Severance Agreement Lawyer California

Severance Agreements in California — Employee Rights Guide

When an employer offers you a severance package, they are offering money or benefits in exchange for your signature on a legal document that waives your right to sue them. This is not a routine formality — it is a binding legal contract with potentially enormous consequences. Many employees sign severance agreements without understanding what rights they are giving up or how much more they could have received with legal representation.

California law imposes specific requirements on severance agreements and prohibits certain types of clauses. If you have been offered a severance package, understanding your rights before signing is essential. Bluestone Law reviews and negotiates severance agreements for California employees — and in many cases, we can significantly improve the terms.

What Is a Severance Agreement?

A severance agreement (also called a separation agreement, release of claims, or termination agreement) is a contract that typically offers the departing employee:

• Severance pay (a lump sum or continued salary for a defined period)
• Continuation of health insurance benefits (employer-paid COBRA premiums)
• Acceleration or extension of equity vesting
• A neutral or positive reference letter
• Outplacement services

In exchange, the employee typically agrees to:

• Release all known and unknown legal claims against the employer
• Cooperate with future litigation or investigations involving the employer
• Maintain confidentiality of proprietary business information
• Comply with post-employment non-solicitation restrictions (non-competes are generally unenforceable in California under Business & Professions Code § 16600)
• Provide a non-disparagement commitment

California Law Requirements for Valid Severance Agreements

Consideration

A severance agreement must provide something of value — "consideration" — beyond what the employee was already entitled to receive. If the employer simply offers to pay wages already owed or benefits already vested, that is not sufficient consideration for a release of claims. The consideration must be new and additional — often expressed as a specific dollar amount or number of weeks of pay "over and above" the employee's final paycheck.

Knowing and Voluntary Waiver

California courts require that a release of claims be made knowingly and voluntarily. Courts consider factors including: the employee's education and business experience; whether the employee had time to review the agreement; whether the employee was represented by counsel; and whether the release was obtained through fraud, duress, or undue influence.

OWBPA Requirements (Employees Age 40+)

The Older Workers Benefit Protection Act (OWBPA) — an amendment to the ADEA — imposes mandatory requirements on any severance agreement that releases age discrimination claims from employees 40 or older:

• 21-day consideration period: The employee must be given at least 21 days to consider the agreement (45 days in a group layoff)
• 7-day revocation period: The employee has 7 days after signing to revoke the agreement
• Advice of counsel: The agreement must specifically advise the employee in writing to consult an attorney
• Group layoff disclosures: If the termination is part of a reduction in force, the employer must disclose the ages and job titles of all employees in the decisional unit who were and were not selected for termination

An agreement that does not satisfy all OWBPA requirements cannot validly release ADEA age discrimination claims, even if the employee signed and returned it.

What a California Severance Agreement Cannot Waive

Despite the breadth of most general releases, California law prohibits waivers of certain rights:

• Future claims: A release can only waive claims that arose before the date of signing — not claims that arise after
• PAGA penalties: Per Iskanian v. CLS Transportation Los Angeles, LLC, 59 Cal.4th 348 (2014), individual PAGA claims (the employee's 25% share) can be released, but the State's 75% share of PAGA civil penalties cannot be released in a private agreement
• Workers' compensation claims: A severance agreement cannot waive the right to file for or receive workers' compensation benefits
• Right to file charges: The EEOC and CRD have stated that a release cannot prevent an employee from filing a charge with the agency — though it can waive the right to receive money in any subsequent proceeding
• Government assistance: Rights to unemployment insurance, Medi-Cal, or similar government benefits cannot be waived
• Criminal restitution

SB 331 — The Silenced No More Act (2021)

California's SB 331, effective January 1, 2022, significantly expanded restrictions on workplace settlement agreements. Under SB 331:

• Employers cannot prohibit employees from disclosing the facts underlying a settlement involving discrimination, harassment, or retaliation under FEHA — even if a monetary settlement is paid
• Non-disparagement clauses in settlement agreements involving FEHA claims must include a carve-out that allows the employee to disclose violations of FEHA
• Agreements cannot prevent employees from working for competitors or other employers as a condition of settlement

Violations of SB 331 expose employers to civil penalties. Any confidentiality clause that purports to silence an employee about FEHA violations is void and unenforceable.

Negotiating a Better Severance Package

Most employees assume the severance offer is fixed — it is not. Common negotiation strategies include:

• Increasing the severance amount: The standard "one week per year of service" formula is a floor, not a ceiling. Employees with potential legal claims, specialized skills, or long tenure often receive significantly more after negotiation.
• Extending health insurance coverage: Negotiating employer-paid COBRA for 3-6 months (or longer) instead of the standard 30-90 days.
• Neutral reference agreement: Many employers agree to provide a neutral reference (dates of employment and job title only) rather than refusing to provide references or providing only "do not rehire" designations.
• Limiting the scope of the non-disparagement clause: Ensuring it is mutual (the employer cannot disparage you either) and that it explicitly preserves your rights under FEHA and SB 331.
• Outplacement services: Professional job search support as an additional benefit.
• Equity acceleration: If you have unvested stock options or RSUs, negotiating acceleration of vesting or an extended post-termination exercise period.

When to Consult a California Employment Attorney

You should consult an attorney before signing a severance agreement if:

• You believe you were terminated for an illegal reason (discrimination, retaliation, whistleblowing)
• You are 40 or older (OWBPA rights attach)
• The agreement contains broad non-disparagement, non-solicitation, or intellectual property assignment clauses
• You have pending wage claims or workers' compensation matters
• The agreement requires you to cooperate with future legal matters or investigations
• You are unsure what claims you may have or what they are worth

At Bluestone Law, we review severance agreements on flat-fee or contingency arrangements and frequently negotiate substantially improved terms for our clients. Contact us before the deadline expires.

Frequently Asked Questions — Severance Agreements California

Tax Implications of California Severance Agreements

Severance pay has important tax implications that employees frequently overlook. Understanding how different types of severance consideration are taxed can affect negotiations significantly:

Ordinary Income Treatment

Severance pay is generally treated as ordinary income for federal and California income tax purposes — subject to income tax withholding, Social Security and Medicare taxes (FICA), and California SDI withholding. The tax treatment is the same as regular wages. In some cases, large lump-sum severance payments can push the employee into a higher tax bracket for the year received.

Section 1041 Allocations

Severance agreements sometimes allocate payments between different types of claims — for example, a portion to "wages" and a portion to "emotional distress damages." Tax treatment can differ: wages are fully taxable; physical injury or sickness damages under Internal Revenue Code § 104 may be excludable. Proper allocation requires careful legal and tax planning. Attorneys negotiating severance agreements can structure allocation provisions to maximize after-tax recovery.

Consulting or Independent Contractor Arrangements

Some employers offer severance structured as consulting fees over a period of months — treating the former employee as an independent contractor. This can reduce employer tax obligations but shifts the FICA tax burden entirely to the former employee (self-employment tax of approximately 15.3%). Employees should carefully evaluate whether a consulting arrangement's tax disadvantages outweigh any benefits before agreeing.

Post-Employment Obligations in California Severance Agreements

Non-Solicitation Clauses

California Business & Professions Code § 16600 voids contracts that restrain a person from engaging in a lawful profession, trade, or business. This means that most non-compete agreements are unenforceable in California. However, well-drafted non-solicitation clauses targeting clients or employees the former employee had a direct relationship with may be enforceable in narrowly limited circumstances under the Loral Corp. v. Moyes (1985) line of cases — though recent appellate decisions have significantly narrowed the permissible scope of such clauses.

Non-Disparagement Clauses — California's Restrictions

Under SB 331 (the Silenced No More Act), non-disparagement clauses in severance and settlement agreements cannot bar an employee from disclosing facts underlying a FEHA violation (discrimination, harassment, or retaliation). Any non-disparagement provision must contain an explicit carve-out stating that the employee retains the right to disclose factual information about FEHA violations to government agencies, law enforcement, or any other person.

Cooperation Clauses

Many severance agreements require the departing employee to cooperate with future litigation or investigations involving the employer. These clauses are generally enforceable but should be carefully reviewed to: limit the scope of required cooperation (to matters the employee has personal knowledge of); cap the time the employer can demand; provide for compensation for the employee's time and reimbursement of related expenses; and ensure cooperation requirements do not extend indefinitely beyond the severance payment period.

Reviewing Your Severance Agreement — Checklist

When reviewing a severance agreement, pay particular attention to:

1. The exact dollar amount — is it adequate relative to your years of service, your potential legal claims, and the company's ability to pay?
2. What claims are being released — are you releasing claims you did not know you had? Does the agreement include a § 1542 waiver?
3. The consideration period — do you have at least 21 days to review (45 days for group layoffs if you are 40+)?
4. The revocation period — is there a 7-day revocation period for employees 40+?
5. Non-disparagement terms — is the clause mutual? Does it comply with SB 331 carve-outs?
6. Non-solicitation and non-compete terms — are they enforceable under California law?
7. Equity and benefits provisions — what happens to unvested stock, health insurance, and other benefits?
8. Reference agreement — will the employer provide a neutral reference? To whom?
9. Return of company property requirements — are they reasonable and clearly defined?
10. COBRA election period — does the agreement address continuation of health coverage?

If any of these items is missing, unclear, or unfavorable, those are negotiation points. An employment attorney can evaluate the full agreement, identify leverage, and negotiate on your behalf — often recovering significantly more than the initial offer without costly litigation.

Understanding Severance Agreements — Common Red Flags

California employment attorneys who review hundreds of severance agreements each year consistently identify certain provisions that employees sign without fully understanding their implications. Before signing, be alert to:

Overly Broad General Releases

Most severance agreements include a "general release" clause releasing all known and unknown claims against the employer. These releases are often so broadly worded that they purport to extinguish rights the employee did not know they had — including discrimination claims, unpaid wage claims, and whistleblower claims. A general release paired with a California Civil Code § 1542 waiver (waiving claims the employee "does not know or suspect to exist") is particularly broad. Before signing such a release, have an attorney review whether you have potential claims worth more than the severance offered.

Overbroad Non-Disparagement Clauses

Non-disparagement clauses that prevent you from ever speaking negatively about your former employer — without the SB 331 carve-out for FEHA disclosures — are unlawful. Under California's Silenced No More Act (SB 331, effective January 1, 2022), any non-disparagement provision in a settlement or separation agreement must expressly state that it does not prevent you from disclosing facts underlying a FEHA claim (discrimination, harassment, or retaliation). Any clause lacking this carve-out violates California law.

Mandatory Arbitration of Future Claims

Some severance agreements include provisions requiring the employee to arbitrate any future claims arising from the separation — for example, if the employer later defames the employee in references. These mandatory arbitration clauses may be enforceable or unenforceable depending on whether they comply with California's Armendariz requirements for employment arbitration (neutral arbitrator, adequate discovery, no waiver of statutory remedies, employer pays arbitration costs). An attorney can evaluate whether the arbitration provision is enforceable before you sign.

Intellectual Property Overreach

Severance agreements sometimes include intellectual property assignment provisions that attempt to claim ownership of any work the employee performs after separation — including consulting work, inventions, or creative work done on personal time for other clients. Under California Labor Code § 2870, employers cannot require assignment of IP developed entirely on the employee's own time, without employer resources, and unrelated to the employer's business or anticipated R&D. Review any IP assignment clause carefully before signing.

Industry-Specific Severance Considerations

Technology and Entertainment Industry Employees

In California's technology and entertainment industries, severance negotiations frequently involve complex equity components — unvested stock options, RSUs, performance grants, and options to purchase company stock. Key issues include:

• Option exercise window: After termination, stock options typically expire within 90 days. Some severance agreements extend this period to 1-3 years or even through the term of the options — a potentially valuable concession if the company is pre-IPO or growing.
• Single vs. double trigger acceleration: Whether unvested equity accelerates upon termination ("single trigger") or only upon both termination and a change of control ("double trigger") significantly affects the value of the separation.
• Clawback provisions: Some equity agreements include clawback provisions that allow the employer to recover vested equity if the employee joins a competitor. These must be carefully reviewed for enforceability under California's § 16600 prohibition on non-competes.

Financial Services and Broker-Dealers

Employees in the financial services industry face unique severance considerations related to industry licensing, U-5 filings (broker termination reports filed with FINRA), and promissory notes for training or signing bonuses. Negotiating the language of the U-5 filing is often as important as negotiating the severance amount — a negative U-5 disclosure can follow a broker for years and damage career prospects across the industry. California employment attorneys with financial services experience can often negotiate neutral U-5 language as part of a severance agreement.

After Signing — What Happens Next

The Revocation Period

For employees age 40 or older, federal law (OWBPA) gives you seven calendar days to revoke your acceptance of the severance agreement after signing. During this period, the agreement is not final. To revoke, you must provide written notice to the employer or its counsel — a certified letter or email is sufficient. The revocation period cannot be waived. After the seven-day period expires without revocation, the agreement becomes binding and irrevocable.

Filing for Unemployment Insurance

Receiving severance pay does not automatically disqualify you from collecting California Unemployment Insurance (UI) benefits. Whether and when severance affects UI eligibility depends on how it is structured: lump-sum severance paid after the separation date generally does not reduce UI benefits; severance paid as continuation of salary (where the employer treats you as still employed) may delay UI eligibility. File for UI immediately at California EDD — do not wait for the severance to conclude.

Health Insurance Continuation

After separation, you have the right to continue group health coverage under COBRA for up to 18 months (or 36 months in some circumstances). COBRA notice must be sent within 30 days of the qualifying event. COBRA can be expensive — employer-sponsored group rates are typically far less than the full COBRA premium. If your severance agreement includes employer-paid COBRA continuation, understand exactly how long it lasts and what happens when it expires. California's Cal-COBRA extends continuation coverage for smaller employers and for situations where federal COBRA has exhausted.

Wrongful Termination and Severance — The Intersection

One of the most important situations requiring careful severance review is when the termination itself was potentially wrongful. California employment attorneys regularly encounter clients who signed generous-seeming severance agreements without realizing that:

1. Their termination was retaliatory — following a protected complaint to HR
2. They were discriminated against — as part of a layoff that disproportionately targeted older workers
3. They had significant unpaid wage claims — including overtime, missed breaks, and expense reimbursements — that the severance release would extinguish
4. They were owed a commission or bonus that the employer was trying to avoid paying through the separation

In each of these situations, the value of the underlying legal claims may far exceed the severance offered. An employment attorney can quickly evaluate whether you have viable claims and estimate their approximate value before you sign. Many attorneys provide this assessment for free as part of an initial consultation.

Negotiating Severance After a Wrongful Termination

If your termination was wrongful — discriminatory, retaliatory, or in violation of public policy — you are in a strong negotiating position. Your potential legal claims give you leverage that the employer's standard severance offer does not reflect. Effective negotiation strategies include:

Identifying Your Strongest Claims

Before negotiating, understand what claims you may have and approximately what they are worth. A discrimination claim under FEHA, with two years of back pay, emotional distress damages, and punitive damages potential, may be worth hundreds of thousands of dollars. The employer's offer of four weeks of pay looks very different against that backdrop. An attorney can help you identify and quantify your strongest claims before you negotiate.

Making a Demand Before Signing

Many employees don't realize they can make a counter-demand before signing a severance agreement. An attorney's letter identifying potential claims — without filing a formal complaint — often motivates employers to improve their severance offer significantly. Employers who know they face potential litigation for wrongful termination frequently increase severance offers by 3-5x when presented with a credible legal claim assessment.

Structuring the Negotiation

The most effective severance negotiations address multiple components simultaneously, not just the base severance amount. Experienced employment attorneys negotiate:

• A higher base severance (often 2-4x the initial offer in wrongful termination situations)
• Tax-efficient allocation between wages and other categories
• Equity acceleration and extended exercise windows
• Neutral reference agreement with specific language agreed upon in advance
• Outplacement services or career coaching fees
• Waiver of any non-solicitation provisions that might limit future employment
• Resolution of any outstanding expense reimbursement claims

When Not to Sign a Severance Agreement

Sometimes the best decision is to decline a severance offer entirely — particularly when:

• Your potential legal claims are worth substantially more than the offered severance
• The agreement contains unlawful provisions (e.g., PAGA waiver, prohibited confidentiality of FEHA facts) that the employer refuses to remove
• You want to file a complaint with the CRD or EEOC and do not want the release to complicate your government agency case
• The severance consideration is inadequate — offering only wages already owed to you (like accrued PTO), which is not valid consideration for a general release
• You are uncertain about the full scope of your potential claims and need more time to investigate

Declining a severance offer does not prevent you from suing for wrongful termination. California law does not require an employee to accept a severance offer as a condition of pursuing legal claims. If you believe your termination was wrongful and the severance offer is inadequate, consulting an employment attorney before signing — or declining — is the right first step.

Bluestone Law — California Severance Agreement Review

Before you sign a severance agreement, you need to know what you are giving up. At Bluestone Law, founding attorney Rotem Tamir (CA Bar #328968) reviews and negotiates severance agreements for California employees — providing an honest assessment of your potential claims, identifying unlawful provisions, and negotiating improved terms directly with the employer or its counsel.

Our severance review process includes:

• Evaluating whether the severance offer is fair relative to your potential legal claims
• Identifying any provisions that violate California law (SB 331, OWBPA, PAGA, § 16600)
• Assessing whether your termination was potentially wrongful (discrimination, retaliation, public policy violation)
• Estimating the realistic value of any viable claims
• Negotiating directly with the employer if your claims provide sufficient leverage

We handle severance agreement reviews on a flat-fee or contingency basis depending on the complexity of your situation. The review period matters — OWBPA gives workers 40+ only 21 days (45 days in group layoffs) to consider before the period expires. Do not let time pressure force you into signing an agreement you do not fully understand.

Contact Bluestone Law today for a free initial consultation. We serve employees throughout Los Angeles, the Inland Empire, Orange County, San Diego, Sacramento, and all of California.

Common Misconceptions About Severance Agreements

California employees frequently hold mistaken beliefs about severance agreements that cost them money or rights:

• "I must sign to get my final paycheck." False. Your employer must pay all wages earned through your last day of work regardless of whether you sign a severance agreement. Conditioning your final paycheck on signing a release is an unlawful wage deduction under Labor Code § 221.
• "The severance amount is fixed by company policy." False. Severance is a negotiated contract. "Company policy" is the employer's opening position, not the legal limit.
• "I can always come back and sue later." False. Once a properly drafted general release is signed and the revocation period expires, most claims are permanently waived.
• "Only executives get to negotiate." False. Any employee can negotiate severance terms. The difference is that executives typically already have attorneys; other employees benefit just as much from legal representation.