California employers should carefully consider how to fire employees. Even though the at-will doctrine is a powerful termination tool, it is not full proof. For that reason, often an employer will choose to offer severance to an employee slated for termination. In that case, in exchange for consideration-money in addition to owed wages-the employee signs an agreement waiving the right to sue the employer. A carefully drafted severance agreement is essential, and they often have 30 or more numbered paragraphs designed to cover many issues related to termination.

In the recent past, employers included non-compete clauses in severance agreements, even though in most cases the California courts would not enforce those clauses. In fact, the courts would only uphold non-competes in limited circumstances: the sale of a business (Business & Professions Code §16601), partnership dissolution or a partner disassociation (Business & Professions Code §16602), or limited liability company dissolution or a member disassociation (Business & Professions Code §16602.5).

Still, until this year, employers often insisted on having non-compete clauses in severance agreements, even when circumstances did not meet an exception to the rule, because they faced no real penalty for having them. Some employers still hoped to deter former employees from joining a rival and competing against them. Now, Business & Professions Code §§16600.1 & 16600.5 penalize employers who use non-competes to stifle a former employee from working in his or her industry.

Business & Professions Code §16600.1 required an employer to send a written notice to employees that their non-compete clauses were void by February 14, 2024. If the employer failed to do that, an employee may sue the employer.

Business & Professions Code §16600.5 has even more burdensome penalties related to non-compete clauses. Essentially, a former employee can sue an employer if the employer tries to enforce a non-compete clause or if an employee’s severance agreement simply has one. The employee may get damages and attorney’s fees.

During a termination situation, sometimes both employers and employees say things in anger that can create liability for defamation. Defamation is a false communication received by a third party that harms the reputation of the person to which the words referred. The person about whom those words were said or written can sue for the harm to his or her reputation.

In addition to potential defamation liability, severance agreements usually have provisions that guard against speaking badly about a former employer, employee, or both. They are usually called non-disparagement clauses. This is a simple one:

EMPLOYEE expressly agrees EMPLOYEE will not make any disparaging comments about EMPLOYER, EMPLOYER’S owners, or EMPLOYER’S current or former employees to any third party. The agreement set forth in this section shall not apply to responses to any governmental agency or court inquiries, or testimony under oath.

Often agreements require both the employer and employee not to disparage the other. Non-disparagement clauses usually aim to prevent both true and untrue statements and can even make a person stating an opinion liable for damages. In short, non-disparagement clauses make a party to a severance agreement liable for statements that would not qualify as defamation.

Severance agreements are often a useful tool to prevent future litigation and to give a terminated employee a more positive attitude about being terminated. Still, drafting an effective agreement requires careful consideration. Non-compete clauses, defamation, and non-disparagement are only few of those necessary considerations.

Employment Law Office of Ward Heinrichs
4565 Ruffner Street, Suite 207
San Diego, CA 92111
858-292-0792
(858)408-7543 (fax)