When Should an Employer Offer Severance Payments?

Understanding Severance Payments:

We are often asked, “under what circumstances should an Employer offer Severance, and is there a Standard Severance Agreement that applies to all separations?”

Severance is not required by law.  Severance payment is either provided to a long-term employee to thank them for their service and tie them over while they find new employment and/or to resolve any disputes or actual, threatened or potential claims in exchange for a release of claims.

Offering a voluntary severance package should be considered if, for example,

• An employee is terminated for reasons other than serious misconduct,
• An employee knows where all “the bones are buried” in connection with corporate and personal executives, including, legal claims, compliance, potential unlawful actions involving financial, corporate, or business decisions, such as a personal assistant, billing or accounting personnel;
• Documentation regarding the employee, or lack thereof, may create employer liability;
• An employee engaged in protected activity, such as, complained about unlawful conduct or made a sexual harassment complaint within the last 6 months to one year of the termination;
• An employee is a long-term employee who is a member of one or more protected classes, such as, age, race, sex, etc. and any other circumstances that may give rise to discrimination or harassment claim,
• An employee has already raised employment-related claims, or initiated charges or legal action against the employer,
• An employee can raise colorable legal claims against the employer, and is likely to do so, such as, violation of wage and hour laws, or is entitled to attend rehabilitation under California law, etc.
• An employee is needed to testify in upcoming matters such that cooperation is key.

There is no one-size-fits all severance agreement.  Although there are certain provisions that are standard, the vast majority of the agreement must be customized to address the employment matter at hand.  The decision to offer severance, the material and non-material terms of any proposed agreement, scripting and documenting the meeting and presentation of the proposed agreement, negotiation of terms and finalizing the agreement should all involve experienced employment counsel.

Need Help Crafting a Severance Agreement?

For more information, feel free to contact our office at (424) 249 -3631 or schedule a free consultation by filling out a contact form.

FAQs

• Is severance pay required by law?

No. California and federal law generally do not require employers to pay severance unless a contract or policy obligates the employer to do so.

• How much severance should an employer offer?

There is no set formula. Employers often base severance on the employee’s years of service, potential legal claims and the need for a release. Discuss your situation with counsel before deciding on an amount.

• Are there circumstances when severance becomes mandatory?

Only when an employment agreement, collective bargaining agreement or company policy expressly requires severance. In most other situations, severance is discretionary.

• Can employees negotiate severance terms?

Yes. Employees may negotiate pay, benefits, confidentiality clauses, non‑disparagement clauses and other terms. Employers should be prepared for negotiations and maintain consistent practices.

• Why should I consult an attorney before offering severance?

An experienced attorney can help identify potential claims, draft enforceable language, evaluate tax and benefits issues and ensure compliance with state and federal laws. This reduces the risk of future disputes.

• What should be included in a severance agreement?

Typical provisions address payment terms, release of claims, confidentiality, non‑disparagement, return of company property, cooperation clauses and any post‑employment restrictions. Tailor each agreement to the facts of the separation.