Employment Severance Package Law

Brad Nakase, Attorney

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As an employee, if you receive an option for a severance package, the best step is to take your time reviewing it and understanding it. Speak with your family and others who may have gone through the same or similar situation. If this isn’t helpful, reach out to an attorney and see if you have a fair compensation and valid package before agreeing to the employer’s terms. This will ensure you have protected yourself while also protecting your future.

Sometimes businesses need to let an employee go due to either specific issues with the employee or the demands of the business. Employers worry that if he or she were to fire or terminate employment, they might be sued. In order to ensure this will not happen, some employers will offer a severance package. A severance package is one that compensates the employee or gives them money in order to find a new position. Moreover, the agreement usually states the employee cannot sue the employer if he or she accepts the package. California has certain laws in place to allow these types of benefits while also protecting both the employer and the employee.

What is a severance package?

A severance package is an agreement between an employee and employer that terminates the employee’s job position but also gives the employee certain compensation in return for leaving. This arises many times when a position has been dissolved or the company is suffering layoffs. Further, the agreement may include a provision where if the employee takes the package, he or she cannot further come after the employer; essentially, the employee gives up his or her legal rights when taking the package.[i]

Benefits of a severance package

Although an employer is not forced to give a severance package, it does raise many benefits for the employer and the employee. First, it ensures the employee and the employer leave on good standing. Even if the employer did not agree with how the employee did is or her job, it ensures the employee is compensated in its transition period. Further, there likely will not be any bad blood between the two parties because the employee has been compensated for leaving. Moreover, if the company has had to lay off certain employees, they may want to work with the employee in the future. Giving that employee a “gift” may help when reaching out for further employment.

Also, this package ensures there cannot be a lawsuit filed. Most employers when handing out or presenting a severance package include a provision stating the employee cannot sue the employer for further benefits or compensation. This allows the parties to be done or sever the relationship amicably.

Disadvantages or potential issues with severance packages

Even though there are benefits to a severance package for both parties, there can be issues that arise when offering the severance package. The biggest being that the employee realizes he or she may have a case against the employer. If this happens, the employee may not want to sign the severance package forms and go seek advice from an attorney. In this process, the employee may find out he or she can receive more money than previously expected in the severance package. Although the cost of litigation may be high, the benefit may outweigh those costs.

I have agreed to a severance package but I think it was handled incorrectly. What can I do?

If an employee signs or agrees for a severance package but believes he or she was promised something and never received it, the employee may have a case and the severance agreement will be canceled. This usually arises through fraud, undue influence, or coercion.[ii]

fraud arises when the employer deceives the employee or leaves out a material fact. Moreover, the employer can make a promise then not follow up on that promise. If there is a material, important, fact, the employer must tell the employee otherwise, they can be found to be fraudulent.[iii] If an agreement was signed under fraudulent assumptions, the package will likely be nulled.

Undue influence:
undue influence arises when one party exercises his or her authority over the other wrongfully. This power usually forces the weaker party to act a certain way when he or she doesn’t want to but does so because of the unfair assertion of power.[iv] If an agreement was signed under undue influence, the package will likely be nulled.

duress is another type of wrongful activity. It can arise economically or in physical exertion. For example, if an employer holds a gun to your head and says, “Sign this or die,” that is a type of physical coercion and the agreement will not be conscionable or valid. If the employer says, “Sign this or I will take all your money and tell everyone you are a horrible employee in this industry,” this is a type of economic duress because it is threatening your livelihood in the profession. Both of these will lead to an invalid severance agreement.

Any of the above actions will cancel a severance agreement and allow the employee to sue the employer for compensation. Further, some of the above actions may lead to jail time for the employer especially if violence was used.  

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Legal Reference

[i] Maxwell v. Save Mart Supermarkets, 2019 Cal. App. Unpub. 1

[ii] Civ. Code, § 1570

[iii] Civ. Code, § 1570

[iv] Keithley v. Civil Service Bd. (1970) 11 Cal.App.3d 443

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