Posted on July 24th, 2017
Introduction:
As Employer Defense lawyers our job is to try to protect you as much as possible and reduce your liability so we can save you as much money as possible.
But every year the laws get more restrictive in California making it more difficult for us employers.
However there are still some tools available to us to help reduce our risk.
One thing you want to do above all is try to avoid a court case.
Its better to shell out a little bit of money now to reduce your risk of giving up much, much more in the future.
That is where an employee severance agreement can come in.
What is a Severance Agreement?
A employee severance agreement is pretty straightforward and simple in concept. You as the employer give the departing employee a small— but extra parting payment on their last day in exchange for their signature on a severance agreement document.
This agreement is a release and wavier of claims stating that the employee will not sue or make employment related claims against you or your business now or in the future.
Severance pay is not required by law so you get to set the terms of it.
I recommend using a termination checklist so you are sure the law is being followed in your firings.
Why You Should Use a Severance Agreement
This agreement is as close as you can get to peace of mind against future lawsuits.
When I suggest a severance agreement many employers tell me they have nothing to worry about because they have broken no labor laws.
Nothing is further from the truth!
Even if you think you didn’t break any laws it does not mean the employee cannot sue you.
And guess what? They get their attorney for free so they have nothing to lose!
You meanwhile will be paying your attorney high rates to prove you did nothing wrong. If its found the employee has no claim do you think you get your money back? Heck no! That money is gone forever.
And that is best case scenario if you win.
If you lose you have to pay your attorney fees, whatever the labor penalty in the case is AND the employees attorney fees!
Yes you read that right. You have to pay the employees attorneys. That is where you will likely lose the most money.
So just to review; if you go to court the best case scenario is you win but you still spend thousands on your own attorney and months of your time to prove you did nothing wrong.
Worst case is you lose the case and pay your attorney, their attorney and all the penalties. I have seen these go into the hundreds of thousands and totally wipe some companies out all together.
But there is another way! Get the employee to sign a severance agreement! Typically that is 1-2 weeks pay. Much less damage than any possible outcome of a court case.
Employee Lawsuits are crazy expensive and could put you out of business completely. This is one of the best strategies to keep you out of these situations.
Why Should You Reward an Employee You Are Firing?
Great question!
Look I know we are basically asking you give money to someone you just fired.
And I know exactly what you are thinking.
“Why would you want to reward someone that you don’t want working for you anymore?”
After all you are probably not firing this person because they were your best or even a good employee.
Well that is a very valid point. But you have to change the way you think about this. Don’t think about it as a reward for the former employee but as protection for your business.
Remember this is not personal, its business. And this is the best step to take to protect your business.
You must mitigate your risk.
Its not about being right or wrong. Or what is fair or unfair.
Which Employees Should You Offer A Severance Agreement to?
We recommend that you offer a severance agreement to any and every employee you let go.
- Even if you fire an employee for just cause it does not mean they cannot come back and sue you.
- Even if the employee you fired did not seem to be upset and you left each other on relatively good terms does not mean they will not come back and sue you.
You should try to get every employee who you fire to a sign a severance agreement on their last day.
In exchange for additional monetary reward they are agreeing to release any future legal claims against you or your business related to Labor law.
Problem Employees
Now if you do not want to adopt a policy of having a severance agreement with every fired employee because of the cost or some other reason you should still considered it for special cases.
These are the cases where you think it is very likely that the employee could try to make a claim against you or the business in the future.
- Does the employee have a history of complaining?
- Do they appear to be angry with you or one of their supervisors?
- Are they known for riling up your other employees up against management?
- Do they have any history that you know of with past claims against previous employers?
- Have they ever been overheard or directly threatened you with a lawsuit?
- Have they ever expressed feeling disrespected or unappreciated by you or one of their supervisors?
If they are being fired or if they are leaving on bad terms this is where you really have to get your antenna up.
Remember even if you did nothing legally wrong they can still sue you!
In fact we have found that most employees sue because they do not like the owner or their supervisor not because they think they have been legally wronged!
What if They Wont Sign the Severance Agreement
You cannot make an employee sign a severance agreement. And you must pay the employee on their last day everything that is owed to them (backdated regular pay etc).
You definitely don’t even want to give the perception that you are pressuring them to sign.
Just like you are not obligated to offer a severance they are not obligated to agree to one.
What you can do is sweeten the pot. If the payment is really low, like a week you can offer to increase it to two weeks and see if they bite.
If they absolutely refuse to sign you may want to brace for a coming lawsuit. After all if they have no plans to sue why would they not accept free money?
What to Include in Your Severance Agreement
The most important provision to have (and really the main point) of the agreement is that the employee cannot sue you if they accept the severance.
There are many different options for your offer but typically employers will send the employee packing with 2 extra weeks pay as their severance.
Remember this is not the pay they already had due to them. California has a Final Paycheck Law.
Its one of the strictest in the nation and says you must pay a fired or laid off employee immediately after termination.
California also makes employers pay any accrued but unused PTO or vacation time on that final day.
So keep this in mind when you offer your severance. The severance is something extra along with the final regular pay and vacation time that is already due to them.
Time limit to accept the deadline.
- A general release with a Civil Code section 1542 waiver releasing all known and unknown claims.
- Confidentiality
- No admission of liability
- No present or future employment
- Non-disparagement clause which can also set forth what job reference, if any, will be given to any prospective employers
- Return of company property
- non-solicitation of customers clause
Conclusion
Like I said at the start of this article I know it can really suck to give a problem employee a severance. This almost feels like you are rewarding someone you are terminating.
But I hope after reading this article you see why it makes so much sense and is a critical tool for employers looking to minimize their risk of an employee lawsuit.
If you would like a free consult on a severance agreement for your specific business please reach out for an appointment with me.
Hi I’m John Fagerholm, the founding partner of DefendMyBiz. My mission is to defend employers like you from California’s unfair labor laws.
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