Compliance/Best Practices Employment Law Legal Topics

Does an Employer Have to Give Severance Pay?

The short answer is “No.” But this may not be the smart answer. Although there’s no legal requirement to provide departing employees with severance pay, employers should always consider doing so in exchange for a general release of claims the employee may have against the employer.

Giving severance pay when the employment relationship ends in exchange for a release obviously makes good business sense when the employer believes that the termination of an employee creates an increased risk of litigation. But there are differing views on giving severance when there’s no threat of litigation: Some see no reason to offer severance when there’s no threat, while others see it as a reward for the employee’s contribution to the business and a way to help with the transition to a new job. Regardless of the reason for it, anytime an employer pays severance it should get a release in exchange.

A release will only be enforceable if it’s part of a valid contract and follows various legal requirements:

  1. Basic requirements for standard waiver. Under both federal and state law, a waiver of rights must be knowing and voluntary. Because a general release can’t waive claims unknown to the employee when it’s signed that would materially affect the consent, the release must show a specific intent to waive claims that the employee doesn’t know or suspect to exist in his or her favor.
  2. Requirements for waiver by employees age 40 and over. The Older Workers Benefit Protection Act of 1990 (OWBPA) (Pub L 101–433, 104 Stat 978), amending the Age Discrimination in Employment Act of 1967 (ADEA) (29 USC §§621–634), sets out specific requirements for enforceable releases of ADEA claims. 29 USC §626(f). A waiver and release of such claims under the OWBPA must be knowing and voluntary and can’t be considered “knowing and voluntary” unless, at a minimum, it complies with the requirements in 29 USC §626(f)(1).
  3. Waiver for group reduction in force. Special rules apply when the waiver is requested from an employee age 40 or over “in connection with an exit incentive or other employment termination program offered to a group or class of employees.” 29 USC §626(f)(1).

And keep in mind that some claims can’t be waived, such as the right to file a charge or participate in an investigation or proceeding conducted by the Equal Employment Opportunity Commission (29 USC §626(f)(4)), claims for wages indisputably due (Lab C §206.5), and claims for state unemployment benefits (Un Ins C §1342).

Before advising an employer on severance and releases, review the requirements for and limits on releases and get sample release provisions in CEB’s Advising California Employers and Employees §§17.100-17.113. You’ll also find useful information in chapter 18 of that book on reductions in force.

Other CEBblog™ posts you may find useful:

© The Regents of the University of California, 2017. Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited.

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