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.

The steps you can take depend on the type of severance plan or benefits involved.

Some severance plans are covered by a federal law called the Employee Retirement Income Security Act (ERISA). ERISA governs most private-sector pension plans and many employer-provided benefit plans, including some severance plans, health insurance plans, and other employee benefit programs. Government employee plans and church plans generally are not covered by ERISA.

If your severance plan is covered by ERISA, you may need to follow the plan’s internal appeal process before filing a lawsuit. Because strict deadlines may apply, it is important to act quickly if your claim for benefits is denied.

The U.S. Department of Labor’s Employee Benefits Security Administration (EBSA) helps workers understand their rights under ERISA and may be able to provide information about employee benefit plans and claims. You can contact EBSA here.

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 $12,500). 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.

A severance agreement often includes a “release of claims.” A release of claims is a promise that you will not sue your employer for certain legal claims in exchange for severance pay or other benefits.

By signing a release, you may be giving up your right to bring many types of legal claims against your employer, including claims you already know about and, in some cases, claims you do not yet know about.

Examples of claims that may be released include:

· Discrimination, harassment, and retaliation claims. These include claims based on race, color, national origin, religion, sex, pregnancy, disability, age, sexual orientation, gender identity, or other protected characteristics. Examples include claims under Title VII of the Civil Rights Act of 1964 (Title VII), the Americans with Disabilities Act (ADA), the California Fair Employment and Housing Act (FEHA), and similar laws. While a severance agreement may waive your right to sue your employer for these claims, it generally cannot prevent you from filing a complaint with a government agency such as the Equal Employment Opportunity Commission

(EEOC) or California Civil Rights Department (CRD). You may find more information about discrimination claims and the related laws in our Discrimination and Harassment FAQ found here.

• Wrongful termination claims. These include claims that your employer illegally fired you or otherwise violated your rights at work.
• Family and medical leave claims. These include claims related to protected medical or family leave, such as claims under the Family and Medical Leave Act (FMLA) and the California Family Rights Act (CFRA).
• Employee benefits claims. Some severance agreements may release claims involving retirement plans, health insurance benefits, COBRA benefits, or other employer-provided benefit plans. Some agreements may also release claims under the Employee Retirement Income Security Act (ERISA).
• Defamation and other state-law claims. These include claims that your employer harmed your reputation or otherwise caused you harm under California law.

Disability Claims

A disability insurance plan (such as a long-term disability insurance plan provided through your employer) may be separate from your employer. This means that a release of claims against your employer does not necessarily waive your right to continue receiving disability benefits unless the agreement specifically says it also covers claims against the disability plan.

However, claims involving a privately administered disability plan may sometimes be waived in a severance agreement.

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

Class Action and Group Claims

Some severance agreements include language stating that you agree not to participate in class actions, collective actions, or other group lawsuits against your employer.

However, employees generally cannot waive claims brought under California’s Private Attorneys General Act (PAGA) on behalf of the State of California.

Unknown Claims

Some severance agreements also waive “unknown claims.” This means you may be giving up legal claims even if you do not know you have them when you sign the agreement.

For example, if you later discover that your employer may have violated the law before your employment ended, a valid release may prevent you from bringing a claim based on those facts.

Because signing a release can waive important legal rights, you may wish to speak with an attorney before signing a severance agreement.

Workers’ Compensation Claims

Generally, workers’ compensation claims cannot be waived in a severance agreement. An employer also cannot reduce or offset workers’ compensation disability benefits because it paid severance pay.

Age Discrimination in Employment Act Claims

Claims under the Age Discrimination in Employment Act (ADEA), which protects workers age 40 and older from age discrimination, can only be waived if specific legal requirements are met. For example, the employer generally must give the employee at least 21 days to consider the agreement, advise the employee to consult an attorney, and allow the employee at least 7 days to revoke the agreement after signing it.

Minimum Wage and Overtime Claims

An employer cannot require an employee to give up the right to receive wages that are clearly owed under California wage and hour laws, including minimum wage and overtime pay. Any agreement requiring an employee to give up those rights is generally not enforceable.

However, an employee may settle a wage claim if there is a genuine disagreement about whether wages are owed.

Claims under the Fair Labor Standards Act (FLSA), the federal minimum wage and overtime law, also generally cannot be waived unless the settlement is approved by a court or supervised by the U.S. Department of Labor.

Unemployment Insurance Claims

You cannot waive your right to apply for unemployment benefits in a severance agreement.

Military Service Claims

Courts generally have not enforced waivers of certain claims under the Uniformed Services Employment and Reemployment Rights Act (USERRA), a federal law that protects service members’ employment rights.

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 employees to keep the terms of the severance agreement confidential. Some agreements also include a provision requiring an employee to pay a specified amount of money if they violate the confidentiality provision. These monetary damage clauses 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. Severance agreements often identify any claims or complaints that have already been filed so that the agreement clearly resolves those matters.
• No Admission of Employer Wrongdoing. Most severance agreements state that the employer does not admit that it violated the law or did anything wrong.
• Limits on Participation in Other Lawsuits. Some agreements attempt to restrict a former employee from voluntarily participating in lawsuits brought by others against the employer. However, an agreement generally cannot prevent a person from providing testimony or information when legally required to do so, such as in response to a subpoena or court order.
• Negative Statements by Employee. Some severance agreements prohibit employees from making negative statements about their former employer (also known as a non-disparagement provision). If your agreement includes a non-disparagement provision, you may wish to ask whether the employer will agree to a mutual non-disparagement provision that also prevents the employer from making negative statements about you.
• Letters of Reference. Some severance agreements include a neutral letter of reference that can be used if future employers request information about your employment. Employees may wish to review the proposed letter before signing the agreement.
• No-Rehire Provisions. If an employee has not previously filed a legal claim or workplace complaint, an employer may be able to include a provision stating that the employee will not apply for or accept future employment with the employer. If the employer has multiple subsidiaries, affiliates, or related companies, employees may wish to clarify whether the provision applies to those companies as well.
• Entire Agreement Provisions. Many severance agreements state that the written agreement is the complete agreement between the parties. This means that promises not included in the written agreement may be difficult to enforce later.
• Governing Law Provisions. Severance agreements often specify which state’s laws will be used to interpret and enforce the agreement.
• Severance of Unenforceable Provisions. Many agreements provide that if one provision is found to be unenforceable, the remainder of the agreement will remain in effect.
• Arbitration Provisions. An arbitration provision requires employees to resolve disputes through arbitration rather than in court. Arbitration is a private process in which an independent arbitrator decides the case. The arbitrator’s decision is generally final and difficult to appeal. Some arbitration agreements also include class-action waivers, which generally prevent employees from bringing claims as part of a class action lawsuit. 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.

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

If an employee has already filed a legal claim or workplace complaint, California law generally prohibits employers from including a “no-rehire” provision in a settlement agreement. This includes claims filed in court, with a government agency, through arbitration or mediation, or through the employer’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 block 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, 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 if you ask for changes to a severance agreement, your employer may treat that as a rejection of its original offer. If the employer does not agree to your proposed changes, the original offer may no longer be available.

In California, employees offered a severance agreement generally must be given at least five business days to consider the agreement and must be notified of their right to consult with an attorney before signing. This protection comes from California’s “Silenced No More Act” (SB 331). Employees may choose to sign earlier, but the employer cannot require immediate acceptance.

Employees age 40 and older who are asked to waive claims under the federal Age Discrimination in Employment Act (ADEA) generally must be given at least 21 days to consider the agreement.

You can also ask for additional time to review a severance agreement before signing it, but the employer is not required to give you more time.

Fraud, misrepresentation, duress, and unconscionability are legal arguments that may allow you to challenge a severance agreement that you have already signed. These terms generally refer to situations where an employee was misled, pressured, or treated unfairly during the process of signing the agreement.

Although these arguments are rarely successful, a court may refuse to enforce a severance agreement if the employer obtained the employee’s signature through fraud, coercion, or other serious unfair conduct. 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.