to any employees who have filed a claim: (1) against the employer in court, (2) before an administrative agency, (3) in an alternative dispute resolution forum, or (4) through the employer’s internal complaint process. Therefore, if the employee has complained internally, and a severance agreement is reached with the employee without any litigation being filed, the employer would still be restricted from placing a no-rehire provision in the severance agreement.
The law does not prohibit or otherwise restrict an employer from preventing an employee from obtaining future employment if the employer has made a good faith determination that the person engaged in sexual harassment or sexual assault.
Severance agreements may a contain confidentiality provision where the employee agrees not to disclose the amount paid or the terms of the agreement. The confidentially provision can set forth the limited number of people the employee may make disclosures to, such as legal or tax advisors, family members, or as required under the law.
5. Special provisions for a release of age claims
The Older Workers Benefit Protection Act (OWBPA) protects individuals 40 years old or older. The OWBPA provides that to release a claim for age discrimination, a severance agreement must meet certain requirements. Some of these requirements include that the employee is advised to consult with an attorney, the waiver is easily understood, the individual is given at least 21 days to consider the agreement, and the individual is given at least 7 days following the execution of the agreement to revoke the agreement. The 21-day consideration period can be waived by the employee, but the seven-day revocation period after the agreement is signed cannot be waived by the employee. Therefore, it is important to consider potentially not paying any money until after the seven-day revocation period expires. If the employer is offering the release to a group or class of employees a longer consideration period and other requirements apply. It is recommended that employers receive the assistance of counsel to ensure that employees 40 years old or older effectively waive any rights under the OWBPA.