A severance agreement is a contract outlining the terms of an employee's departure from a company. In California, severance agreements are particularly relevant for at-will employees, who can be terminated for any lawful reason at any time. Severance agreements typically provide compensation and other benefits in exchange for the employee’s agreement to certain post-employment conditions, including restrictive covenants such as non-compete, non-solicitation and nondisclosure agreements.

California law is exacting in its treatment of restrictive covenants. Under California Business and Professions Code Section 16600, non-compete agreements are generally unenforceable because they are seen as restrictions on an individual's right to work in their chosen field. However, other types of restrictive covenants, such as non-solicitation and confidentiality clauses, may be enforceable if carefully drafted. A non-solicitation clause, which forbids a departing employee from contacting clients or employees, may not overreach in duration or scope. Confidentiality agreements protecting trade secrets and proprietary information are often upheld, provided they comply with California’s Uniform Trade Secrets Act and do not prevent the former employee from working in the industry.

Severance agreements must also provide valuable consideration to the employee in return for the post-employment obligations they are agreeing to undertake. Consideration (also known as quid pro quo) generally means additional compensation or benefits that the employee would not otherwise receive, such as a lump sum payment, extended health benefits or outplacement services. This consideration must be clearly specified in the agreement if the employee is giving up rights in return.

Many severance agreements include liquidated damages clauses, which specify an amount of money an employee must pay if they breach terms, such as a confidentiality clause. In California, liquidated damages are enforceable only if they are a reasonable estimate of actual damages that the breach would cause the employer. If the liquidated damages amount is excessive, a court is likely to deem it an unenforceable penalty. Employers should be careful to ensure that any liquidated damages clause accurately reflects potential harm, rather than acting as a deterrent or punishment.

A company should have a skilled California employment lawyer draft and review severance agreements to make sure they comply with California law, focusing on whether the consideration is fair and whether any restrictive covenants or liquidated damages clauses might be unenforceable. A well-crafted agreement can prevent future disputes and bolster the company’s reputation for fair treatment of its employees.

Garcia & Gurney, A Law Corporation serves businesses from the Tri-Valley to Silicon Valley, including Pleasanton. For help with a labor and employment issue in and around Alameda and Contra Costa Counties, call us today at 925-468-0400 or contact us online.