Basics of Separation Agreements for California Employees

What is a Separation Agreement?

An employee separation agreement is both the end of an individual’s employment and the beginning of a new chapter. These agreements are particularly important in the context of California employment law, where they can help protect both the employer’s interests and the employee’s future employment prospects.
In its most basic form, a separation agreement outlines the terms under which an employee will be leaving the company. For many employers, having a formal agreement in writing may help provide them peace of mind , while also reducing the chances that the employee will pursue formal legal action against them in the future.
When an employee leaves a company, he or she often has a number of questions about outstanding wages, accrued vacation time, and benefits. In some cases, the individual may have potentially viable legal claims against the employer. For this reason, most employee separation agreements include provisions that help address these issues in one comprehensive document.

California Law

California law requires certain provisions in separation agreements, most significantly the requirement that any releases of claims asserted by or that might be brought by the employee under California Civil Code Section 1542 be done knowingly and voluntarily. Civil Code Section 1542 waives any and all rights of the plaintiff to unknown claims. This section is substantive law in California. It is conceivable that a court would find that a release purporting to release unknown claims in exchange for the consideration of an amount of, for example, two weeks severance, is void for lack of mutuality.
Another requirement of California law is that the document be titled "Separation Agreement and Release of Claims" so all parties are on notice of the significance of the document. However, where an employee has been involuntarily terminated from their position, the employee must be provided with a two (2) day period during which he/she may revoke the Separation Agreement. Any unrevoked Separation Agreement is enforceable by the employer, as long as it is not ambiguous and not procured by fraud or duress.
Therefore, legal "consideration" has dual requirements in California. First, the employer must provide the employee with something new or additional, such as a severance payment or other consideration in addition to what the employee has previously earned, and second, the employer must provide the employee with two (2) days to revoke the Separation Agreement if the employee is involuntary terminating the employment relationship.

Common Contents of a Separation Agreement

In California, there are some common components that will almost always form part of an employee separation agreement:
Severance. A severance payment is compensation provided to an employee after their employment has ended or is about to end. A severance amount is typically based on the employee’s number of years of employment, amount of their salary and any additional bonuses. In some cases, such as in the case of a highly-skilled employee, the amount of the severance may be calculated based on other factors, including but not limited to the particular job responsibilities.
Confidentiality. In many instances, a confidentiality clause is included in the separation agreement in order to protect the employer from the employee disclosing certain confidential information (e.g. trade secrets, protected business strategies, etc.). Under California law, employers are prohibited from restricting employees from using confidential information acquired during the course of their employment in their new job unless such a restriction is narrowly tailored (e.g. it does not last longer than reasonably necessary and it is supported by consideration). General confidentiality provisions however can be found in nearly every separation agreement as they are enforceable to prohibit disclosure of information beyond trade secret status.
Non-disparagement. Non-disparagement clauses are also a fairly common component of many separation agreements. These clauses prevent the employee from speaking negatively about the employer or its employees. While these provisions are enforceable on their own, confidentiality clauses are sometimes incorporated into these clauses to prevent an employee from publicly disclosing disparaging remarks. However, in the case of Cal. Code Civ. 12964, it is illegal for an employer to require an employee to sign a non-disclosure agreement to keep secret the facts of sexual harassment or assault occurring in the workplace or in the course of work-related duties; therefore, care must be taken when drafting a non-disparagement clause involving sexual harassment or assault issues.
In addition to these common components, CA separation agreements will also include standard terms and conditions such as:
Written notice of rights under PAGA, which affords employees the right to, through counsel, recover unpaid wages, damages, statutory penalties and attorneys’ fees for work violations committed within the previous year; a one-year waiver of FMLA and CFRA claims; release of all wage and hour related claims; release of all claims related to workplace safety/retaliation; and the waiver of all future claims.

Advantages of a Separation Agreement

A separation agreement can provide many benefits for employers and employees. For the employer, it can help mitigate against future, expensive lawsuits. It can also ensure that the company maintains information confidential, and out of the hands of its competitors. For the employee, it provides them with certainty. They know exactly what they will receive, what they can do, and what they cannot do. In fact, most people actually prefer for the resolution to be over, and to know exactly how much they will be receiving. While others may want revenge, or want to continue to act out, on a much greater level. However, for the general populace, and the vast majority of people, knowing that the matter is over, and knowing the exact parameters of the resolution, can be an unconflictful, and rational way to move forward.

Disadvantages of a Separation Agreement for Employees

A potential risk for employees is that some employers may attempt to use separation agreements to try and limit employee rights or unfairly restrict employees from pursuing their rights through an administrative agency or in court.
A potentially significant risk is that the separation agreement may include a broad and unreasonable waiver of legal rights in which the employee is waiving the right to sue the employer in exchange for the employer providing the employee some form of additional consideration.
Not only are these waivers in many cases invalid, they have the potential to unlawfully bar an employee from pursuing their legal rights . For example, the California Court of Appeal held that an employee’s agreement not to sue his employer for discrimination was invalid because it did not comply with the California Fair Employment and Housing Act (FEHA). (Rojo v. Kliger (1990) 52 Cal. 3d 65, 68.) Therefore, even if an employee signs a separation agreement with a broad waiver of the right to sue the employer, the employee may still have the right to pursue legal action against the employer later in court.
For all of these reasons, getting independent legal advice before signing a separation agreement is important.

Severance Agreements and California Law

Severance pay in California is not mandated by law. As discussed above, employers do, however, have the right to impose various requirements in separation agreements and set forth conditions for an employee’s eligibility to receive the severance package offered.
California law defines "severance" as "an amount over and above the payment of final wages upon termination of employment." Therefore, any payment made by an employer intended as compensation separate from final wages will likely be considered a severance package.
As the following example illustrates, the issue of whether an employer has provided a sufficient explanation regarding the purpose of the payment, or appropriately distinguished which portion of the payment served as wages can lead to a dispute:
Plaintiff was employed as a staff accountant by a CPA firm. The contract between Plaintiff and the firm provided that "[b]oth parties hereby agree that the overtime work for Employee, which is not otherwise paid in cash due to the limitation of hours permitted by law, shall have a market value of $20,000.00 upon the termination of employment of the Employee for any reason." When Plaintiff was terminated by the firm, she received a check from the firm for $5,014.80 with the notation "Final Pay". Plaintiff argued that the $5,014.80 represented her final wages, not a severance payment, and therefore the firm owed her the unpaid $20,000 overtime wages she claimed she was owed. Defendants argued that the $20,000 payment was severance. The trial court agreed with the employer. The Court of Appeal reversed, finding that Plaintiff’s employment contract reflected that Plaintiff’s overtime worked but not paid at the time of her termination constituted wages to be paid with her final pay. Accordingly, the Court of Appeal found that there was a triable issue of fact whether the firm’s separate payment to Plaintiff of $5,014.80 satisfied the firm’s obligation to pay her all wages due. Given this uncertainty, an employer’s careful drafting and explanation of severance packages becomes ever-more important.
Employers are cautioned against tying receipt of a severance payment to the signing of a general release or agreement to waive the right to file a discrimination suit. Indeed, an employer’s potential liability is greatly increased where the employee can successfully challenge the execution of the release. This can be especially problematic in the context of a "mass layoff." If the employer is offering separation pay or other benefits in exchange for the waiver of claims, then the employer must consider the requirements of the Older Workers Benefit Protection Act ("OWBPA") and its corresponding state law, the California Civil Code Section 1542 waiver. For an employee to effectively waive his/her right to bring an age discrimination lawsuit, the employer must provide that employee with a clear and unambiguous explanation of what rights are being waived. Generally, this has been interpreted to mean that the employer needs to provide the employee with a clear and specific reference to the facts that are alleged to be discriminatory and involve the waiver. Specifically, Employers must give employees additional consideration (beyond any severance pay) and a period of several weeks to consider the agreement. Employers must also allow employees to revoke the agreement within seven days after signing it, during which revocation would render it void.

How to Negotiate a Separation Agreement

Negotiating the terms of a separation agreement can significantly impact both employees and employers. Understanding the underlying interests of both parties is crucial in reaching a mutually acceptable agreement. When negotiating a separation agreement, it is essential for employees to be mindful of their key interests, such as maximizing severance pay, negotiating healthcare benefits post-separation, and ensuring that they will retain certain valuable employee benefits under the terms of the agreement.
Employers, on the other hand, may have different goals, often focused on minimizing their financial liability and mitigating future claims from former employees. This may include seeking waivers of rights to sue, non-disclosure of confidential information, and non-competition or non-solicitation clauses. However, not all of these objectives are enforceable, dependent on the underlying circumstances.
There are numerous components to negotiate, and how these issues are approached can make the difference between an acceptable agreement and one that leads to long, drawn-out litigation. Thus, a successful negotiation will not just result in an executed contract, but rather, will leave key stakeholder interests intact while developing a solution that works for all parties.
While some separation agreements offer robust separation packages, others are very minimal and contain some of the same terms employees may have received as part of their standard benefits. Even in those cases, the agreement may contain important protective measures that help prevent potential liabilities and losses.
The contents of the separation agreement may vary greatly depending on the size of the participating company, the negotiating tactics of the parties, and the circumstances of each case. For example, if the employer has a good faith concern about the employee stealing clients or customers, that provision may be included, whereas another company may not feel the concern exists or is not worth pursuing.
Similarly, the potential for litigation costs and attorneys’ fees may have some influence on the outcome. As a general rule, it is not considered good business to make an unreasonable offer to a separating employee in hopes of getting the employee to walk away. With the huge disparity in bargaining power in California, often, the employee will be presumed to have little to no leverage. Seeking to avoid any further costs associated with litigation is often in the best interest of all parties.

How Can a Separation Agreement be Enforced

Aside from the well-publicized Garden Leave Clauses, there are a number of other obligations to keep in mind. For example, pay in lieu of notice or severance cashing out the value of accrued untaken holiday.
The steps for enforcing a separation agreement in California depend on the individual terms of the separation agreement. Breach of the terms of a separation agreement can occur prior to, and after, the effective separation date. If either party breaches the terms before the separation date, the other party may seek injunctive relief (to force specific performance) and/or damages. If either party breaches the terms after the separation date, then the other party may bring a lawsuit seeking breach of contract monetary damages, as well as other legal or equitable remedies (i.e. set off of damage payments owed to the breaching party). If both parties have breached the terms, the parties may bring claims against one another on the basis of comparative fault.
Parties to a separation agreement in California must comply with all written and unwritten contractual commitments entered into before, during, or after the employment relationship. For example, many employee handbooks, privacy policy documents, and other miscellaneous employment documents constitute an enforceable agreement with the employer. Employers are also required to comply with the: (1) California Fair Employment & Housing Act ("FEHA"); (2) Fair Credit Reporting Act ("FCRA"); (3) Federal Credit Report Reporting Act ("FCRA"); (4) California Labor Code; and (5) applicable California administrative regulations. Failure to comply with any of these legal obligations can result in monetary and non-monetary liabilities for the breaching party (whether it is the employer or the employee).
Both the employee and the employer are subject to confidentiality restrictions , and may be liable for breaching those confidentiality restrictions if they divulge the terms of the separation agreement, or the underlying settlement and/or employment terms. Further, if the employee breaches the confidentiality restrictions—and uses them as the basis for a whistleblower lawsuit—the employee may not be entitled to any remedies under California’s Whistleblower Protection Act.
In many cases, the employee may also be subject to a continuing duty to maintain the confidentiality of the employer’s trade secrets, which restrictions extends beyond the termination of the employment relationship. A breach of this obligation can result in a variety of types of liabilities for the employee—including an award of the employer’s attorney’s fees and costs incurred in enforcing its rights to the proprietary information. (See, Cal. Civ. Code 3426.4.)
If the employee violates his or her post-employment restrictions, then the employer has the right to pursue injunctive relief and/or remedies in law. If the employee uses the employer’s trade secrets to establish or work at a competitor, the employer can pursue remedy at law (e.g., monetary damages for lost profits, corrective advertising, destruction of copies of the trade secret, loss of customer goodwill, etc.).
Further, some separation agreements require the employee to provide a copy of the separation agreement to subsequent employers, and to include the agreement by reference in future employment agreements. Failure to abide by these covenant would also result in liability to the employee.
The employee should also try to obtain a release of any claims arising under the Consolidated Omnibus Budget Reconciliation Act ("COBRA"). Failure to adhere to the COBRA requirements can result in monetary liabilities for the employer.