Many terminated employees are presented with a Severance Agreement by their former employer. The purpose of a Severance Agreement is to prevent employment litigation before it ever begins. Legally speaking, a Severance Agreement is a written contract; in exchange for money, the employee promises to never sue the employer, legally called a “release of claims.” Employers are legally permitted to seek a release for almost every type of conceivable legal claim from the employee by way of a Severance Agreement. This article discusses several important rights that employees cannot legally release in their Severance Agreement. Part One of this article, discussing Severance Agreement basics, may be found here.
In most cases, a Severance Agreement cannot include a non-competition clause. In short, a non-competition clause is an agreement that the employee will not open a competing business or work for a future employer that is in competition with the former employer. California has close to a total ban on non-competition clauses, which are considered a “restraint on trade.” (Bus & Prof Code § 16600.) No other state has as absolute a prohibition on non-compete clauses as California. The public policy behind this statute is to encourage open competition, employee mobility, and to protect the legal right to pursue lawful employment and business. (Edwards v. Arthur Anderson LLP (2008) 44 Cal.4th 937, 946.) Courts will broadly construe this right to compete and will disallow non-competition clauses in all but the narrowest of circumstances.
Since most other states affirmatively allow non-competition clauses, employers headquartered outside of California are far more likely to include unlawful non-competition clauses in their Severance Agreements. Notably, California’s prohibition on non-competition clauses does not affect an employer’s rights to protect their own intellectual property and trade secrets.
Workers' Compensation Claims:
California has a separate and robust judicial system for litigating and resolving legal claims for on-the-job injuries called the Workers' Compensation Appeals Board (“WCAB”.) The WCAB has the exclusive power to resolve workers' compensation claims and a WCAB judge must approve any agreement between the employer and employee to resolve a workers' compensation claim. Accordingly, employers cannot resolve a workers' compensation claim by way of an ordinary Severance Agreement outside of the WCAB.
Notwithstanding this prohibition, employers will frequently have the employee verify by way of a Severance Agreement that the employee has not suffered an on-the-job injury. This language can easily be missed in a 10-15 page, single spaced Severance Agreement packed with unfamiliar legal language and run-on sentences. This affirmation -that the employee was not injured- can be used against the employee in a subsequent workers' compensation claim.
Employees who have been injured on-the-job or who have filed a workers' compensation claim should contact an attorney before signing a Severance Agreement. Employees who have been terminated following an on-the-job injury (called an “industrial injury”) are among the most common groups subjected to unlawful disability discrimination.
Unemployment Insurance Benefits:
Employees who are terminated, without good cause, are eligible for Unemployment Insurance benefits. Unemployment Insurance is not insurance at all. Rather, the benefits are a form of welfare or government assistance, paid for by the employer, and administered by the California Employment Development Department (“EDD”.) Unemployment Insurance benefits are temporary in nature and normally last up to six months. The amount of the weekly benefits are only a fraction of what the employee actually earned while employed. The total amount depends upon how much money the employee earned while employed and the length of their employment with a $450.00 per week maximum payment. The benefits are available for workers who are “unemployed through no fault of their own.” (Unemp. Ins. Code § 100.) Employees who have been fired for poor performance or other legitimate cause can still receive Unemployment Insurance benefits. Only employees who were terminated for misconduct may be denied the benefit (i.e. absenteeism, insubordination, fighting/ arguing.)
Employees cannot waive their right to receive Unemployment Insurance benefits in a Severance Agreement. (Unemp. Ins. Code § 1342; Citronen Cars Corp. v. Unemployment Ins. Appeals Bd. (1980) 107 Cal. App. 3d 945, 949 fn. 6.) As a matter of public policy, California mandates that employers and employees cannot enter into a contract that affects the employees right to receive a benefit.
Employers are prohibited from requiring an employee to sign a Severance Agreement (or any other type of release of legal claims) as a pre-condition of receiving wages that are indisputably owed to the employee. (Lab. Code § 206.5.) Any such release is deemed “null and void” as a matter of law. (Id.) The only instance in which an employer may condition a release upon payment of wages is if the employer can establish that there is a bona fide or good faith dispute over the wages. (Chiandrah v. Pick Up Stix, Inc. (2009) 171 Cal.App.4th 796, 803.) Employers cannot retroactively fabricate pretextual reasons to not pay owed wages. If wages are concededly due, and there is no dispute over the amount of hours worked by the employee, the employer must issue payment without delay and without the condition the employee sign a Severance Agreement or other release.
Despite the clear language of Labor Code § 206.5, most Severance Agreements will contain multiple references to the employee’s wages, including representations from the employee that they have been paid their regular wages and that any money offered in the Severance Agreement is over and above what they actually earned as wages.
In conclusion, severance Agreements are lengthy, complicated, and are almost always given to an employee when the employee is under some level of mental distress or shock from a recent termination. Notwithstanding the clear prohibitions of what things cannot be legally included in a Severance Agreement, employers and their attorneys will often push the limits. This behooves many employees to seek legal representation as soon as they have been presented with a Severance Agreement.
Have you been presented with a Severance Agreement? Contact the Law Office of Brian Mathias for a consultation.