Everything You Need to Know About Severance Pay in California

Finding out whether you qualify for extra pay when you leave a job can feel overwhelming. If you work or plan to work in California, this guide will help you understand how severance pay works in the Golden State, what options you have, and how to protect your rights.

What Is Severance Pay

Severance pay is an amount of money an employer might offer to an employee who is leaving the company. In many cases, this happens after layoffs, restructuring, or other employment changes. While some employers automatically offer a severance package, others only do so if the employment agreement or company policy requires it. California does not have a law that forces employers to give severance pay, but you may still be entitled to it under certain circumstances.

Why California Has No Required Severance Law

Unlike some states that mandate final paycheck timing, California does not require employers to pay severance at all. Instead, California law focuses on making sure employees receive all earned wages, accrued vacation, and other owed benefits when they leave. Any additional severance agreement comes down to what’s in your employment contract, company handbook, or a negotiated offer. Always check for written language about severance when you start a job or during performance reviews, since verbal promises can be hard to enforce.

Who Is Eligible for Severance Pay

Even though California doesn’t mandate severance pay, many employers choose to provide it. You might be eligible if:

• Your employment agreement mentions severance
  Some offer a fixed formula (for example, one week of pay for every year worked). If you signed a contract that specifies severance, that language is generally enforceable.
• Your company has a severance policy
  Check your employee handbook or any summary of company benefits. Some companies outline eligibility criteria, such as length of service, job type, or reason for separation.
• You negotiate a severance offer
  When layoffs or restructurings are announced, employers sometimes offer packages to encourage employees to leave voluntarily. Even without a policy, you can try negotiating a severance agreement before your last day.
• You’re part of a group layoff or reduction in force
  Large reductions in force sometimes involve lump-sum offers to avoid unemployment spikes. In those cases, the employer might propose severance for employees meeting certain tenure or performance requirements.

How Much Severance Pay Is Typical

If you’re offered severance, it often follows a standard formula:

• One to two weeks of pay for each year of service
  This is the most common approach. For example, if you worked five years and the policy is one week per year, you may receive five weeks of pay.
• Fixed lump-sum based on your salary
  Some companies calculate a percentage of your annual salary as severance, often ranging from 10% to 25% for longer‐tenured employees.
• Continuation of benefits
  Instead of, or in addition to, cash, some agreements include a set number of months of health insurance coverage under COBRA at the employer’s expense.

Remember that unused vacation or paid time off must be paid out separately at your final rate of pay, regardless of any severance offer. In California, accrued vacation is considered wages, so an employer cannot deduct vacation pay from severance.

How California Labor Code Affects Final Pay and Benefits

While severance itself isn’t required, California has strict rules about final wages:

• Final wages due immediately upon termination
  If you get fired or laid off, your employer must pay all earned wages, unused vacation, and commissions on your last day. For employees who resign without giving notice, the employer has 72 hours to pay.
• Accrued vacation counts as wages
  Any vacation or paid time off you earned but did not use must be paid out at separation. This amount cannot be conditioned on staying to train your replacement or signing a severance agreement.
• COBRA and Cal‐COBRA requirements
  If your employer has 20 or more employees, you normally qualify for COBRA coverage. In California, Cal-COBRA can cover smaller employers as well. Keep in mind that severance agreements may include provisions about benefit continuation. Compare your options carefully before signing away rights.

If your employer fails to pay final wages promptly, they may owe you waiting time penalties under California Labor Code Section 203. These penalties can add significant dollars to what you’re owed.

Can You Negotiate Severance in California

Yes. Even if your company does not have a written severance policy, you can ask for a severance agreement. Follow these steps:

1. Prepare your case
   Know your value, tenure, performance record, and any unique skills that make you hard to replace.
2. Ask for an in-person meeting with HR or management
   Treat it as a professional discussion rather than a demand. Explain your situation and why severance would benefit both parties—especially avoiding litigation or lengthy unemployment costs.
3. Request a written offer
   If you receive a verbal promise, politely ask for confirmation in writing. Without that document, you may have limited options to enforce the agreement.
4. Consider involving an attorney
   If a significant amount of money is at stake or if the offer requires you to sign a release of claims, a labor attorney can help you negotiate terms, such as a reasonable payout or longer benefit continuation.

Keep in mind that most employers will not offer severance beyond what their peers provide in your industry. Research similar companies to understand standard severance packages and tailor your ask accordingly.

Key Clauses in Severance Agreements

Before signing a severance agreement, watch for:

• Release of claims
  Employers often require employees to waive the right to sue for wrongful termination, discrimination, or unpaid wages. Make sure you understand exactly what rights you’re giving up.
• Noncompete or non-solicitation clauses
  California generally prohibits noncompete agreements, but some severance offers may try to limit where you can work next. These clauses may be unenforceable but can create confusion—so review carefully.
• Confidentiality requirements
  Some agreements include nondisclosure of the terms, which could prevent you from discussing your severance pay with former coworkers or potential employers.
• Timing to accept
  Under the Older Workers Benefit Protection Act (OWBPA), if you’re over 40 and waiving age discrimination claims, you have at least 21 days to consider the agreement and seven days to revoke it. Make sure you know the deadlines so you don’t miss your chance.

If anything seems unclear, ask for an extension or have your attorney review the documents. Even a small change in language can have big consequences.

Common Scenarios for Severance in California

Here are a few situations where severance pay might apply:

• Layoff due to company downsizing
  Employers try to offer a cushion to employees who lose jobs unexpectedly.
• Merger or acquisition
  When two companies merge, redundant roles often get cut. Employers may offer severance to ease the transition.
• Change of control clause
  In executive contracts, there may be a clause that triggers a severance payment if leadership changes.
• Health or disability departure
  Some companies offer severance if you leave due to inability to perform your job because of health issues, especially for senior positions.

If you fall into any of these categories, look for language in your employment contract, offer letter, or employee handbook.

Steps to Claim Severance Pay

If you believe you’re owed severance, take these actions:

1. Review all relevant documents
   Employment contracts, offer letters, and employee handbooks could contain severance language.
2. Speak to HR or your manager
   Ask if your separation qualifies for severance. Request details about how they calculate it and any deadlines for acceptance.
3. Demand a written explanation
   If they deny severance, ask in writing for the specific reason. This creates a record if you need to take further action.
4. File a wage claim or lawsuit
   If you’re owed severance per a written agreement but your employer refuses, you can file a claim with the California Division of Labor Standards Enforcement (DLSE) or consult an employment attorney.
5. Keep records of communication
   Save emails, letters, and notes from phone calls related to your severance. These can be crucial if you challenge the employer’s decision.

Even if the employer claims they have no severance policy, you still have the right to pursue anything in writing. Silence or vague answers may not be enough to deny a valid claim.

Tax Implications of Severance Pay

Severance pay is considered taxable wages. Here’s what you need to know:

• Federal income tax withholding
  Severance is subject to the same withholding rates as regular pay. It might be taxed at a flat supplemental rate (22 percent as of 2025).
• State income tax in California
  California also taxes severance as ordinary income. Make sure you account for this when budgeting your living expenses.
• Social Security and Medicare
  Employers must withhold Social Security and Medicare taxes from your severance pay.
• Unemployment benefits
  If you receive a lump‐sum severance payment, you can still qualify for unemployment benefits. California Employment Development Department (EDD) clarifies that severance pay does not disqualify you, but it may delay your benefits until the severance amount is “used up” based on your weekly benefit amount.

Consult a tax professional if you have questions about how a large severance payout affects your overall tax liability.

Tips to Negotiate a Better Severance Package

While not guaranteed, consider these strategies:

• Highlight your accomplishments
  Remind your employer of cost savings or revenue you generated. This can strengthen your bargaining position.
• Ask for a heads-up letter
  If you suspect layoffs ahead, ask management to provide written notice or justification. This could lead them to offer severance earlier or improve your negotiating power.
• Request benefit continuation
  Even if the cash offer is low, try negotiating for extended health coverage or access to company services (like career counseling).
• Negotiate a positive reference
  Sometimes a letter of recommendation or agreement on reference calls can be just as valuable as extra pay.
• Ask for outplacement services
  Some companies offer career transition support instead of higher cash payments. These services can help you find a new job faster, saving you money in the long run.

Every employer has a different tolerance for negotiation. Be polite, professional, and realistic when making your requests.

Frequently Asked Questions

Does California law require a specific severance formula?
No. California does not mandate any severance pay formula. If you see a formula in your employment documents, it’s because your employer voluntarily included it.

Can an employer revoke a severance offer?
Generally, once you sign a severance agreement, the employer cannot go back on it. If they try, you may have grounds for a breach‐of‐contract claim.

What happens to unused sick time?
California law does not require payout of unused sick time unless your employer’s policy states otherwise. Unlike vacation pay, sick time is not considered wages unless specifically paid out.

Can part-time employees receive severance?
Only if the company policy or employment agreement covers part-time staff. If you don’t see your status mentioned, ask HR for clarification.

Will severance affect Social Security or disability benefits?
Severance itself does not count as wages for Social Security earnings calculations. However, if you use it to cover a period when you’d normally work, it could affect how much you earn in that year. If you receive long‐term disability, check with your insurance provider about how severance might count toward income offset.

Protecting Your Rights

Even though severance pay is voluntary in California, you have legal protections for final wages and benefits. Make sure your employer:

• Pays all earned wages and unused vacation on your last day.
• Provides a written explanation if you don’t get severance when the policy says you should.
• Complies with COBRA or Cal-COBRA requirements if you qualify for extended health coverage.

If you suspect a violation—such as unpaid wages or vacation—file a wage claim with the DLSE or consult an employment attorney.

Final Thoughts

Severance pay in California can feel unpredictable since state law does not require it. Your best protection is knowing your rights, reading any documents you sign carefully, and negotiating from a position of knowledge. Whether you have a written severance clause, a company policy, or simply want a fair deal, a clear understanding of California’s labor code and common industry practices will help you make informed decisions. If you’re unsure, don’t hesitate to seek professional advice.

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