The Ultimate Guide for Executives to Understand the California Severance Process
A California severance package is a collection of pay and benefits offered to departing employees. Unless a severance package is written into your employment contract, an employer is not obligated to supply one.
Severance packages are typically offered to executives and employees who are laid off due to downsizing or restructuring. They are not usually offered to people who resign or who are fired for poor performance or other cause.
Severance Review & Consultation
We offer a Severance Package Review & Consultation for $500. We review your severance package and then meet with you over the phone to review it. We point out any issues and suggest modifications. In most cases, that is all you need. But if major changes are necessary we go further and negotiate the modifications but we charge our hourly rate for that work. We have offices in Los Angeles and San Francisco.
California Severance Package Basics
Each California severance package is based on a payment of money to the departing employee in exchange for a promise not to sue and to cooperate in the transition. When a company enters into a severance agreement, they are buying the cooperation of the employee so the departure does not disrupt the business.
The amount paid through a California severance package is usually based on the length of the executive’s employment with the company. The longer the term of service, the bigger the package. Many severance packages use a formula such as one week’s pay for every year of service, or more generous packages might payout a month’s pay for every year. Other packages are based on lump sum payments. The parties are free to use any formula or payout any amount. Severance payments are not regulated.
Are Employers Just Being Nice?
A severance package isn’t merely a thank you for services rendered. Most companies require employees to sign a release of any potential claims and agree not to bad-mouth the business if severance is received. Unsurprisingly, severance packages are a way for businesses to protect themselves. However, a fair severance package is a win-win for all involved.
Does your California severance package cover the basics? Even though every severance package is different, at the bare minimum it should include:
- Consolidated Omnibus Budget Reconciliation Act (COBRA) information
- confidentiality agreement
- general release of claims and covenant not to sue
- return of property (if applicable)
- severance payment terms
- unemployment information
- vacation payment terms
All about the money. Most people prioritize the money aspect of their California severance package. How much will you get, and how will it be paid? Severance pay is usually based on terms of service. However, it can also include:
- a stock option statement with an exercise schedule
- commissions, deferred compensation payouts, and bonuses
- loan repayment terms
- restricted stock and acceleration
- rights from a pension, 401(k), or profit sharing
- unreimbursed business expenses (this is often part of the release process and it’s important that you know when these forms are due)
Mitigation Offset. Look out for mitigation offset clauses. These provisions require you to pay back your severance if you get a new job during within the severance period. Ask to have these removed.
Health Matters. For many people, health benefits are just as important as severance payments. Most employers offer the option to continue with the group’s medical/dental coverage under the COBRA law.
COBRA is a federal law. If you elect to use it, your employer must continue to offer the same health insurance policy to you at the same rate for 18 months. You will need to pay for it though.
Should I be worried about the non-compete clause? Not in California. Non-compete agreements are not enforceable in California so most severance packages in California do not include them. If your’s does, you can ignore it or ask your employer to remove it.
So, what now? According to Salary.com, more than 70 percent of companies in the US work with outplacement services to help former workers find a new job. These services include resume writing/editing, help with interview preparation, and target company searches.
Even if your employer does offer help finding a new job, remember that networking is still best. Salary.com reports that over 60 percent of people find new jobs via someone they already know.
Does it matter if I’m over 40?
There are many protected classes, including those over the age of 40. If you fall into this category, you are protected by the Age Discrimination Employment Act (ADEA). If your severance package includes an ADEA waiver (and most of them do), you have 21 days to look over the general release and a seven-day period to revoke the release. Also, if you were laid off as part of a reduction in force, the ADEA requires your employer to provide you with a disclosure showing the ages and job titles of those laid off. It’s one way to help ensure age wasn’t a factor in a layoff.
Negotiating a Severance Package
The California severance package in front of you is just an offer. You don’t need to accept it as is. At our law firm, we negotiate severance packages every day. Sometimes we get much better deals for people, other times modest improvements, and occasionally no improvement.
We recommend having a law firm assist you, but many people try it on their own. Even if you don’t like confrontation, haggling, and cringe at the idea of negotiating a better deal, doing so can make a big difference during your transition.
First things first: Always read the fine print before you sign anything.
It’s best not to sign anything before taking the information home and thinking about it. Most severance packages include a review period of a week to 21 days or more. Also, companies will almost always agree to give you more time.
We recommend asking for more than you think you’ll be awarded. Just make your request politely and preferably to someone you know. Avoid asking human resource people.
What’s the worst that can happen—they fire you? You’re already laid off or set to retire, and they can’t lower or cancel a pending severance package without causing a lot more trouble. We never see companies revoke severance offers.
Were You Wrongfully Terminated?
Figure out exactly why you were let go, because that may give you the leverage to negotiate for a better California severance package. If you’re part of a protected class, you need to be certain you weren’t illegally terminated. A protected class is a legal term used to describe certain characteristics or traits such as one’s race, gender, age, sexual orientation, religion, national origin or disability. The idea here is that it’s unfair (and illegal) to treat someone differently because of who they are. It’s also illegal for a company to fire or demote someone because of the following:
- complaining of sexual harassment
- not receiving overtime payment
- being pregnant
- serving jury duty
- having a serious illness
- caring for sick family members
- taking Family Medical Leave
If you suspect you were wrongfully terminated, contact an employment attorney immediately.Severance Review & Consultation
We will review your severance package and meet with you over the phone to discuss the package. We will identify potential problems and ways to improve the terms.
Ready to Negotiate?
Here are the primary issues to tackle. Pick your battles wisely:
- Severance Pay. Always ask for more pay, especially if you were laid off because of a merger or acquisition. If you receive continuation of salary in lieu of severance pay, ask that it continue even upon disability or death. Ensure there are no offsets or mitigations if you’ll be paid in installments. Double-check that any unpaid bonuses are included.
- Medical benefits via COBRA. You’re entitled to continual medical/dental coverage for up to 18 months after a job termination (or 29 months if you are disabled). You can save money by asking that a taxable lump sum payment is made directly to you instead of having the employer pay the insurance policy. If this is agreed upon, you may be able to switch to a more affordable plan.
- Outplacement assistance. This is a common severance package benefit, which can also make it the easiest to negotiate. You can even ask for a cash outlay to hire your own outplacement firm. The typical price of outplacement assistance ranges from $10,000 – $25,000 according to Forbes.
- General Release of Liability. The most important part of the California severance package for the employer is going to be long and full of legalese. This entire release may be negotiable. It’s best to have an employment attorney review this document.
- Non-disparagement. Severance packages usually include language that prohibits the departing employee from making or writing any “disparaging” remarks about the employer. However, this clause can be mutual. You can negotiate to protect yourself from disparaging comments, too, but larger companies sometimes balk at this.
- References. How will the employer respond if and when you ask for references or recommendations? You can negotiate to have a standard agreement to state something positive should the occasion arise, or put into the agreement that recommendations will be provided.
- Non-compete agreements. Non-compete agreements are illegal in California but some companies still include them in severance packages. Ask for it to be removed if you see one.
- Legal fees. In some cases, you may be able to negotiate coverage of legal fees incurred while getting the agreement reviewed and negotiated.
- Company property. It’s possible to negotiate company property as part of a severance package. This usually refers to a laptop, phone, or other mobile devices. Most employers who agree require the device to be wiped clean first.
- Confidentiality. Most severance packages are confidential. However, you can negotiate for exceptions. Common exceptions are family members, financial advisors, attorneys, tax authorities, and the government.
- Transitional arrangements. It’s not uncommon for the employee and employer to agree upon a consulting relationship after employment termination. Such transitional arrangements require negotiating numerous terms including:
- Confidentiality obligations
- Dispute resolution processes
- Hours per month/week
- Length of arrangement
- Services to be provided
- Solicitation of employee restrictions
- Cooperation. Many severance packages include a cooperation clause to ensure the employee cooperates with the company should investigations or litigations occur. You can negotiate so that the cooperation is only limited to your period of employment and work scope. Cooperation shouldn’t interfere with future employment, and you may be able to get reimbursed for any travel related to the cooperation efforts. Any reasonable out of pocket fees should also be reimbursable and you can ask to be paid at an hourly rate for any time spent.
Remember, almost anything is negotiable within a California severance package.
Severance Package Policies
Some of the largest companies in the world are based in California. Some of these corporate giants have formal severance pay policies. If you work for one of these companies, you should review their severance policies. You’ll likely find this information in the employee handbook or you can get it from human resources.
If there is a formal policy, it typically outlines:
- Conditions. Policies will detail what an employee needs to do to qualify for and receive severance packages. This might include involuntary termination or layoffs as the requirements to qualify. Conditions that may not qualify, such as involuntary termination for cause, will also be featured.
- Documents. Many employers require workers to sign legal releases before severance can be paid.
- Employer’s right to modify agreements. Employers keep themselves protected. They often maintain the exclusive right to terminate or amend a severance policy. There might also be stipulations. If a company is merged or sold, severance might not be paid—especially if an employee is fired.
- Groups covered. Even if a company offers severance packages, they don’t necessarily offer it to all employees—and they don’t have to. Sometimes severance packages are exclusive to classes of workers. For example, salaried employees may qualify for severance but hourly employees may not.
- How severance is paid. Are you getting a lump sum or regular severance payments? How severance is paid can impact unemployment benefits, which is why it’s important to understand how your employer handles severance.
- Purpose. This is an outline of the severance plan purpose. Oftentimes, it highlights help offered to employees while they look for a new position.
- Severance pay calculation. Employers decide how severance pay is calculated. Policies will outline this and detail where the payments stem from (i.e. weeks of employment, unused vacation time, etc.).
It’s a good idea to read and understand the severance policies at your work before you need them.
Severance Review & Consultation
We offer a California severance package Review & Consultation. We will review your severance package and meet with you over the phone to discuss the package. We will identify potential problems and ways to improve the terms. We can also advise you on the fairness of the offer. We charge a flat fee of $500 for the Review & Consultation. Executives often hire us to negotiate their agreements after the Review & Consultation.