Severance packages: Why employers need to consider them.

During the course of business, employers inevitably have to let employees go. In some cases, business just isn't going well; in other cases, there may be a problem with a specific employee. Whatever the case, employment sometimes must be terminated and employers need to consider how they should go about doing that. The most important question faced by any California employer is whether they should offer the employee a severance pay or a severance package.

What is severance pay?

Severance packages are a way for employers to insulate themselves from legal liability. The employer pays the employee a sum of money or provides them with benefits for a number of months in exchange for the employee signing a waiver that releases the employer of liability. In other words: the employer pays the employee to waive any lawsuits that the employee might be entitled to bring.

Why are severance packages a good idea?

Even if an employer hasn't done anything wrong, severance pay can help them from a legal, social, and economic standpoint.

Legal benefits.

From a legal standpoint, severance pay is a routine way to prevent potentially litigious employees from suing down the road. It's often impossible to tell what kind of grievances an employee might have and how legitimate those grievances might be.

For example, an employee might have been assigned too much work and they kept working off the clock without telling anyone. They might have been sexually harassed and not reported it. Or they might feel like the termination is based on a discriminatory motivation. In each of these situations, an employee might have a lawsuit and the employer wouldn't even know about it. It is also possible that the employee might just dislike the employer and be willing to make up a story to bring a lawsuit.

So many, if not most, employers will err on the side of caution and provide terminated employees with a severance package.

Other benefits.

Beyond just the legal benefits, severance pay can help ensure a smooth transition. Employees that receive a severance package are less likely to be angry at their employer. Along with that, they're less likely to badmouth their employer to clients, friends, customers, or other employees. Employee

If other employees find out about the circumstances of the termination, they may feel more secure in their job if they know that severance pay was provided. Severance indicates to existing employees that their employer respects them, even after they leave. It also demonstrates that their employer values their commitment to the business. In that way, severance pay could serve to increase employee loyalty.

Finally, from a moral standpoint, severance pay can help alleviate any guilt an employer might feel because they'll know that the employee will have money to survive while they find a new job.

Imagine for a moment that you've just been fired. You're upset, of course, but what are your first thoughts? You might initially think about your family, your mortgage, or your bills. If you have no savings, you might even be worried about what you're going to eat. If these fears are going through your head, your first reaction might be to blame your employer. But if your employer just offered you a nice severance package, it's a lot harder to be angry at them. Also, you're a lot less likely to feel helpless or angry if you have enough money to survive until you find a new job.

Overall, severance pay is just the right thing to do.

Are there any risks in offering severance pay?

As with any business deal, there are risks. Offering a severance package could indicate to the employee that the employer is concerned about being sued. It could also remind an employee about potential lawsuits that they hadn't planned on pursuing.

The most common risk is that an offer of severance pay incentivizes an employee to contact a lawyer to negotiate a higher severance package. The difficulty in measuring these risks, however, is that it's impossible to tell whether the employee would have contacted a lawyer anyway.

The likelihood, however, is that an overly litigious employee will react the same way to being terminated no matter what. Other employees, on the other hand, might be dissuaded from pursuing legal remedies if they're offered severance. So most people that carefully consider the issue of severance packages end up deciding in favor of offering severance.

Additionally, California's evidence code prohibits an offer of severance from being used to prove liability. ((Evid. Code, § 1152.)) So, even if employers run the risk of reminding employees that they might have a potential lawsuit, the offer itself cannot be used against the employer.

Are employers required to provide severance pay?

In most cases, no. An employer is not required to provide severance pay. Even if it is in the employer's best interest to do so, there is usually no legal requirement that they offer any sort of severance package.

The exception to this rule is where an employment contract or other agreement provides for severance or other types of benefits on termination, retirement, or discharge. In these kinds of situations, the employer may be contractually bound to pay severance at the time of termination. The kinds of packages, however, are often reserved for executive or other high-profile employees.

How much severance pay should be provided?

The answer to this question changes in every case. From a purely pragmatic standpoint, the employer should consider: how much is necessary to convince the employee to sign the severance agreement? Some employees may need the money more than others and may be willing to sign for less.

At the same time, the employer should consider how much is fair. If the employer is concerned about the employee saying bad things to clients or other employees, providing a fair severance offer could help ensure that the employee walks away from their job satisfied.

The employer should adopt some ascertainable standard for determining what kinds of severance packages to offer. For example, an employee may find out that a different employee was offered a severance substantially different from the one they are being offered. If the severance offers are not fair and relatively consistent (based on an ascertainable standard), the employee may reject their offer or even be offended by it. If the employer adopts a standard on which to base their severance offers, this problem can be avoided somewhat.

One standard that many employers adopt is based on how long the employee has been with the company. Employers using this kind of standard might offer two weeks of severance pay for every year the employee has been with the company. The employer may also keep the employee's health insurance active during this time.

Are there any claims that cannot be waived in a severance agreement?

Yes. There are several types of claims that cannot be waived in a severance agreement. The most common examples include the following:

  • If an employer owes an employee wages and there is no dispute about whether those wages are actually due, the employee cannot waive their right to those wages in a severance agreement. ((Labor Code, § 206.5.))
  • An employee may not waive their right to participate in any proceeding of Equal Employment Opportunity Commission. ((29 U.S.C. § 626, subd. (f).))
  • An employee usually may not waive claims to workers compensation or unemployment benefits. ((Labor Code, § 5001; Unemployment Insurance Code, § 1342.))

In addition to these, there are other types of claims that may not be waived by employees in a severance agreement. If there are specific types of lawsuits that are important to you, you should contact an employment lawyer today to find out the scope of your rights.

Final thoughts.

The question of whether or not to offer severance pay is an important one. Refusing to offer an employee severance can be very costly, both from a legal standpoint and a social standpoint. Employers could get involved in costly litigation or they could damage their reputation.

If severance packages are offered, it's important that the underlying agreement be enforceable and respect the rights of both parties. Both employees and employers should contact their lawyer to determine whether the agreement sufficiently protects them. If you need legal assistance in either drafting or reviewing a severance agreement, give Optimum Employment Lawyers a call at (949) 954-8181 for a confidential and complimentary consultation.