While California law does not require employers to offer severance pay, providing it in exchange for a release of claims can be a strategic move to avoid future litigation when parting ways with employees. For at-will employees, where no contract mandates severance, an employer may still benefit from offering a severance package in specific situations to mitigate legal risks. Though severance agreements can be complex, this article highlights five key considerations employers should keep in mind when drafting such agreements to protect their interests and minimize costly disputes.
1. Release of claims
The idea of the severance agreement is to have some certainty that there will not be litigation following the employee’s separation from the company. Employers may seek a general release of known and unknown claims if it is specific and easy to understand. Courts have held that “a written release extinguishes any obligation covered by the release’s terms, provided it has not been obtained by fraud, deception, misrepresentation, duress, or undue influence.” (Skrbina v. Fleming Cos., 1996).
Release of Unknown Claims
The employee (and employer for that matter) can waive all known claims. However, in California, for any party to release unknown claims, the agreement needs to be clear and advise the party that they are releasing unknown claims. Ideally, the agreement should set forth that the employee is waiving all rights under California Civil Code section 1542, and to specifically quote section 1542 in the agreement, which provides:
A general release does not extend to claims that the creditor or releasing party does not know or suspect to exist in his or her favor at the time of executing the release and that, if known by him or her, would have materially affected his or her settlement with the debtor or released party.
2. Choice of law and venue
California Labor Code section 925 prohibits employers from requiring an employee who primarily resides and works in California, as a condition of employment, to adjudicate claims outside of California that arose in California and deprive the employee of “substantive protection of California law.” Section 925 does not apply to any contracts negotiated when the employee is represented by legal counsel. Section 925 only applies to contracts entered into, modified, or extended on or after January 1, 2017. However, since a severance agreement is being entered at the end of the employment relationship, employers may have the argument that section 925 does not apply to severance agreements because it is not being entered into “as a condition of employment.” Employers should approach this issue carefully, and to the extent there is a need to provide for a state other than California’s law to apply to the severance agreement, or for the venue to be set outside of California, employment counsel needs to be consulted.
3. No re-hire
Beginning January 1, 2020, an employer may not include a no re-hire provision in the severance agreement under certain circumstances. Code of Civil Procedure section 1002.5 prohibits and invalidates any provisions in settlement agreements entered into on or after January 1, 2020 that prevent workers from obtaining future employment with the settling employer or its affiliated companies.
The law applies to any employees who have filed a claim: (1) against the employer in court, (2) before an administrative agency, (3) in an alternative dispute resolution forum, or (4) through the employer’s internal complaint process. Therefore, if the employee has complained internally, and a severance agreement is reached with the employee without any litigation being filed, the employer would still be restricted from placing a no-rehire provision in the severance agreement.
The law does not prohibit or otherwise restrict an employer from preventing an employee from obtaining future employment if the employer has made a good faith determination that the person engaged in sexual harassment or sexual assault.
4. Confidentiality
Severance agreements may a contain limited confidentiality provision where the employee agrees not to disclose the amount paid or the terms of the agreement. The confidentially provision can set forth the limited number of people the employee may make disclosures to, such as legal or tax advisors, family members, or as required under the law. However, California employers need to be careful about confidentiality provisions, as California law prohibits confidential settlement agreements or disclosure of allegations related to unlawful acts in the workplace.
Employers may still contain non-disparagement provisions and confidentiality clauses in agreements with employees, but the following notice must be included in the document:“Nothing in this agreement prevents you from discussing or disclosing information about unlawful acts in the workplace, such as harassment or discrimination or any other conduct that you have reason to believe is unlawful.”
5. Special provisions
When drafting severance agreements, it’s important to include a range of key provisions to ensure compliance with legal requirements and to protect the employer’s interests. Some of the critical provisions to consider are:
- Older Workers Benefit Protection Act (OWBPA): Provides protection for employees aged 40 or older, ensuring that they receive certain rights and protections under severance agreements.
- Non-waivable claims: Certain claims, such as workers’ compensation and unemployment insurance claims, cannot be waived by the employee.
- No prevailing party and attorney’s fees: Ensure that the agreement does not include provisions that would allow either party to claim attorney’s fees if legal disputes arise.
- Return of company property: A clause requiring the employee to return any company-owned equipment or materials upon separation.
- Non-competition, non-solicitation, and non-disclosure terms: These provisions can help protect the company from competition, solicitation of clients or employees, and disclosure of proprietary information. However, California law is highly restrictive when it comes to non-competition agreements, generally prohibiting them except in limited circumstances, such as the sale of a business or dissolution of a partnership, making it essential for employers to carefully craft these terms.
- Job reference: Address how future job references will be handled, including the possibility of neutral or positive references.
- Integration clause: Ensures that the written agreement constitutes the entire understanding between the parties, superseding any prior discussions.
- Severability clause: Provides that if any part of the agreement is found to be invalid, the rest of the agreement will remain enforceable.
- Arbitration clause: Allows disputes to be resolved through arbitration rather than litigation, which can be a faster and less costly option for employers.
Incorporating these provisions helps create a comprehensive severance agreement that minimizes potential risks and complies with legal standards.