What You Need to Know About California Severance Pay Laws
Leaving a job is sometimes confusing or stressful for employees searching for new employment. Here’s what you need to know about California severance pay laws.
What is Severance Pay in California?
Severance pay is financial compensation an employer makes to an employee upon termination to aid the employee during temporary or permanent unemployment. Severance pay is often a part of a severance package, including various benefits an employee will receive.
Severance package benefits may include:
- Pay for unused vacation time,
- Health insurance coverage,
- References,
- Outplacement services,
- Unemployment insurance benefits, and
- Stock option payments.
Is Severance Pay Required in California?
California does not have any labor law mandating employers to provide severance pay upon terminating a worker’s employment. Consequently, providing severance pay is at the employer’s discretion. Employers who elect to offer severance benefits may provide the compensation as a “thank you” to employees who possess a long tenure with the company.
A situation where the law requires an employer to issue severance pay is if the employer promised to do so in one of the following ways:
- Oral promise to pay severance from the employer to the employee,
- Written contract binding the employer to pay the employee severance,
- Promise of severance pay included in a company handbook for employees, or
- Established history of the company paying severance to employees in the same position.
Related: California Wage Deduction FAQs
Severance Pay for California Employees Who are Fired, Discharged, Terminated, or Laid off
The lack of state and federal laws governing severance means employees who experience termination are not automatically entitled to severance benefits. However, some employees may receive protections under the Worker Adjustment and Retraining Notification Act (WARN). According to the U.S. Department of Labor (DOL), the Act requires employers with 100 or more employees to provide at least 60 calendar days advance written notice of a plant closing and mass layoff affecting 50 or more employees at a single employment site. The requirement does not count employees who have worked less than six months in the last 12 months or work an average of fewer than 20 hours a week). WARN does make specific exceptions for employers who fire workers due to unforeseeable circumstances, faltering companies, and natural disasters.
When is Severance Pay Due in California?
California considers pre-set severance pay as wages and requires employers to provide complete severance immediately upon termination, on the last employment day if the employee gives:
- 72 hours notice of quitting, or
- Within 72 hours of the employee’s last day, if the employee provided no notice of intention to resign.
Is Severance Pay Taxable in California?
According to the Internal Revenue Services (IRS), severance pay and unemployment compensation are taxable entities. The IRS may also collect taxes on employee payments for accumulated vacation or sick time. The IRS recommends the employee takes measures to withhold enough taxes from severance payments or make estimated payments.
Severance Pay For California Employees Over 40
The Older Workers Benefit Protection Act (OWBPA) is a federal statute requiring employers to offer employees at least 40 years old benefits equaling or costing the same amount as benefits younger workers receive. The OWBPA entitles employees 40 or older to various benefits and prohibits employees from pressuring dismissed employees into signing legal waivers. The laws protect more senior employees from experiencing age discrimination in the workplace or unfair termination of employment.
Severance Pay and Unemployment
An employee may file for unemployment benefits in addition to receiving severance pay, depending on the circumstances. The Employment Development Department (EDD) will examine the employee’s case to determine if the employee is not responsible for the wage reduction. The EDD does consider the severance pay as wages for insurance purposes, allowing an employee to obtain unemployment benefits.
Related: Community Property Laws in California
Severance pay does not count as wages against unemployment benefits in the following situation:
- The employee received payment under company policy,
- The company policy states the payment is for a specific reason (i.e., employment termination, past service recognition, etc.),
- The policy is available to at minimum a specific group of employees, and
- The purpose of the severance is to supplement unemployment insurance benefits.
FAQs About California Severance Pay Laws
What is a California severance agreement?
A severance agreement is a contract between an employer and employee where the employee receives severance benefits in exchange for releasing claims against the employer. The agreement will contain all claims the employee agrees to release against the employer. An employee may not release claims in exchange for compensation for previous hours worked or benefits the employee will already receive.
What if I did not receive the severance pay required in my California employment contract?
An employee who did not receive the severance pay included in the employment contract should contact the Employee Benefits Security Administration (EBSA) for assistance. EBSA is committed to assisting workers and retirees with various benefits plans.
Contact Us
If you or a loved one would like to learn more about California Severance Pay Laws, get your free consultation with one of our Employment Attorneys in California today!