A severance agreement (sometimes known as a separation agreement or termination agreement) is a contract that governs the terms under which employment will end. Most severance agreements promise the employee a sum of money (“severance pay”) in exchange for surrendering the opportunity to make any kind of legal claim against the employer. Since employees may be giving up valuable rights by signing a severance agreement, asking an employment lawyer to review the proposed agreement, and perhaps to negotiate changes, is always wise. The California employment lawyers at Minnis & Smallets help executives and other employees negotiate severance agreements that are appropriate in light of their circumstances.
While employers can reward loyal service by providing severance pay without asking the departing employee to sign a severance agreement, employers often offer severance agreements because it is in their own interests to do so. State law does not require employers to provide severance pay in California, and generally there is no set standard for severance payments employers may offer, unless required by a company policy or a contract. Many employers offer severance in order to get employees to release all legal claims against them.
Severance agreements may be offered as a matter of ordinary business practice or, otherwise, to resolve a potential dispute, such as a claim that the employee was subjected to workplace harassment or discrimination. They might be included as part of a larger agreement to settle a pending lawsuit, or they might be offered to preempt the possibility of a lawsuit. For example, when an employer knows an employee believes that he or she is being subjected to unlawful treatment, such as harassment or retaliation, the employer may decide to offer the employee an opportunity to resign in exchange for a severance payment and a release of any legal claims.
Prior to accepting a position, employees in executive positions often negotiate an employment contract that includes a payment of severance to the employee in the event of an involuntary separation from employment as an inducement for the executive to join the company.
Severance pay for executives and management-level employees is usually larger than the payments offered to non-managerial employees. Whether the proposed separation pay is fair depends upon the potential value of the legal claims that the executive is being asked to release, as well as other considerations. An employment lawyer can help executives evaluate the severance agreement they have been asked to sign.
In most cases, California law permits employers to offer employees a severance agreement. However, federal and California law prohibits employers from including certain terms in a severance agreement, while other terms may be unenforceable.
Non-compete provisions in a severance agreement may violate California law. An employer cannot require an employee to release a claim for indemnity under the Labor Code. Additionally, some terms—although legal—may be negotiated so that the employee is treated more fairly. For example, a non-disparagement clause and the release should be mutual whenever possible, and the agreement should specify what information the employer can share about the employee. Having an employment lawyer review and discuss a proposed severance agreement will help the employee understand whether the agreement is legal and enforceable.
Severance agreements must be entered into voluntarily. Employees are usually offered money that an employer is not otherwise legally obligated to pay as an inducement to sign the agreement.
An employer cannot require an employee to sign a severance agreement in order to receive pay that the employee has already earned. California law requires employers to make an unconditional payment of all wages that have earned when employment terminates, including accrued vacation pay and other earned benefits. An employee should seek legal advice if an employer withholds pay unless the employee signs a severance agreement.
One consideration in an employee’s decision to sign a severance agreement is whether the agreement offers something of greater value than the rights that the employee is surrendering by signing the agreement. If the agreement gives an employee nothing other than the wages the employee has already earned, there may be no reason to sign the agreement.
Many severance agreements offer only a nominal payment. That may be sufficient if the employee has no realistic legal claim to assert against an employer. On the other hand, if the agreement requires the employee to give up a claim that potentially has significant value, a larger severance payment may be warranted. Employees should obtain legal advice to help them weigh the advantages and disadvantages of signing a separation agreement.
Severance agreements are legal documents. They are often lengthy and complex. You should understand what you are giving up in exchange for a severance payment. You may also have legal grounds to obtain a better severance offer, which may ease your transition to new employment.
The employment lawyers at Minnis & Smallets can review your severance agreement, explain the terms, and answer your questions to ensure you are making an informed decision. We can help you identify your options and we may be able to negotiate more favorable terms for you. The employment lawyers at San Francisco’s Minnis & Smallets have advised many executives, professionals, and employees about their severance agreements. To schedule a review of your severance agreement, please call us at 1-415-551-0885 or submit our online contact form.