OVERVIEW
Most business owners know that California is, at least in theory, an at-will state. In other words, except in cases of discrimination (e.g., race, gender, religion, etc.) or retaliation (e.g., whistleblower, etc.), an employer can fire an employee whenever it wants to for any reason (or no reason) at all. On the flip side, employees can quit at any time, without any prior notice or repercussions.
That said, any experienced business attorney will still caution their clients regarding how risky it can be for an employer operating in California to fire employees—even when there’s good cause to do so—without first having a verifiably good reason for doing it. Sadly, because California’s labor and employment laws incentivizes disgruntled employees to file even frivolous lawsuits against employers, even if the employer had an excellent reason to fire that employee, there is still substantial risk associated with doing so. One way, however, to minimize the potential liability (and the enormous costs associated with litigation and bad publicity) associated with terminating an employee is to offer some sort of severance agreement.
WHAT IS A SEVERANCE AGREEMENT?
Severance pay does NOT include wages, compensation, or accrued and unused vacation pay, all of which must be paid upon an employee’s termination, and none of which may be conditioned upon the employee agreeing to do anything. Rather, severance pay is money offered to an employee on top of what is “owed”—money offered specifically to induce a terminated employee to agree to waive all of his or her potential claims against the employer.
So, how does an employee go about securing the protection afforded by a severance agreement? Simple. At the time of termination, the employer offers the terminated employee a severance agreement to review and sign. But be warned. Not all severance agreements are equal. The difference between a generic, one-size-fits-all severance agreement and one prepared specifically for the employer by an experienced business attorney, is night and day.
Severance agreements need to contain specific language indicating the employee’s waiver of claims related to the employer/employee relationship, as well as specific waivers of claims and rights under a variety of federal and state laws, including (to name just a few), the Fair Labor Standards Act, the Occupational Safety and Health Act, and the Fair Employment and Housing Act (and when dealing with employees over 40, the Age Discrimination and Employment Act). Certain severance agreements must also abide by notice and cancellation timelines to ensure, for example, that age discrimination claims are properly waived. So there are waiting times to consider as well.
Simply put, a severance agreement is a complicated document that needs to be drafted properly, or the employer risks losing the very protection it thought it was getting.
CONCLUDING THOUGHT
While using a severance agreement will, as a matter of course, force an employer to spend money paying a departing employee more than what the employee is actually owed, the benefits often far outweigh the costs, and thus every business person should seriously consider using severance agreements with all departing employees, whether they were terminated or resigned.