Severance Pay in California
Severance pay in California is an essential topic for both employers and employees to understand. While many think of it as a standard benefit, severance pay is not legally required in every situation.
Knowing when and how severance pay applies, how much you might be entitled to, and what rights you have can save you from unexpected challenges if you’re ever laid off or terminated.
This MJB Law Group guide will walk you through the ins and outs of severance pay in California, helping you make informed decisions whether you’re an employee or an employer.
What is Severance Pay?
Severance pay refers to compensation offered by employers to employees who are terminated or laid off from their job. This pay is often a one-time lump sum intended to ease the financial burden while the employee seeks new employment opportunities.
Severance pay can also include benefits such as continued health insurance or outplacement services.
California’s Approach to Severance Pay
California law does not mandate severance pay in most cases. However, there are scenarios where employers are required to provide it, such as when outlined in an employee contract or as part of a severance agreement.
While not a legal obligation in general, severance pay can be crucial for workers transitioning out of a job due to layoffs or other unforeseen circumstances.
California Laws Governing Severance Pay
California’s approach to severance pay is largely shaped by state laws, as well as the terms of individual contracts or employee handbooks. Employers are encouraged, though not required, to offer severance to employees, especially in cases of layoffs or plant closures.
California Labor Code 2922
California Labor Code §2922 establishes the legal principle of “at-will” employment, meaning an employee can be terminated at any time without cause, and similarly, they can resign at any time.
This statute, however, doesn’t require employers to provide severance pay unless it’s specified in an employment agreement or employee handbook.
Importance of Employee Handbooks and Contracts
While severance pay is not mandated by law, many employers include provisions for severance pay in their employee handbooks or individual contracts. These agreements are crucial for setting expectations on both sides.
If you’ve signed a contract that promises severance pay, it’s important to understand the terms and conditions under which it applies.
Waivers of Severance Rights
In some cases, employees may be asked to waive their right to severance in exchange for other benefits, such as a settlement or a reference.
However, waivers are subject to strict legal scrutiny to ensure they are enforceable.
Requirements for Valid Waivers
For a waiver to be valid, it must meet specific legal requirements, such as adequate consideration (something of value) and knowing, voluntary execution by the employee.
Employees should be fully informed about what they are waiving, and the terms must be clearly outlined.
Potential Pitfalls of Waivers
Unenforceable waivers can be problematic. For example, a waiver may not be valid if it violates public policy, such as waiving the right to pursue claims for discrimination, hostility at work, or wrongful termination.
Similarly, waivers that apply to future claims or are not voluntarily signed may also be contested.
When is Severance Pay Required in California?
In general, severance pay is not required in California unless outlined in a contract or company policy. However, there are some situations where severance pay may be common or even expected.
Layoffs and Reductions in Force
In cases of mass layoffs or reductions in force, California employers may provide severance pay as part of a transition plan for affected employees. This is especially common in large corporations or companies with specific policies on handling layoffs.
Plant Closings
Under the California Worker Adjustment and Retraining Notification (WARN) Act, certain businesses must provide advance notice (and sometimes severance pay) when closing a plant or mass terminating employees.
Resignations (Limited Circumstances)
While resignation typically disqualifies an employee from severance, there are certain situations, like constructive discharge, where employees may still be entitled to severance.
Constructive Discharge
Constructive discharge occurs when an employer creates intolerable working conditions, forcing the employee to resign. In these cases, the employee may be entitled to severance as if they had been terminated.
Wrongful Termination (Potential for Severance as Damages)
In cases of wrongful termination, severance pay might be awarded as part of a settlement or damages to the employee
If the termination was illegal (e.g., based on discrimination or retaliation), the employee may be entitled to severance and other compensation.
Factors Affecting Severance Pay Amounts
The amount of severance pay can vary widely depending on several factors. Understanding these can help employees and employers alike navigate the process.
Employee’s Position and Salary
Higher-level employees, such as executives, often receive larger severance packages, which may include several months’ salary, stock options, and bonuses. Employees in lower positions or part-time roles may receive less, typically calculated based on their salary and length of service.
Company Size and Financial Health
Large corporations are more likely to offer generous severance packages, particularly if they are part of layoffs or restructuring. Smaller businesses may not offer the same level of compensation, especially if the company is facing financial difficulties.
Length of Employment
The longer an employee has worked at a company, the more likely they are to receive a larger severance package. Long-tenured employees may negotiate for a better severance deal, including additional benefits.
Industry Standards
In some industries, such as tech or finance, severance packages are often more generous than in other sectors. Employees in these fields may expect severance that is reflective of industry norms.
Negotiated Agreements
Employees may also be able to negotiate their severance package, especially if they have leverage, such as a long tenure, a high salary, or if the termination is related to wrongful conduct by the employer.
Employee Performance and Conduct
In cases where an employee’s performance or behavior led to the termination, they may not be entitled to severance. However, if the termination was due to factors beyond the employee’s control, severance may be more likely.
Calculating Severance Pay
Understanding how severance pay is calculated can help employees and employers prepare for potential payouts.
Common Calculation Methods
The most common method of calculating severance pay is based on the employee’s length of service. For example, an employee may receive one week of pay for every year worked.
Weekly Pay vs. Monthly Pay
Severance is typically calculated using the employee’s weekly or monthly salary, but the calculation method may vary depending on the employment agreement.
Accrued Vacation Time
Accrued vacation time is often added to the severance pay, providing employees with compensation for unused paid time off (PTO).
Bonuses and Commissions
In some cases, bonuses and commissions may also be included in severance pay, especially if these are regularly earned components of an employee’s compensation.
Benefits Beyond Severance Pay
In addition to financial compensation, severance agreements may include other benefits.
Continued Health Insurance (COBRA)
Employees who are terminated may be eligible for continued health insurance under COBRA, which allows former employees to continue their employer-sponsored health insurance for a limited time, though you are responsible for the full payment of it.
Outplacement Services
Outplacement services, which help employees find new jobs, may also be provided as part of a severance package, especially for higher-level employees.
Job Search Assistance
Employers may offer job search assistance to help former employees transition into new roles more quickly.
Severance Pay Tax Implications
Severance pay is subject to taxation, and employees may face a higher tax rate on their severance pay than on regular wages due to the lump-sum nature of the payment.
Stock Options and Restricted Stock
Severance packages may include stock options or restricted stock, allowing employees to maintain ownership in the company or benefit from its future success.
Protecting Your Severance Rights
Knowing your rights is crucial in ensuring you receive the severance you’re entitled to.
Understanding Your Employment Agreement
Employees should carefully review their employment contract to determine whether severance pay is outlined and under what conditions it is provided.
Documenting Communication with Your Employer
Maintaining clear communication and documenting any relevant interactions with your employer regarding severance pay can help protect your rights.
Seeking Legal Advice Early On
If you have any concerns about your severance rights or agreement, it’s wise to consult with an employment attorney at MJB Law Group early in the process.
Gathering Evidence
Collecting documents, such as emails, performance reviews, and company policies, can help substantiate any claims you may have related to severance pay.
Common Severance Pay Disputes
There are several common issues that arise in severance disputes.
Unpaid or Insufficient Severance
Disputes often arise when employees believe they have not received their full severance entitlement or that the amount is too low.
Disputes Over Waiver Agreements
Waiver agreements that employees are asked to sign in exchange for severance pay can also lead to disputes, particularly if the terms are unclear or the employee feels they were coerced.
Claims of Wrongful Termination
In some cases, employees may file claims of wrongful termination, arguing that their severance pay was withheld due to illegal reasons.
Retaliation for Seeking Severance
Employees who assert their rights to severance may face retaliation from their employer. Retaliation claims can lead to legal battles over both the severance pay and other damages.
Age Discrimination
Employees who feel they have been unfairly terminated based on their age may file claims, especially if severance pay is involved in the settlement process.
Disability Discrimination
Similar to age discrimination, employees who face termination due to their disability may seek severance pay as part of their claim.
MJB Law Group: Your California Employment Law Experts
At MJB Law Group, we specialize in employment law and personal injury cases. Whether you’ve been wrongfully terminated, denied severance pay, or have faced discrimination, we’re here to fight for your rights.
Our team has the expertise and experience to help you navigate severance disputes, ensuring that you receive the compensation you deserve.
With years of successful outcomes, MJB Law Group is committed to offering a client-centered approach, guiding you through every step of the process. Contact us today.
Conclusion
Severance pay in California is an important but often misunderstood subject. While not always required by law, it plays a crucial role in protecting employees who are transitioning out of a job. Whether it’s due to layoffs, plant closures, or wrongful termination, understanding your severance rights can make all the difference.
Don’t hesitate to consult with a legal professional at MJB Law Group to ensure that you’re getting the severance pay you deserve.
