The Severance Payoff

Terminations are like taxes—they are almost certain in any workplace. The reasons for terminations vary, from involuntary, to position eliminations, to retirement. Employers may wonder if severance pay mandatory in California? When should you offer a severance agreement?

First, let’s clear up that severance agreements/payouts are not required in California. It is always at the option of both the employer and employee. However, there are a number of circumstances when it is advisable for the employer to offer a severance payout and accompanying agreement for departing employees.

So what are severance agreements? Severance agreements are contracts between an employer and an employee specifying the terms of the end of employment. The employer usually provides a lump sum of money (“payout”) in return for the employee's waiver of potential legal claims connected with the employment relationship. For instance, an employer handling a challenging termination where they are worried the employee may turn around and sue, may use a severance agreement to avoid a potential wrongful discharge lawsuit. While the employee would have to voluntarily agree to it, the employer may offer any sum of money they think would entice the employee to sign. In another instance, it may be the employer’s policy to grant severance pay for position eliminations or retirement to assist employees through the transition.

Because severance agreements are legal documents, a knowledgeable employment attorney should always craft the agreement. Notably, there are very specific legal elements that must be included in the contract for it to be valid and enforceable. For example, depending on the age of the terminated employee, and how many terminations are executed at one time, there are additional mandatory disclosures and timelines that the employer must follow. This is why you should never download a contract from the internet or use one that has been passed down from a previous owner. It is likely that the verbiage in the contract will change depending on the individual(s) you are terminating.

For a more in depth review of dos and don’ts, CEA members may download our Severance Agreement Fact Sheet on our HR Forms Page, to help guide them with the specific required elements to consider. Our Partners page also offers employment law attorneys that can assist with reviewing or creating a severance agreement. For additional information call us at 1.800.399.5331, or email us at CEAinfo@employers.org.