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When should companies offer severance pay?

Employers may offer severance pay to workers upon termination or involuntary loss of employment.

While California does not require companies to provide severance options, business owners should know when it can be beneficial.

Honoring dedicated employees with severance packages

Severance pay provides extra financial support when an employee loses their job. When companies close permanently or lay off long-term employees due to restructuring, severance pay is an excellent way to bridge the gap until a worker can find another job. Payments might include unearned income plus the following:

  • annual bonuses paid upon termination
  • stock options
  • continuation of the employer’s share of health insurance premiums

Employees can still file for unemployment after receiving severance pay.

Offering severance agreements to protect the business

Occasionally, an employer terminates an employee for specific reasons and could use a severance agreement at that time. A severance agreement differs from severance pay because the employee has to offer up something in exchange for the money. It is a legal contract designed to protect the company from the employee sharing trade secrets, filing lawsuits or sharing information about the cause of termination.

When offering a settlement agreement, employers must follow the guidelines established in Senate Bill 331. This law states:

  • employees can still report discrimination, harassment and other crimes
  • an employee should have an attorney review the agreement before signing
  • an employee has five days to consider the agreement

A severance plan is beneficial to both employers and employees. Not only does it help workers during financial hardship, but it gives business owners peace of mind.


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