Are You Considering Entering into a Severance Agreement With Your Employer?
Matt Ruggles has negotiated a wide range of severance agreements from both sides – for decades as a defense attorney representing corporations at one of the largest law firms on Earth; and since 2016 representing employees who have found themselves in the difficult position of involuntarily leaving employment.
Additionally, Matt Ruggles has negotiated countless severance agreements to the advantage of employees, securing favorable terms, maximizing financial compensation, and protecting their legal rights during the transition from employment to separation.
At the Ruggles Law Firm, Matt’s primary goal is to empower employees with the information and provide tools they need to understand and better negotiate a California severance agreement.
Common Scenarios Where Employers Offer Severance Agreements:
In California, employers’ offer of severance pay generally arises under the following specific conditions.
Employment Contract Provision:
Pre-negotiated Employment Contracts: A employer may be required to offer a severance agreement if there is a provision in the employment contract that outlines severance terms. However, it’s essential to note that such provisions are relatively rare and are typically limited to high-level executives, often referred to as C-suite executives (CEO, CFO, COO, etc.) Ordinary employees are less likely to find severance provisions in their employment contracts.
Company’s Severance Policy:
Company Severance Policy: A severance agreement may be offered by the employer if the company has a written severance payment policy in its employee handbook. However, this is also relatively uncommon, and many companies in California do not have such policies in place. Even when a policy exists, it may not apply universally to all employee separations but typically applies only in specific circumstances or to certain roles.
Beyond employment contracts and companies’ severance policies, a severance agreement may also be offered in one of the two following situations:
Sale of the Business, Merger, or Closure: In cases where a company undergoes significant changes like a sale, merger, change in control, or business closure, employers may offer severance agreements. These agreements provide financial support to employees affected by these transitions, helping them navigate uncertain times and fostering a smoother transition. Although a severance agreement typically involves a monetary payment to the affected employee, severance benefits may also include job retraining assistance, relocation assistance, or other benefits designed to assist the affected employment finding subsequent employment.
Employment Litigation Concerns:
Dispute Resolution: When disputes arise between employers and employees, offering a severance agreement can be a strategic way to resolve differences without resorting to costly litigation. It provides both parties with a mutually agreed-upon settlement and avoids the uncertainty and expenses associated with legal proceedings.
Mitigation of Legal Risks: Employers may offer severance agreements when they perceive potential legal risks from an employee’s legitimate claims or grievances. By reaching a negotiated settlement and obtaining a release of claims, employers aim to protect themselves from the possibility of future lawsuits.
It’s important to recognize that ‘severance agreements’ and ‘settlement agreements’ are essentially synonymous. Whether you refer to it as a severance agreement or a settlement agreement, you’re essentially talking about a legally binding contract that resolves employment-related disputes or concerns between an employer and an employee. To be clear, a severance agreement is a voluntary agreement in which the terminated employee agrees to waive his/her claims in exchange for waiving the right to sue the Employer for any potential claims; a settlement agreement is a voluntary agreement in which the employee-plaintiff agrees to voluntarily dismiss a pending lawsuit or a pending administrative charge against the former Employer in exchange for a monetary payment. In both situations the “agreement” is virtually identical because both agreements include a comprehensive waiver of claims in exchange for a payment to the employee.
Employees Typically Have No General Legal Right to Severance:
There is no general legal right to a “severance” payment for most employees in California; there is no law in California that requires an employer to offer a severance payment to an employee. This means that in the absence of an employment contract provision or a company policy, employers in California are typically not obligated to provide severance pay when an employment relationship ends.
Matt’s Further Legal Perspective:
California employees have no statutory right to a severance agreement, even if your company has a severance agreement policy.
In California, employees have no statutory right to severance payments or a severance agreement, as these are typically offered at the discretion of the employer and are not mandated by state employment laws.
If a company has a policy outlining severance payments or severance agreements (most companies don’t have such policies), these policies may be legally enforceable by a contract. However, a severance policy is generally limited to a particular circumstance and/or a particular position within the Company. Sometimes, an employee that otherwise isn’t entitled to severance may be able to negotiate a severance agreement when considering departure from the company if the company is unhappy with the employee but lacks sufficient reasons to terminate for cause.
Always seek legal advice and clarification if you have questions about your entitlement to severance.
Legal Basics of a California Severance Agreement: A Private Contract between Employer and Employee
At its core, a severance agreement is a private contract between employer and employee and represents a mutual exchange. Employees typically agree to relinquish their right to sue the company for potential legal claims arising from their employment and the termination of their employment. In return, they receive compensation or benefits, encapsulating the essence of “you give up your right to sue the company in exchange for money.”
Certainty and Peace:
For employers, offering a severance agreement is akin to buying peace and certainty. By having departing employees sign these agreements, employers safeguard against the possibility of costly legal disputes. It is a strategic move to ensure that a lawsuit will not be filed against them, thereby mitigating legal risks for the employer.
California severance agreements are known for their standardization. Many companies use templates or formulaic language in these agreements, ensuring consistency in the essential legal provisions. This standardization streamlines the process and helps protect the interests of both parties.
California severance agreements are highly enforceable in courts. Once signed, these agreements become legally binding contracts, and both parties are obligated to adhere to their terms. This enforceability provides a level of security for both employees and employers.
It’s crucial to understand that once an employee signs a severance agreement, the employee generally forfeits all rights to sue the company for any past occurrences during their employment, including the termination of employment. The agreement serves as a final resolution of the employment relationship, bringing closure for both the employee and employer.
Understanding the Legal Aspects of California Severance Agreements
1. Signing the Agreement Releases the Employer from All Potential Claims by the Employee:
When an employee signs a California severance agreement, it means that they are voluntarily giving up their right to bring legal claims against their employer related to their employment, termination, or other workplace issues. This includes claims like wrongful termination, discrimination, harassment, violation of employment contract, and many others that might arise from the employment relationship.
Note: Undisputed wage claims, which encompass issues such as unpaid wages, overtime violations, meal and rest break violations, and similar wage-related disputes, cannot be legally waived or released by an employee through a severance agreement in California. However, a “disputed” claim for wages or other benefits can be the proper subject of a severance agreement. Determining whether a wage claim is properly “disputed” requires legal advice from an employment attorney.
2. Employees are Sometimes Permitted to Revoke a Signed Severance Agreement:
In California, for employees 40 years of age or older, there may be a revocation period included in the severance agreement. The revocation period is required by the California Age Discrimination in Employment Act (ADEA).
Duration: The revocation period under the Age Discrimination in Employment Act (ADEA) is generally seven calendar days from the date the employee signs the severance agreement. This means that the employee has one week to change their mind after signing the agreement.
Business Days and Calendar Days: It’s important to note that the revocation period includes both business days and weekends or holidays. It encompasses all calendar days, not just business days.
Starting Date: The revocation period typically begins on the day the employee signs the severance agreement.
Revocation Process: To revoke the agreement within the designated period, the employee must provide written notice of their decision to revoke. This notice is typically sent to the employer or the employer’s representative responsible for handling severance matters.
Effective Date: The revocation becomes effective upon the employer’s receipt of the written notice. It’s advisable for employees to retain proof of delivery when sending the revocation notice, such as certified mail with a return receipt.
Timing and Legal Advice: Employees are encouraged to carefully review the terms of the agreement and, if desired, consult with an attorney during the revocation period to ensure they fully understand the implications of the agreement.
3. Common Illegal or Unenforceable Severance Agreement Clauses
Certain clauses are considered illegal or unenforceable in California severance agreements due to state labor laws and public policy.
Muzzle Clauses: These are provisions that attempt to prevent employees from reporting or discussing unlawful workplace conduct, such as discrimination or harassment. California law strongly opposes such clauses as they interfere with an employee’s rights to report wrongdoing and cooperate in investigations.
Non-Compete Clauses: These clauses restrict employees from working for competitors or starting their own competing businesses after leaving their current employer. They are generally unenforceable in California, with limited exceptions for specific situations.
Confidentiality for Sexual Harassment Claims or Settlements: California law prohibits clauses that require employees to keep sexual harassment settlements confidential. Employees have the right to discuss and disclose information related to such settlements.
Do Not Overlook These Key Components of a Severance Agreement
While there are indeed various components within a severance agreement, two key components that often carry significant implications for the departing employee are the liquidated damages provision and the non-disparagement clause.
1. Liquidated Damages
A liquidated damages provision typically outlines the financial penalties or consequences an employee would face if the employee violated any terms of the severance agreement. These terms might include confidentiality, non-disparagement, or non-solicitation clauses.
Key characteristics of liquidated damages include:
- Predetermined Amount: Liquidated damages are a fixed, specific dollar amount agreed upon in the contract.
- Certainty: They are used when it’s challenging to precisely calculate the actual financial loss or harm that might result from a breach. By agreeing on a specific amount, both parties avoid the uncertainty and cost of litigation to determine damages.
- Enforceability: Liquidated damages are generally enforceable if they meet certain legal criteria, such as if they are a reasonable estimate of potential damages at the time of contract formation. Courts typically respect the parties’ agreement unless it is deemed to be a penalty.
It’s vital to scrutinize these provisions for several reasons:
- Potential Financial Liability: The liquidated damages provision can result in substantial financial penalties for an employee if they inadvertently breach the terms of the agreement. Penalties can range from $1,000 to $15,000 per violation or more.
- Ambiguity and Fairness: The terms and conditions that trigger liquidated damages can sometimes be vague or overly broad. Negotiating this provision allows you to clarify these terms and ensure they are reasonable and fair.
- Protection of Rights: An employment lawyer can assess whether the liquidated damages provision might unfairly restrict your ability to seek future employment, voice your opinions, or engage in other lawful activities. They can help protect your rights and interests.
2. Non-Disparagement Clause
A non-disparagement clause typically prohibits both parties from making disparaging statements about each other, ensuring a degree of confidentiality and professionalism. Here’s why this clause should be a focus of negotiation:
- Potential Constraints on Speech: Non-disparagement clauses can limit your ability to discuss your former employer publicly, even if the information you want to share is factual or concerns issues of public interest. It’s crucial to ensure that the clause doesn’t unduly restrict your ability to communicate.
- Balance and Fairness: By negotiating the non-disparagement clause, you can seek a balance between respecting your former employer’s reputation and preserving your right to express your opinions or concerns, especially when these are in the public interest.
- Consequences for Breach: Consideration should be given to the consequences of breaching the non-disparagement clause. An employment attorney can help ensure that these consequences are reasonable and proportionate.