9.4 Severance Agreements, Older Workers Benefit Protection & Civil Code § 1542 Waivers

9.4 Severance Agreements, Older Workers Benefit Protection & Civil Code § 1542 Waivers

Executive Summary: Severance and separation agreements serve as the primary legal mechanism for employers to secure a release of claims upon an employee's departure. In California, however, drafting an enforceable separation agreement requires compliance with a complex web of state and federal statutory requirements. Under California Labor Code § 206.5, severance consideration must consist of additional value above and beyond wages and accrued vacation already owed to the employee. To release unknown or unsuspected claims, the agreement must include an explicit, knowing waiver of California Civil Code § 1542. Furthermore, under the Silenced No More Act (SB 331), codified in California Government Code § 12964.5 and Code of Civil Procedure § 1001, employers are flatly barred from including non-disclosure agreements (NDAs) or non-disparagement clauses that restrict the disclosure of factual information regarding workplace harassment, discrimination, or retaliation across all FEHA protected categories. Employers must also navigate the federal Older Workers Benefit Protection Act (OWBPA) for workers aged 40 and older, while ensuring that non-waivable statutory rights—such as workers' compensation, EDD unemployment benefits, and administrative agency filing rights—are strictly preserved.

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Essential Elements of an Enforceable California Severance Agreement

Under California contract law and the Labor Code, an agreement waiving employee rights must meet three foundational legal requirements:

1. The Legal Consideration Requirement

For a release of claims to be binding, the employer must provide valid legal consideration—meaning additional compensation, benefits, or concessions to which the employee is not already legally entitled.

• Permissible Consideration: A lump-sum severance bonus, employer-subsidized COBRA premiums beyond statutory mandates, accelerated equity vesting, outplacement assistance services, or payment of contractual bonuses not yet earned.
• Impermissible Consideration (Labor Code § 206.5): An employer cannot use earned wages, overtime pay, statutory final pay, or accrued vacation/PTO as consideration for a severance agreement.

┌─────────────────────────────────────────────────────────────────────────────┐
│                     CALIFORNIA LABOR CODE § 206.5 MANDATE                   │
├─────────────────────────────────────────────────────────────────────────────┤
│ • "An employer shall not require the execution of a release of a claim or   │
│   right on account of wages due, or to become due, or made as an advance on │
│   wages to be earned, unless payment of those wages has been made."         │
│ • CRIMINAL SANCTION: A violation of § 206.5 is a MISDEMEANOR.               │
│ • LEGAL EFFECT: Any release executed in violation of § 206.5 is NULL AND    │
│   VOID as a matter of law.                                                  │
└─────────────────────────────────────────────────────────────────────────────┘

[!CAUTION] The Final Check Severance Trap: An HR manager conducts a termination meeting and hands the employee an envelope containing two documents: their final paycheck (including base wages and 40 hours of accrued PTO) and a severance agreement providing an extra $5,000. The HR manager states: "You must sign the severance release before we can give you your final paycheck." This conduct violates Labor Code § 206.5, constitutes a misdemeanor, invalidates the severance release, and subjects the employer to Labor Code § 203 waiting time penalties for willful failure to deliver final wages on the date of discharge.

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California Civil Code § 1542: The General Release of Unknown Claims

Under California common law, a standard release of claims discharges only those disputes known to the parties at the time of execution. To prevent inadvertent surrender of hidden or unasserted rights, the California Legislature enacted California Civil Code § 1542:

"A general release does not extend to claims that the creditor or releasing party does not know or suspect to exist in his or her favor at the time of executing the release and that, if known by him or her, would have materially affected his or her settlement with the debtor or released party."

Requirements for a Valid § 1542 Waiver

To effectively release all claims—both known and unknown—a California severance agreement must contain a specific, express waiver of Civil Code § 1542:

1. Verbatim Statutory Citation: The agreement must quote the full statutory text of Civil Code § 1542.
2. Express Acknowledgment: The employee must explicitly acknowledge that they understand the statutory provision and knowingly, voluntarily agree to waive all rights under § 1542.
3. Legal Consequence of Omission: If an employer fails to include an express § 1542 waiver, the employee can subsequently sue the employer for claims that existed at the time of signing but of which the employee was unaware (e.g., an unasserted wage-and-hour misclassification, an unnoticed meal break violation, or an unrevealed systemic pay equity disparity).

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The California Silenced No More Act (SB 331 / Gov. Code § 12964.5)

Following the #MeToo movement, California enacted Senate Bill 820 (2018), which prohibited non-disclosure agreements regarding sexual harassment and sexual assault. Effective January 1, 2022, Senate Bill 331 (the "Silenced No More Act") dramatically expanded these protections across the entire employment spectrum.

┌─────────────────────────────────────────────────────────────────────────────┐
│                     THE SILENCED NO MORE ACT (SB 331) MANDATES              │
├─────────────────────────────────────────────────────────────────────────────┤
│ • EXPANDED PROTECTED CLASSES: Restricts NDAs and non-disparagement clauses  │
│   involving ALL protected categories under FEHA (race, color, religion, sex,│
│   gender, sexual orientation, disability, age, medical condition, etc.).    │
│ • UNLAWFUL PROVISIONS: Employers cannot prohibit an employee from disclosing│
│   factual information regarding unlawful harassment, discrimination, or     │
│   retaliation in the workplace.                                             │
│ • MANDATORY CARVE-OUT LANGUAGE: Any non-disparagement or confidentiality    │
│   clause MUST include the statutory disclaimer protecting discussions of    │
│   unlawful acts.                                                            │
│ • MANDATORY REVIEW WINDOW: Employers must advise the employee in writing    │
│   of their right to consult counsel and provide AT LEAST FIVE (5) BUSINESS  │
│   DAYS to review the agreement.                                             │
└─────────────────────────────────────────────────────────────────────────────┘

1. Prohibitions on Non-Disclosure and Non-Disparagement Clauses

Under Government Code § 12964.5 and Code of Civil Procedure § 1001:

• It is an unlawful employment practice for an employer to include in any separation or settlement agreement any provision that restricts an employee from disclosing factual information regarding unlawful acts in the workplace, including discrimination, harassment, retaliation, or wage violations.
• Employers cannot include blanket non-disparagement clauses prohibiting the employee from making negative statements about the company unless the required statutory disclaimer is prominently featured.

2. Mandatory Statutory Disclaimer Language

Under Government Code § 12964.5(b)(1)(A), any non-disparagement or confidentiality provision in an employment or separation agreement must include the following specific disclaimer (or substantially similar wording):

"Nothing in this agreement prevents you from discussing or disclosing information about unlawful acts in the workplace, such as harassment or discrimination or any other conduct that you have reason to believe is unlawful."

Any separation agreement executed after January 1, 2022, that contains a non-disparagement clause lacking this mandatory statutory carve-out is contrary to public policy and unenforceable.

3. What Information CAN Still Be Kept Confidential?

SB 331 does not eliminate all confidentiality in California separation agreements. Employers may lawfully protect:

• Severance Amount: The financial amount of the severance settlement paid to the employee.
• Trade Secrets & Proprietary Data: Confidential business information, source code, customer lists, and non-public technical data protected under the California Uniform Trade Secrets Act (CUTSA).
• Claimant Identity (At Employee's Request): Under CCP § 1001(c), a provision shielding the identity of the claimant may be included only if requested by the employee.

4. Mandatory Review Period and Right to Counsel (Gov. Code § 12964.5)

Under Government Code § 12964.5(b)(4), when offering a separation or severance agreement:

• The employer must notify the employee in writing of their right to consult an attorney regarding the agreement.
• The employer must provide the employee a reasonable time of not less than five (5) business days to review and consider the agreement.
• Early Execution Exception: The employee may sign the agreement prior to the expiration of the 5-business-day period, provided the employee's decision to accept before the end of the period is knowing and voluntary and is not induced by the employer through fraud, misrepresentation, or a threat to withdraw or alter the offer.

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The Older Workers Benefit Protection Act (OWBPA) Requirements

When a severance agreement includes a release of age discrimination claims under the federal Age Discrimination in Employment Act (ADEA, 29 U.S.C. § 621 et seq.) for employees aged 40 and older, the employer must satisfy the rigid statutory mandates of the Older Workers Benefit Protection Act (OWBPA, 29 U.S.C. § 626(f)).

┌─────────────────────────────────────────────────────────────────────────────┐
│                     FEDERAL OWBPA STATUTORY REQUIREMENTS (AGE 40+)          │
├─────────────────────────────────────────────────────────────────────────────┤
│ 1. PLAIN LANGUAGE: Written in a manner calculated to be understood by the   │
│    individual (no legalese obfuscation).                                    │
│ 2. SPECIFIC ADEA REFERENCE: Specifically refers to rights or claims arising │
│    under the Age Discrimination in Employment Act (ADEA).                   │
│ 3. NO FUTURE WAIVERS: Does not waive rights or claims arising after the     │
│    date the agreement is executed.                                          │
│ 4. VALUABLE CONSIDERATION: Consideration provided in addition to anything   │
│    of value to which the employee is already entitled.                      │
│ 5. ADVICE TO CONSULT COUNSEL: Employee advised in writing to consult an     │
│    attorney prior to signing.                                               │
│ 6. CONSIDERATION PERIOD:                                                    │
│    • INDIVIDUAL TERMINATION: At least TWENTY-ONE (21) CALENDAR DAYS to      │
│      consider the agreement.                                                │
│    • GROUP / CLASS TERMINATION (2+ workers): At least FORTY-FIVE (45)       │
│      CALENDAR DAYS to consider the agreement.                               │
│ 7. REVOCATION PERIOD: At least SEVEN (7) CALENDAR DAYS following execution  │
│    to revoke the agreement; CANNOT be waived or shortened!                 │
│ 8. GROUP DISCLOSURES: Mandatory Decisional Unit informational disclosures.  │
└─────────────────────────────────────────────────────────────────────────────┘

1. Consideration Period: Individual (21 Days) vs. Group (45 Days)

• Individual Termination: An individual worker aged 40 or older must be given at least 21 calendar days to consider the agreement. The employee may choose to sign before the 21 days expire, provided the early signing is voluntary and not induced by threats.
• Group / Class Exit Incentive Program: If an exit incentive or termination program is offered to a "group or class" of employees (defined as two or more employees terminated as part of the same operational event or reduction in force), the consideration period expands to at least 45 calendar days.

2. The 7-Day Revocation Period (Cannot Be Waived)

Under 29 U.S.C. § 626(f)(1)(G), the agreement must provide that for a period of at least seven (7) calendar days following execution, the employee may revoke the agreement.

• The agreement does not become effective or enforceable until the 7-day revocation period has expired (becoming fully binding on Day 8).
• Absolute Prohibition on Waiver: The 7-day revocation period cannot be shortened, waived, or eliminated by mutual agreement. Any provision purporting to waive the 7-day revocation window renders the ADEA release void.

3. Mandatory Group Disclosures (Decisional Unit Disclosures)

In a group termination (45-day rule), the employer must provide a detailed written disclosure to all eligible employees. The disclosure must identify:

1. The Decisional Unit: The class, unit, or group of individuals covered by the program, the eligibility factors for the program, and any time limits applicable;
2. The Job Titles and Ages of All Individuals Selected for the program; and
3. The Ages of All Individuals in the Same Job Classification or Organizational Unit Who Were Not Selected for termination.

Failure to provide accurate decisional unit disclosures invalidates the ADEA waiver for all participating employees (Oubre v. Entergy Operations, Inc. (1998)).

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Categorically Non-Waivable Rights Under California Law

Certain statutory employee rights are deemed fundamental to California public policy and cannot be released or waived in a severance agreement, regardless of the monetary consideration provided:

1. Workers' Compensation Benefits (Labor Code § 5001): An employee cannot release a workers' compensation claim through a standard severance agreement. A release of workers' compensation rights requires a separate formal Compromise and Release (C&R) approved by a Workers' Compensation Administrative Law Judge at the Workers' Compensation Appeals Board (WCAB).
2. Unemployment and Disability Insurance (Unemp. Ins. Code § 1342): Any agreement by an employee to waive, release, or commute their rights to unemployment compensation benefits or State Disability Insurance (SDI) is void as a matter of law.
3. Statutory Wage Claims (Labor Code § 206.5): Claims for earned, unpaid wages cannot be waived.
4. Administrative Agency Filing & Whistleblower Rights: An employer cannot prohibit an employee from filing an administrative charge with, testifying before, or cooperating with government agencies, including the Civil Rights Department (CRD), Equal Employment Opportunity Commission (EEOC), National Labor Relations Board (NLRB), Securities and Exchange Commission (SEC), or Cal/OSHA.
5. PAGA Representative Claims: An employee cannot waive their right to bring or participate in a Private Attorneys General Act (PAGA, Labor Code § 2699 et seq.) representative action in a pre-dispute separation agreement unless formal court approval standards are satisfied.
6. Statutory Indemnification (Labor Code § 2802): An employee's statutory right to indemnification for necessary business expenses and legal defense costs incurred in the discharge of duties cannot be waived.

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Federal vs. California Severance Agreement Standards

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Common Exam Traps

[!WARNING] Exam Trap 1: The Blanket Non-Disparagement Clause An exam question presents a separation agreement with a standard clause: "Employee agrees never to make any disparaging or negative statements regarding Company, its executives, or its products." The question asks if the agreement is enforceable. Under SB 331 (Gov. Code § 12964.5), this clause is unlawful and contrary to public policy because it lacks the mandatory statutory disclaimer explaining that nothing prevents the employee from discussing unlawful acts in the workplace.

[!WARNING] Exam Trap 2: Waiving the OWBPA 7-Day Revocation Period An employer terminates a 55-year-old director. The director wants their $50,000 severance check immediately, signs the agreement on Day 1, and signs an additional addendum stating: "I hereby knowingly waive my 7-day revocation right under the OWBPA so that funds may be disbursed immediately." The employer disburses the funds. The waiver is void. Under federal law, the 7-day revocation period cannot be waived by either party. The director can revoke within 7 days and retain the right to sue for age discrimination.

[!WARNING] Exam Trap 3: Confusing SB 331's 5 Business Days with OWBPA's 21 Calendar Days An HR specialist drafts a severance agreement for a 28-year-old employee. Believing that OWBPA rules apply to everyone, the specialist provides 21 days to review. Providing 21 days is lawful (as it exceeds 5 business days), but when drafting for an employee under 40, California's statutory minimum under SB 331 is five (5) business days. However, for employees aged 40 and older, the employer must comply with both SB 331 (attorney notice + 5 business days) and OWBPA (21 calendar days individual / 45 calendar days group).