“Settlement” Benefits Payable Upon Termination of Employment

by | Jul 27, 2023 | Governmental Benefits, Plan Administration, Retiree Health

Governmental employers are challenged by today’s tight labor market, where many experienced and older public employees have already retired. It is becoming increasingly difficult to attract experienced or senior management personnel without commitments or guarantees that they will receive the same or better benefits than they had in previous positions. Making these commitments or guarantees can become problematic where an agency is negotiating with an ongoing employee (for the extension of their services) or with a new hire – particularly with respect to what happens if the period of employment is terminated early. The success of such negotiations may turn on the willingness and ability of the agency to provide certain levels of benefits, following the employee’s termination of employment. There are two statutory limitations to consider when providing these guarantees:

Section 53260 of California’s Government Code imposes limits on cash settlements that may be paid to any employee of a local agency in the event the employee’s contract is terminated. Generally, the limit is the employee’s monthly salary multiplied by the number of months left on the unexpired term of the contract, up to a maximum of 18-months’ worth of salary. For any district superintendent of schools, the maximum cash settlement is limited to 12-months’ worth of salary.

California Government Code section 53261, further clarifies that “noncash items” (except health benefits) payable to an employee upon contract termination may be continued for the duration of the settlement, subject to the 18 and 12-month limits of section 53260.

What are some ways that a local agency can provide post-termination benefits without running afoul of these limitations?

  • Carefully document employment agreements to distinguish between regularly-earned employee benefits, regardless of when paid, and those payments that are made because of the termination of the contract – in settlement. This was clarified in Page v. MiraCosta Community College District (2009) 180 Cal. App. 4th 471, 102 Cal. Rptr. 3d 902. The court construed Government Code Sections 52360 and 53261 to apply only “to settlements upon termination of employment, regardless of the circumstances surrounding the termination.” It would seem that any arm’s length negotiation, and resulting documentation, that clarifies and distinguishes “amounts payable as a settlement” from other amounts due the former employee as previously earned or accrued employee benefits would be useful.
  • This may cause the parties to negotiate certain retirement or welfare benefits payable upon attainment of a specified age and years of service – rather than upon termination of service. This structures the arrangement more as a “retirement benefit” as opposed to a cash or non-cash settlement.
  • Negotiate a payment of nonqualified deferred compensation benefits payable only pursuant to an irrevocable employee election made during the employee’s active employment, and not in connection with contemplated severance or separation. See the related article: What is a Section 415(m) Plan, and When Might You Need One?
  • Provide the draft contract to legal counsel for assistance in finding other ways that to structure benefits so as to avoid the cash and non-cash limitations under current law.

Compliance with Sections 53260 and 53261 of the California Government Code requires a careful consideration of any “severance” or “termination” payments included in any current and prospective employment agreements. The parties should carefully evaluate these provisions prior to the initial contract execution. Avoid delaying such discussions until the time of an early contract termination as this will almost certainly increase the risk of any “new” benefits or payments being deemed subject to the Government Code limitations discussed above.

Jeff Chang is a partner at Best Best & Krieger LLP. He has four decades of experience skillfully evaluating benefit and retirement plan compliance to achieve maximum outcomes for public agency clients throughout California. He can be reached at jeff.chang@bbklaw.com or (916) 329-3685.

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