How to Ensure Rightful Terminations in California: Part 2

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This is the second in a four-part series excerpted from the newly released California Employment Law: An Employer's Guide, Revised and Updated for 2018 (SHRM). Part 1 addressed setting up defensible terminations. Part 3 will review how to implement a reduction in force.

 A severance agreement that includes a release of claims is a good option to consider when an employee needs to be terminated but there is little or no prior documentation of misconduct or performance problems. If the employee signs the severance agreement, the risk of a lawsuit is almost entirely eliminated. A valid release of claims must be knowing and voluntary to be enforceable. It is important, therefore, that severance agreements be written, as far as possible, in simple language that the employee can understand. A severance agreement that runs 10 pages or longer and contains dense legalese is not ideal and in fact may be vulnerable to attack should a departing employee have second thoughts about having signed the agreement. Moreover, a severance agreement must meet additional requirements to be enforceable.

It must provide consideration beyond that to which the employee is entitled. For a severance agreement to be enforceable in California the employee must be given something of value over and above that to which he or she is already entitled to receive. If an employee is owed accrued vacation pay or a bonus, payment of those sums will not provide lawful consideration to support a release of claims. Valid consideration usually consists of severance pay (when the employee is not already entitled to severance under an employment contract, severance plan, or company policy), payment of COBRA continuation premiums for some period of time, outplacement assistance, or some combination of them. 

It should include a provision that all wages due have been paid. A release of wages concededly due is not enforceable in California. A severance agreement may, however, express the agreement of the departing employee that all wages due have been paid. All severance agreements should contain such a provision, as well as an acknowledgment of the amount of accrued vacation or paid time off (PTO) due at termination, that such amount was paid, and that such payment was not conditioned on the employee signing the severance agreement. 

It must include Section 1542 language. Section 1542 of the California Civil Code provides that "a general release does not extend to claims which the creditor does not know or suspect to exist in his or her favor at the time of executing the release, which if known by him or her must have materially affected his or her settlement with the debtor." 

This provision must appear verbatim in any release of claims in California, and there additionally must be language clearly stating that the employee waives this provision and intends to release all claims known or unknown at the time the severance agreement is executed. 

Special provisions apply to federal age discrimination waivers. The federal Older Workers Benefit Protection Act (OWBPA) imposes special requirements on waivers of federal age discrimination claims. Severance agreements for departing employees who are 40 years of age or older must therefore contain a recitation that the employee:

• Is waiving, among other claims, any and all potential claims for age discrimination under the federal Age Discrimination in Employment Act.
• Is receiving consideration in exchange for his or her waiver and release of claims over and above that to which he or she is already entitled.
• Is advised of his or her right to obtain the advice of legal counsel of his or her choosing prior to executing the severance agreement.
• Is not releasing any claims that may arise after the execution of the severance agreement.
• Will have up to 21 days to consider the severance agreement prior to executing it.
• May revoke the severance agreement at any time within seven days from the date he or she executes it.

Further language must be provided advising the employee how to revoke the severance agreement should he or she wish to do so. On account of this right to revoke the release within seven days of signing it, severance pay should not be due under the agreement until the eighth day after the departing employee's execution of the agreement, or on the next business day if the eighth day falls on a weekend or holiday.

When two or more employees are terminated on the same day or within a short period of time for the same reason (a reduction in force, for example), if at least one of them is age 40 or older the following additional language must be included in the severance agreement:

• A provision stating that the employee has up to 45 days to consider the severance agreement prior to executing it (as opposed to the 21-day period that applies to single-employee terminations).

• A provision stating that the employee has up to 45 days to consider the eligibility information presented along with the severance agreement.
• Typically, as an Exhibit A to the severance agreement, a three-column chart containing, in the first column, a list of all the positions in the "decisional unit" of the organization affected by the terminations; in the second column, the ages of all employees in that position who are eligible for severance (because they are being terminated); and in the third column, the ages of all employees in that position who are not eligible for severance (because they are not being terminated). 

The purpose of this list is to disclose information from which the employees contemplating signing the severance agreement can determine whether they might have a valid claim of age discrimination based on the ages of those employees who were terminated versus the ages of those who were not. The decisional unit for the purposes of this list is the department, location, or identifiable group of employees in which the terminations occurred. Examples might be the "engineering department," the "San Diego office," or "salaried managers at the Stockton manufacturing plant." 

Limitations on severance agreements. Although the release of claims provision in a severance agreement may contain a covenant not to sue, it may not prohibit the employee from filing a charge of discrimination with the U.S. Equal Employment Opportunity Commission or the California Department of Fair Employment and Housing. Likewise, the Securities and Exchange Commission takes issue with provisions prohibiting employees from reporting securities law violations to that agency. Therefore, to avoid an attack by one of these agencies on a severance agreement, a provision should contain language stating that the agreement does not prohibit the employee from filing charges with or reporting violations of law to any law enforcement agency, but that the employee waives any monetary recovery from the employer as the result of any such charge or complaint. 

In addition, in California, releases of workers' compensation claims are not valid unless signed by a workers' compensation judge. A general release of claims, therefore, will not bar an employee from filing a workers' compensation claim, and a release of workers' compensation claims in a severance agreement will be invalid without a workers' compensation judge's approval. 

Please visit the SHRMStore to order your member-discounted copy of California Employment Law: An Employer's Guide, Revised and Updated for 2018 by James J. McDonald Jr. 

James J. McDonald Jr., J.D., SHRM-SCP, SPHR, is managing partner of the Irvine, Calif., office of the labor and employment law firm Fisher & Phillips LLP. His practice involves trials, arbitrations and appeals of employment law claims. He also has more than 25 years of experience advising California employers about all aspects of labor and employment law, strategic human resource issues, and how to avoid employment claims and lawsuits. He received his undergraduate degree from New College of Florida and his law degree cum laude from Georgetown University.