Posted on January 9th, 2019
The typical severance package in California is different than in other states. Learn what some employers are doing here.
Only one-third of small business survive ten years, so it’s completely understandable for business owners to worry about their company’s long-term future.
The threat posed from lawsuits can make this anxiety even worse. Up to 53% of small businesses are subject to litigation in any given year.
Many of these lawsuits brought forward by disgruntled former employees. I’ve seen too many small businesses fail because they didn’t properly guard themselves against lawsuits from staff they let go.
Thankfully, there’s a way to help reduce your chances of a lawsuit by using severance packages.
I’ll go over the particulars of a typical severance package so that your business and livelihood is less likely to be in the hands of an employee lawsuit.
Quick review: Severance Package Meaning
While many of you might already know how severance packages work, here’s a quick review.
Upon terminating an employee, you as the business owner give out money to an employee in exchange for them fulfilling obligations to you. This typically includes a stipulation not to file a lawsuit against you and other provisions.
While paying extra money to someone you let go might appear to be a bummer, it’s an excellent way to help reduce the chances of a lawsuit.
It can also even help prevent the employee from badmouthing you, which often makes it harder to recruit solid staff.
You definitely aren’t required to do this, but it can be smart—especially in California where the laws make it difficult to fire employees without fear of it coming back to bite you.
Next, I’ll get into the nitty-gritty of what a typical severance package looks like, and things to think about when putting yours together.
1. Deciding how much payment is in the package
The first thing you have to decide is how much money you want to include in the severance package.
There are several different factors to weigh here.
Firstly, the whole purpose of the severance package is to avoid litigation, so you want to make sure the payment is enough to make the employee not want to sue.
On the other hand, you also want to consider how much is fair.
Paying out gobs of cash to avoid a theoretical lawsuit might not actually be saving your business much money at all.
Some employers base severance packages on how long the employee has been with the company.
Another option is to pay out “x” amount of additional weeks of pay.
Some employers even throw in other goodies, like extended health insurance coverage and assistance in helping the terminated employees find new jobs.
You might only consider this if the employee is being let go as a result of a layoff vs. as a result of poor performance.
The important thing, however, is to develop a standard and keep it consistent.
2. What lawsuit rights will the employee waive
This is the real meat of the severance package and the true value to you as a business owner. After all, the whole point of a typical severance package is to reduce chances of litigation.
You want to be as specific as possible in the agreement about what legal rights to litigate that your terminated employee is giving up in exchange for the severance money from you.
While there are no one-size fits all solution, here are some legal remedies employers often ask for their terminated employee to surrender in exchange for the severance payment:
- Ability to sue for wrongful termination
- Ability to sue for unlawful discrimination
- Ability to sue for harassment or defamation
- Ability to sue for “known and unknown” claims
This is the most important part of your severance agreement. Avoid winging it, and make sure you work with an attorney to get all the particulars exactly right.
3. Determine other things are you going to ask for from the employee?
In addition to avoiding a lawsuit, there are other things you can ask of your employee does in exchange for the severance payment.
This could be very specific to your particular business, but here are some usual things an employer might demand in exchange for the severance package:
- The former employee doesn’t discuss terms of the severance package with anyone
- The former employee will refrain from disparaging or attacking the employer
- The former employee doesn’t divulge company secrets
- The former employee fulfills certain commitments with the employer even after being terminated (i.e. being on-call to answer questions about their previous work for a specific amount of time).
4. Remember the limitations of a severance package
While severance packages can do a great job of helping to protect your business from defamation and lawsuits, there are critical limitations you should be aware of.
Firstly, there are certain legal claims that can never be waived by the employee via a severance package.
For example: no matter what the severance agreement says, an employee can always pursue violations of California wage and labor laws.
You also cannot put non-compete clauses in the agreement that would unfairly limit the employees right to work.
Also: if there’s a claim that the employee signed the agreement under duress, or if they can prove you were deceptive about what the agreement entailed, the whole thing might be ruled by the court as unenforceable.
No right to pursue criminal charges can ever be surrendered in a severance agreement (in contrast to civil charges).
5. A typical severance package might not be typical for you
While I hope this guide helps jump-start consideration of what a severance agreement might look like for your business, what is “typical” for other companies might not be the typical severance package for you.
It’s important, especially in California, that every agreement is tailor-made and able to withstand even the most stubborn disgruntled employees!
Trust me: you don’t want to get tangled up with the California Labor Board, or worse, in court.
It’s important that you get professional legal help to deal with severance packages on the front end, so they don’t become pains in your back end later on!
