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How Does Severance Pay Work in California?

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Severance pay is compensation that employers provide to employee upon termination of their employment. Under California law, businesses are generally not required to offer severance pay to a terminated employee. Similarly, the U.S. Department of Labor does not generally require that employers offer severance pay to employees. However, that does not mean there are no circumstances in which a person in California will receive severance pay. If there is an existing contract that outlines a severance pay agreement between an employer and an employee, this creates a legal obligation to satisfy the payment terms.

Understanding Severance Pay

Severance pay, commonly referred to as a severance package, is compensation that an employer will pay to the worker after the worker is terminated, or is about to be terminated, from their job. Severance pay is typically made through monetary means, though it could include extended benefits such as retirement account payments, stock options, health insurance benefits, help finding a new job, or assistance in training for a new vocation.

In California, severance pay also includes paying out any unused paid time off (PTO), sick leave, or vacation pay.

Severance Agreements Often Involve Protections for the Employer

In many cases, a severance payment will be made only upon the employee agreeing not to pursue any future legal action against the employer. Severance agreements will often include the following:

  • Release of legal claims. If there is any potential for future legal claims from the employee against the employer, a severance pay agreement may include a release of all future claims. This could include claims of discrimination against the employee by the employer.
  • Confidentiality and/or non-compete restrictions. Confidentiality and non-compete restrictions could be included in a severance agreement in California. Specifically, these clauses may request that an employee not divulge any proprietary information about the employer’s internal operations. Non-compete agreements usually limit the employee’s ability to secure future employment in a similar business for a certain period of time or in a certain geographic area. Non-compete agreements are enforceable in California as long as they are considered reasonable and used to protect a legitimate business interest.
  • Mutual non-disparagement clauses. This type of clause will typically provide both the employee and the employer a guarantee that one party will not speak negatively about the other.
  • Neutral reference or reference letter. A severance agreement could include the requirement for a neutral reference or a reference letter. A neutral reference means that an employer may provide only the dates of employment and position the employee worked in to any future requesting employers. A reference letter goes a step further and provides that same information as well as a positive statement on behalf of the employee.

Do You Need an Attorney to Help With a Severance Agreement?

If you are being offered a severance agreement by your employer, it is strongly advised that you seek assistance from an Orange County workers’ compensation lawyer as soon as possible. An attorney can review the terms of a severance agreement to ensure that you are being treated fairly by your soon to be former employer. While severance agreements are not required in California, any severance agreement that is offered or made is considered a legal agreement between two parties. Therefore, you should have a legal expert review the terms of the agreement.

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