Should Employers Provide Severance Pay?

WHAT IS SEVERANCE PAY?

Severance pay is money that an employer chooses to offer an employee who is leaving the company. Common scenarios in which an employer might offer severance pay include layoffs, termination, resignation, or mutual agreements to part ways.

These arrangements may include anywhere from a week or two of pay for each year the worker was employed with the company, or the total amount can be negotiated mutually through a severance agreement.

Do employers in California need to provide severance pay?

Employers are not required under California law to provide severance pay. However, that doesn’t necessarily mean you shouldn’t offer it to departing employees in certain circumstances.

In this article, we highlight three main reasons why employers might consider providing severance pay even when it’s not required.

Protection against potential lawsuits

Employers should consider offering severance pay to an employee in exchange for the employee to sign a release that would free the employer from any legal action in the future.

The waiver of release will only be valid if the employer is giving the employee what the employee is not normally entitled to. The employee’s final pay check is not valid consideration for the release of future claims because the employee is unconditionally entitled to his final pay.

Offering additional pay to the employee is a powerful incentive—without getting this additional severance pay, there would be no reason for an employee to sign a waiver of future claims.

Even if you don’t think an employee would have any reason to sue you, you can never be 100 percent certain that you will not face legal action.

Lawsuits can quickly become costly and time-consuming. It makes sense to do what you can to avoid the issue entirely by offering the severance in exchange for a waiver of all potential legal claims about any type of issue that arose during the course of employment.

Staying on good terms with former employees

Offering severance pay can also serve as a gesture of good faith and allow you to remain on good terms with the employee in the event they ever wish to seek employment with you again.

In addition to severance pay, some companies offer outplacement services to help laid off employees find new jobs, and other benefits, such as allowing the employee to keep some equipment or releasing them from non-compete clauses.

Legal requirements for severance pay

There are some circumstances in which your company is legally required to offer severance pay, but these situations are almost always a result of your company’s own actions.

You must pay severance to former employees if you led them to believe they would receive severance. Examples include:

• Written contracts stating severance pay would be paid to employees
• Promises of severance pay in an employee handbook or documented policies
• A company history of providing severance pay to other employees in the same position
• Oral promises to employees that they would receive severance pay

Is severance pay required for layoffs and business closures?

Severance pay is not required in California for layoffs and business closures. However, the state has created protections for employees in situations where there is a mass layoff or facility closure.

California’s version of the WARN Act (or the Worker Adjustment and Retraining Notification Act) provides more details about the rights of employees during mass layoffs and facility closures, and the responsibilities of employers to provide sufficient warning of layoffs.

The requirements for California’s WARN Act only apply to California employers who have employed 75 or more employees within the past 12 months. Employer violations of the WARN Act may result in back pay or reimbursement costs to former employees.

Questions about severance pay or termination issues? Contact us today

For more information about severance pay and your responsibilities as an employer, contact Amity Law Group’s experienced team of employment law attorneys.

We can help you draft a severance agreement and advise on a wide range of labor and employment issues.

Call (626) 307-2800 to schedule a free consultation or click here.