Severance pay (also called separation pay, termination pay or continuation pay) is money that an employer gives to an employee when that employee is laid off or fired. Severance pay is also sometimes given when an employee resigns.
The Right to Receive Severance Pay
The law normally does not require employers to give severance pay. However, severance pay may be made in the following circumstances:
- workers with employment contracts that require their employers to pay severance have the right to receive the amount of severance promised in the contract
- employees of companies with policy manuals or practices that provide for severance may have the right to recover this money (some severance policies have “strings” attached–for example, a policy might say that employees must give at least two weeks notice before quitting the job in order to get severance pay)
- employers may negotiate with employees to give up (or “release”) their actual or potential legal claims (such as discrimination claims or wrongful termination claims) in exchange for severance pay
- under the WARN Act, if a company closes down or has a “mass layoff” of a large number of employees in a short period of time without giving at least sixty (60) days notice, the company may have to continue paying wages after the employees are laid off for up to sixty days
Amount of Severance Pay
No set amount of severance pay is required unless specified in a statute, union contract, company policy manual or employment contract. However, severance pay is frequently based on length of service (for example, a severance agreement might give each worker two week’s pay for each year of service to the employer–other benefits, such as job counseling, might be included in an overall severance “package”).
If an employee is protected by the WARN Act the amount of severance will depend on how much notice was received. For example, if an employee only receive 5 days notice before being laid off, the employer must continue the wages for 55 more days.
Since severance pay is usually part of a legal contract; the employee has the right to either, accept it, reject it, or negotiate a different contract. Keep in mind, however, that if you make a “counter offer,” the initial offer has been rejected.
Enforcing Severance Agreements
If an employee is entitled to severance pay, the employee can file a claim with the Labor Commissioner or file a claim in court. In many cases, it is necessary to go to court to obtain severance pay. For instance, if an employer’s severance pay policy is paid for by a fund that is covered by the Employee Retirement Income Security Act (ERISA), the Labor Commissioner will not accept a case to enforce this agreement. ERISA claims and WARN Act claims can only be filed in Federal court. Kletter Law LLP is very experienced negotiating severance pay.
Release of Claims
Often, employers will provide severance pay only if the employee signs a release of claims. A release of claims is a contract “waiving,” or giving up, any potential legal claims the employee may have against the employer based upon any legal theory for past acts. These contracts are generally legal and enforceable. Whether these releases are valid depends on the language in the release and the types of claims that the employer asks the worker to waive. There are several types of releases, and some claims that cannot be released.
In the case of a release, the employee normally gives up the right to file potential legal claims. Sometimes, the consideration given by the employee could be something else, such as simply agreeing to work extra hours or stay on the job longer when he/she is not legally required to do so or agreeing to never seek employment with the company in the future. In return, the employer promises the employee something to which she is not already entitled, such as severance pay. It is a violation of the California Labor Code for the employer to ask an employee to release claims in exchange for paying wages for hours already worked, or in exchange for giving benefits are already owed.
The Age Discrimination in Employment Act of 1967 (ADEA) provides, among other things, that employees over 40 years of age and older must be given 21 days to consider any severance agreement and seven days after signing it, they can revoke their acceptance. Those protections only apply to employees 40 years and older, however.
You should contact a lawyer before offering or signing a release of claims or severance agreement.
Contact Kletter Law today by calling us at (415) 434-3400 or you can schedule a consultation. We often review severance agreement on a flat-fee basis, meaning a set fee regardless of how much time is spent reviewing the agreement and consulting with the client about the agreement.