Total and Partial Unemployment TPU 460.35

Severance Pay, Dismissal or Separation Pay

Severance pay is not wages for unemployment insurance purposes. There is no specific code section in the California Unemployment Insurance Code which declares that severance pay is not wages. We cite Section 1265 when we state that severance pay is not wages. The authority for doing so is based on a case decided by the California Supreme Court in 1965.

Powell

The California Supreme Court held in Powell and Byrd vs. California Unemployment Insurance Appeals Board (63 Cal. 2d 103, 1965) that dismissal and severance payments were not wages for unemployment insurance purposes.

In the Powell case employees were laid off and placed in a standby status. In the Byrd case, employees were permanently terminated as the employer discontinued operations. The terminated employees received severance pay or dismissal pay benefits in accordance with the collective bargaining agreements which were in effect.

The terminated individuals filed claims for unemployment insurance benefits and the Department disqualified the claimants as it held that the severance pay and dismissal pay were wages and were allocable to the period following termination of the employment relationship. The claimants filed appeals from the denial of benefits. The Department was affirmed on appeal.

The claimants initiated court proceedings and the California Supreme Court issued its decision on June 30, 1965. In its decision, the Court held that the first issue to be decided was whether the claimants were "unemployed" within the meaning of Section 1251 and Section 1252 of the Unemployment Insurance Code.

The Court cited Section 1252 which provides, in part, that an individual is "unemployed" in any week during which he performs no services and with respect to which no wages are payable to him. The issue to be decided was whether the severance pay and dismissal pay were wages and, if so, whether the wages were allocable to the period immediately following termination.

The claimants argued that the severance pay and dismissal pay were not wages "because such payments are not compensation for services but rather are partial compensation for the loss of anticipated future earnings, the present necessity to retain and acquire new skills, and the need to seek and acquire new jobs without seniority rights." The claimants argued that the severance and dismissal payments were not made with respect to any particular week but were based on services performed prior to termination.

The claimants argued that the severance pay and dismissal pay were distinct from vacation pay and in-lieu-of-notice pay as the employees did not have a vested right to receive the severance pay or dismissal pay. The claimants argued that these payments (severance and dismissal pay) were different since the collective bargaining agreements separately provided for vacation pay and in-lieu-of-notice pay.

The Court noted that it had previously considered the question of whether severance pay was wages in Bradshaw vs. California Employment Stabilization Commission (46 Cal. 2d 608, 1946). In that case the Court had held that severance pay was wages and that the wages were allocable to the period immediately following the termination of the employment relationship. In its reasoning, the Court stated that there should not be a duplication of benefits and that unemployment compensation benefits were not intended to protect employees already protected for the same period of time by their private contracts.

The Court stated it was not necessary to reexamine Bradshaw to determine whether the findings in Bradshaw would apply to the two cases it was then considering. The Court said there was no need to reexamine Bradshaw because the principles cited in Bradshaw, i.e., no duplication of benefits, were set aside by the enactment of Section 1265 in 1959

The Court noted that the Legislature in 1959 had enacted Section 1265 of the Unemployment Insurance Code which provided, in part:

"Notwithstanding any other provisions of this division (which includes Sections 1251 and 1252), payments to an individual under a plan . . . established by an employer . . . for the purpose of supplementing unemployment compensation benefits shall not be construed to be wages . . . and benefits . . . shall not be denied . . . because of the receipt of payments under such . . . plans. This amendment is hereby declared to be merely a clarification of the original intention of the Legislature and is not a substantive change, and is in conformity with the existing administrative interpretation of the law."

The Court stated that supplementary unemployment benefit plans were not the only such plans covered by Section 1265. The Court stated that the legislative intent contained in Section 1265 was sufficiently broad to include within its language the dismissal and severance payments in the two cases under consideration.

The employer and the Board in their arguments before the Court contended that the provisions of Section 1265 should be limited to particular types of payments under plans which expressly declare the intent of the payment is to supplement unemployment compensation benefits. They contended that since the collective bargaining agreements which provided for the severance pay and dismissal pay benefits did not state the purpose for the payment was to supplement unemployment insurance benefits, the payments should not come under the provisions of Section 1265.

The Court held that to determine what something was by the label which had been given it was to put form before substance. The Court stated: "To resolve the issue according to the label attached, as respondents urge, would accord greater weight to form than to substance and such a resolution is not in keeping with the obvious legislative intent expressed in Section 1265 to broaden the coverage of unemployment insurance benefits."

The Court concluded that the severance pay and dismissal pay benefits in the two cases under consideration were not wages but were a form of supplemental unemployment compensation benefits.

Severance Pay Criteria

A payment made at termination to a terminated employee constitutes severance pay if the following conditions are met:

  • The payments are made in accordance with the provisions of a company plan or policy.
  • The plan or policy provides for payment to employees who are terminated for specific reasons, e.g., job elimination, reduction in force, closure, etc.The payments are available to a class or group of employees.
  • The plan need not be available to all employees for the payments to constitute severance pay, but they must be available to a class or group of employees, e.g., to salaried employees, to hourly employees, to represented employees, to management, etc.The purpose of the payment must be to supplement unemployment insurance benefits.
  • The plan may not specifically state the purpose for the payment. If it does, it need not specifically state the purpose is to supplement unemployment insurance benefits.

Some of the reasons that employers put forward for the plans are, for example, "to recognize past services," "to provide additional financial assistance while the employees seek other work," "to provide a bridge between jobs," to help ease the trauma of unemployment," "conscience money," etc.

We would consider the purpose is to supplement unemployment insurance benefits if an employer gives one of the above reasons as the purpose for the payment.

Whenever there is a question as to whether a payment made to an employee under an employer benefit plan is wages, the purpose for the plan must be viewed in relation to Section 1265. The interviewer must establish what the payment is for, why the employer is making the payment, whether the individual must do anything to receive the payment, etc.

If it is determined that the payment comes within the provisions of Section 1265 of the UI Code, the payment is not wages for unemployment insurance purposes. The method of payment, i.e., lump sum or periodic, does not determine what the payment is. Whether a payment is made in a lump sum or periodically is immaterial in deciding whether the payment is wages. Whether there is an employer plan, whether the individual must do anything to receive payment under the plan, and the purpose for the payment are the deciding .factors in determining whether the payment comes within the provisions of Section 1265.

Citroen

For many years severance pay was paid out in a lump sum, but over the years that practice has changed. Increasingly, employers pay the severance pay which is due at regular pay period intervals.

The California Court of Appeal in Citroen Cars Corporation vs. California Unemployment Insurance Appeals Board (107 Cal. App. 3rd 945, 1980) addressed the issue of whether periodic payments made to terminated employees were severance pay or whether the payments constituted wages.

In this case the company decided to close its plant located in Los Angeles. The closure was effective December 31, 1977. The company had no formal policy requiring payment of severance pay or termination pay to employees who were laid off. Previously, the company had informally, on occasion, paid termination pay to employees who were laid off.

The company developed a plan for this closure. On December 30, 1977, the company notified the employees their employment was terminated effective December 31. The company advised the employees it would pay what it called severance pay to all employees who were terminated due to the plant closure provided they signed a release acknowledging that the payment was made in full satisfaction of all claims the employees might have against the company.

The amount of severance pay an individual was eligible to receive was based on length of service with the company. The company advised the employees it would pay the severance pay periodically and that benefit coverage would continue through the period covered by the severance pay.

Two individuals filed claims for benefits and the Department determined the payments were severance pay. The employer appealed from the decision. The Department's decision was affirmed by an administrative law judge and later by the Board.

The employer filed a petition for a writ of mandate seeking to have the Board reverse its decision. The employer contended that it was not the company's intention to supplement unemployment insurance benefits but to replace them. The employer argued that since the payments were being made periodically, they were wages as set forth in Precedent Benefit Decision P-B-4.

In support of its position, the employer argued that the pay was not severance pay because the company did not have a policy which required the company to make the payments and the employees had a vested right to receive the payments.

The court held that the payments were clearly not wage continuation pay as defined in P-B-4 since (1) the payments were available to a class or group of employees and (2) the payments were made in accordance with a plan which the company developed for the closure.

The court stated that Section 1265 did not set forth any requirements with respect to when a plan must have been established nor how long it must have been in effect to come within its terms. In addition, the court held the employees did not have a vested right to the payments since they were required to sign a general release and did not receive the payments if they did not sign the release.

The court concluded that the payments made by the employer were, in fact, severance pay and not wages.

Thus, payments which are made at regular pay period intervals and which are made pursuant to a company plan which provides for such payment to a class or group of employees are severance pay and not wages notwithstanding the fact that the employer continued benefit coverage for the period covered by the payments.

There are other types of separation payments which do not come under the provisions of Section 1265, and yet are not wages.

For example, in Benefit Decision 6502, the Board considered the case of a claimant who received eight weeks' "severance pay" at the time the claimant reached the employer's retirement age. The Board held that this "severance pay" was not wages, and said:

"Section 932 of the Code provides as follows:

932. "Wages" does not include any payment made to an employee on account of retirement, including any amount paid by an employer for insurance or annuities, or into a fund to provide for any such payment.

The only reason for the payment to the claimant of the so-called "severance pay" was "on account of retirement" of the claimant. Therefore, we hold that such payment was not in fact severance pay and was not included in the term "wages" because of the provisions of Code Section 932."

In Benefit Decision 6505, the employer planned to move his plant from Los Angeles to Stockton at the end of the 1955-1956 season. In order to prevent a mass exodus of workers and a consequent disruption of company operations during the 1955-1956 season, the collective bargaining agreement was supplemented by the following agreement:

"A. An employee who becomes surplus and is permanently laid off because of the Association's move to Stockton shall be eligible for dismissal pay provided he meets the following conditions:

1. He shall have been on seniority status since September 1, 1955, or earlier.

2. He shall remain on his job with the Association until released by his department head."

The Board held that these payments were wages, and said:

"Although the amounts paid were designated as dismissal pay in the collective bargaining agreement, it is apparent that the major purpose of the payments was to provide an incentive for the claimants to hold themselves available for employment during the 1955-1956 season and not a duplication of unemployment insurance benefits. Accordingly, we find that the payments involved herein were in the nature of a bonus . . . and properly allocable to the period prior to the termination of employment."

The Board, in Benefit Decision 6509, considered the claims of employees of a feed mill. The feed mill ceased operations and the claimants were discharged. The claimants' union requested, but was refused, severance payments for the employees. Later the employer's executive committee held a meeting and decided to make "termination or dismissal" payments to the claimants. The Board held that these payments were bonuses and allocated to the period prior to termination. The Board said:

"With respect to the payments of $500 made to the other three claimants, the employer designated them 'severance pay. However, this designation did not necessarily establish them to be severance pay . . . . Unlike severance pay which is paid at the termination of an employee's services in order to tide him over a period of unemployment, these payments were made some weeks following the severance of the employment relationship . . . . Additionally, the employer had rejected the union's solicitation for severance pay but thereafter, on its own initiative and without any legal obligation, had decided to give $500 to certain selected employees because of their years of service with the organization. Based on these facts, we hold that the payments were bonuses earned during the claimants' periods of employment and as such were wages allocable to the respective periods prior to termination of their employment."

In each of the above cases, the separation pay was found, on closer inspection, not to be a type of severance pay, but either a bonus, or retirement pay.

Lump-sum payments are paid to certain designated military officers who are retired involuntarily. The purpose of the payments as stated by the Senate Committee on Armed Services is as follows

"It should be emphasized that the committee does not intend that the lump-sum payment should be considered a precedent. The committee recognizes that there is no statutory obligation to provide the lump-sum payment for the noncontinued regular officers. At the same time, the necessary legislation in altering the normal retirement point for these officers, creates some hardship in changing the long-term career plans of these officers. The purpose of this payment is to provide some assistance in adjusting to the necessary changes in their return to civilian life."

Since it is clear that the intent of the lump-sum payment is to provide assistance to the officer in readjusting to his premature and unexpected release to civilian life, the payment is not in the nature of a bonus payment "on account of retirement" as that term is used in Section 932 of the Code. Although the payment involved here is made at the time of the forced retirement, it is not in addition to and incidental to the retirement and is not made on account of or because of retirement. Therefore, the lump-sum payments are severance or dismissal payments made according to a plan for the benefit of the officers, and thus come within the provisions of Section 1265. Because Section 1265 applies, these payments are not deductible wages, and the claimants are not ineligible for benefits because of receipt of these payments.

Certain federal civilian employees may be eligible for severance pay under Section 9 of Public Law 89-301, Federal Employees Salary Act of 1965. The same rule that severance pay is not wages is applicable to these employees who may be in receipt of severance pay.

The receipt of accrued leave pay does not affect an ex-serviceman's eligibility for benefits. This applies to UI and UCFE claims as well as UCX.

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Benefit Determination Guide