Severance Agreement and Release of Claims

A severance agreement is a contract that an employer may ask an employee to sign when they are terminated from a job. Severance pay is often offered in exchange for an employee’s release of their claims against the employer. Severance contracts that contain a release of all claims against an employer in exchange for severance pay or other benefits are legal, enforceable, and binding.

However, an employer cannot require an employee to release their claims in exchange of payment for hours already worked or benefits already owed to the employee. If you suspect that your employer has not paid you all of your wages, you may wish to send your employer a letter telling them so. A template for this sort of letter may be found here.

No. Unless a union contract, company policy manual, or employment contract specifically requires payment of a pre-set amount of severance pay to employees who quit or are laid off, your employer is not required to give you severance pay. Severance pay agreements are up to the discretion of the company, which usually requires a release of claims in exchange for the severance pay.

If your employer has a policy that requires them to pay a pre-set amount of severance pay, then your employer must pay the severance amount regardless of whether you sign a release of claims against them. Pre-set severance pay is considered wages and must be paid in full immediately if terminated, on your last day if you provide 72 hours of notice of quitting, or within 72 hours of your last day if you provided no previous notice of quitting.

No set amount of severance pay is required unless the severance pay is required by a union contract, company policy manual, or some other employment contract.  Severance pay is frequently based on length of service. For example, a severance contract could include a severance pay term granting one week’s pay for each year of service to the employer.

Although not required, some employers may also offer other severance benefits, such as job counseling or payment of COBRA expenses, as part of an overall severance “package.”

If you believe that you have strong employment law claims against your employer and the severance pay depends on your release of those claims, you may be able to negotiate for higher severance pay to compensate you for the alleged harms under those claims.

If the severance plan is regulated by the Employee Retirement Income Security Act (ERISA), then a plan participant must exhaust administrative remedies by timely appealing a claim denial within 60 days and then filing suit if the appeal is denied. ERISA governs pension plans in the private industry, and to a limited extent, governs employer-provided health (e.g., medical insurance) and welfare (e.g., gym membership) plans. Government employee plans and church plans are generally not governed by ERISA.

If the severance plan is not regulated by ERISA, then claims for benefits (“wage claim”) may be filed with the CA Division of Labor Standards Enforcement (also known as the Labor Commissioner), or in court (including Small Claims court if the claim is for less than $10,000). To file a claim with Small Claims court, follow the step-by-step guide here.

It depends. To determine whether you are eligible for unemployment benefits, the Employment Development Department (EDD) first looks at whether you had a reduction in wages by no fault of your own. Severance pay is usually not considered a continuance of “wages” for purposes of unemployment insurance, so even if you get severance pay, you are usually still eligible for unemployment benefits.

In all cases, severance pay will not count as wages against unemployment benefits when:

1. You were paid in accordance with a company policy,
2. The plan or policy provides that the payment is for a specific reason (e.g., job elimination or recognition of past services),
3. The plan is available to at least a class of employees, and
4. The purpose of the payment is to supplement unemployment insurance benefits.

The method of payment, i.e., lump sum or periodic, does not determine whether the severance pay counts as wages.

Important to note, if your employer terminates you and continues to pay your full wages, these payments may be considered “wage continuation pay” or “in-lieu-of-notice pay,” which means you will not be eligible to receive unemployment benefits during the period that you are receiving those payments. Things like your employer keeping you on the payroll after termination, receiving paychecks from your employer on payday, and continuing accrual of service credits (vacation or sick time) may be examples of wage continuation pay, which can count as wages against unemployment benefits. Note: If this pay does not compensate you at your full regular rate of pay, you may be eligible for “partial unemployment.”

Unemployment insurance claims cannot be waived in a general release contained in a severance contract. (See also Question 7).

You may find more information about unemployment benefits and severance agreements at the EDD’s website here.

Statutory Claims

Most statutory claims, including discrimination claims (e.g., Title VII, ADA, FEHA, WARN Act, etc.) brought to court, may be released by an employee, even if the claim is not specifically referred to in the release. So, a release that states that an employee gives up “claims pursuant to Federal laws” would be valid as to the employee’s Title VII discrimination claims. On the other hand, an employer cannot require an employee to waive the right to file a discrimination charge with the EEOC (rather than suing in court).

Other statutory claims that may be released include claims under ERISA and COBRA. A voluntary release of Family and Medical Leave Act (FMLA) claims is enforceable without the permission of a court or the Department of Labor. You may find more information about discrimination claims and the related laws in our Discrimination and Harassment FAQ found here.

Common Law Claims

Claims made pursuant to state common law (e.g., wrongful termination, defamation, etc.) may be validly waived in a release of claims.

Disability Claims

A disability plan (such as a long-term disability insurance plan provided by an employer-designated insurance company) is a separate entity from the employer who offers it. A general release covering claims only against the employer would not waive continuing disability benefits, unless the release specifically covered claims against the disability plan itself. Thus, any claims under a privately-run disability plan may be waived in a release of claims.

Note: This does not apply to California State Disability Insurance (SDI), which is run by the state. Claims under the California SDI cannot be waived.

Class Action Claims

An employee can waive the right to participate in any dispute that is brought as a class, collective, or representative action as long as the claim or claims under which the action is brought are claims that can be waived in a severance agreement.

Note: Class action waivers are unenforceable in relation to representative action claims that are brought under the Private Attorney General Act (PAGA). That means, if you and other class members are suing your employer on behalf of the government, those claims cannot be waived.

Unknown Claims

Employees may validly waive both “known” and “unknown” potential claims against employers as long as the language in the release makes clear that the release of claims extends to unknown claims.

Where an employee has validly released unknown claims, and later discovers that their employer illegally terminated them, they have no legal basis to bring such claims against their employer. If they do so anyway, they may be liable for attorney fees and costs if the claim is dismissed at the pleading or summary judgment stage.

Workers’ Compensation Claims

Generally, a workers’ compensation claim cannot be waived in a general release contained in a severance contract. Employers are also not allowed to credit or offset amounts paid under a severance agreement against workers’ compensation temporary disability benefits.

Age Discrimination in Employment Act Claims

Typically, claims under the Age Discrimination in Employment Act (ADEA), which prohibits employers from discriminating against employees who are 40 years or older because of their age, cannot be waived unless certain requirements are met. Waivers of ADEA claims in severance agreements are only enforceable if the employer, in addition to meeting other requirements, gives the employee at least 21 days to consider the waiver (and at least 7 days to revoke it) and advises the employee to consult an attorney.

Minimum Wage and Overtime Claims

An employer cannot put any conditions on the payment of undisputed wages that are due to an employee under California’s wage and hour laws, including minimum wage and overtime pay. If an employee signs such a release, that release is void. On the other hand, an employee may release a claim for wages that were subject to a bona fide dispute between the parties over whether or not such wages were owed.

Releases of wage and hour claims made under the Federal Labor Standards Act (FLSA) are also generally unenforceable unless the release receives court approval or undergoes Department of Labor supervision.

Unemployment Insurance Claims

Unemployment insurance claims cannot be waived in a general release contained in a severance contract.

USERRA Claims

Courts have not enforced releases of claims for wrongful termination and breach of oral employment contract under the Uniformed Services Employment and Reemployment Rights Act of 1994.

There are several common clauses that employers often include in severance agreements. Below are a few examples of valid clauses that employers can include in a severance agreement, but keep in mind that there may be other enforceable provisions besides the ones listed here:

• Confidentiality Agreements. Employers often require that the terms of a release of claims be kept confidential. In order to put “teeth” into the contract, some employers tie the confidentiality clause to liquidated damage clauses. Confidentiality clauses are routinely included in releases, and are enforceable. Liquidated damage clauses, however, are only valid if 1) damages are difficult to estimate; 2) the amount of damages are a reasonable estimate of damages at the time the contract is made; and 3) are not a penalty.
• Employee’s Confirmation that No Claims Exist. It is routine for a release to identify any claims that have been filed, so that the release will specifically settle all of those pending claims.
• Nonadmission of Employer Wrongdoing. A denial of liability is almost always included in a release and severance contract.
• Nonparticipation of Employee in Claims. Employers often attempt to stop their employees from voluntary participation in lawsuits brought by others against the employer. Such clauses, however, cannot prevent a person from providing legally compelled testimony, such as under subpoena or court order.
• Negative Statements by Employee. To restrict a former employee from disparaging their former employer, an employer may insert language that prevents the former employee from speaking negatively about the employer. If you find a “non-disparagement clause” such as this in your severance agreement, you may ask to add a mutual provision that the employer not disparage you.
• Letters of Reference. Employees are frequently concerned about the type of reference their former employer will give to potential future employers regarding their work. Therefore, many severance agreements attach a “neutral” letter of reference as an exhibit to the agreement that can be used by the employer or employee whenever a letter of reference for the employee is requested. You may find a sample letter here.
• Waiver of Employment. If the employee has not filed any type of claim prior to the agreement, an employer may lawfully prohibit the former employee from working for, or even applying to work for, the employer in the future. If the employer is a large corporate employer with many subsidiaries and associated companies, it is a good idea to ask whether the “no-rehire” clause covers those other companies as well.
• Integration or merger clauses make the contract the final agreement between the parties, and prevents employees from bringing up evidence of any prior oral or written promises that their employer made to them.
• Governing Law. In order to control the forum whose law will apply to the release agreement, contracts will often include language about which state or jurisdiction’s laws will control the agreement.
• Severance of Unenforceable Provisions. In the event of a term in the agreement being declared unenforceable, many agreements will include a clause that allows the unenforceable term to be severed from the rest of the agreement. This means that the rest of the contract will remain legally enforceable.

Arbitration. An arbitration clause provides that you agree to submit any claims to arbitration and waive any right to sue in court. Arbitration is essentially a private court system where you argue claims in front of an independent, third party arbitrator. The arbitrator’s decision is final and enforceable in court, and is not usually appealable. Arbitration may indirectly provide more advantages to the employer than to the employee due to several reasons; one factor is that the employer pays the arbitrators. Class-action waivers in arbitration agreements are also enforceable.

Waiver of Employment if Employee Filed a Claim Prior to the Agreement

If the employee has filed a claim prior to the agreement, under California law an employer cannot include a “no-rehire” clause in an agreement to settle a claim filed in court, before an administrative agency, in an alternative dispute resolution process, or through the company’s internal complaint process. The employer also cannot prohibit its parent company, subsidiary, division, affiliate, or contractor from rehiring the employee in the future. The sole exception under which an employer can include a “no-rehire” clause in a settlement agreement is if the employer has made a “good faith determination that the person engaged in sexual harassment or sexual assault.”

Confidentiality on Whistleblower Violations

Employers cannot impede individuals from reporting potential violations to the Securities and Exchange Commission (SEC) or the Occupational Safety and Health Administration (OSHA), even if the employee signed a confidentiality agreement.

Non-Compete Clauses

In California, it is generally unlawful for an employer to require an employee to sign a non-compete agreement. A non-compete agreement, or also known as a covenant not to compete, is an agreement that prohibits an employee from going to work with a competitor of their current employer.

Before signing a release, it is important to understand what potential claims you may have against your employer. Once you learn the strength of your potential claims, you will be better able to decide whether you want to give up those claims by signing the release or negotiate for a “better deal” in the severance agreement. Whether an employee can negotiate a better deal typically depends on any leverage they may have (i.e., the value of their claims the employer wants them to sign away).

However, it is also important to understand that any counter proposal you might give to your employer is generally considered a rejection of your employer’s offer. If your employer chooses not to respond to the counter proposal, there is a possibility you will end up with nothing.

There is normally no specific time that an employee must be allowed to consider or reject an offer to release claims. You may ask for more time, but the employer is not required to give you more time. The only exception is for ADEA claims, which provides that employees 40 and over be given 21 days to consider any agreement that waives claims under the ADEA.

Fraud, misrepresentation, duress, or unconscionability are common defenses you can use if you want to void a severance agreement that you already signed. Although these defenses are rarely successful, it might be possible to prevail if the release was arrived at through deceit or bad faith by your employer. For example, if you do not speak English and could not read the release when it was signed, this might justify rescission of the contract.

If you believe your employer violated the terms of your severance agreement, you should consult with an employment attorney. You can locate attorneys on the California Employment Lawyers Association’s website here. See Question 4 for information on what to do if your employer failed to pay you severance pay/benefits according to the agreement.