Severance Pay Doesn’t Disqualify Workers from Unemployment Benefits


Why was my former employee granted unemployment insurance benefits when I am already paying her full wages for the next six months as severance pay?

Unemployment insurance (UI) benefits normally are available to individuals who are suffering from a lack of wages after being terminated from their job for reasons other than for misconduct, or who quit with good cause. Severance pay, however, is generally not considered “wages” for UI purposes in California.

Court Ruling

Although there is no specific California UI Code stating that severance pay is not a form of wages, the California Supreme Court held that while severance pay is not a wage, it is a form of supplemental unemployment insurance compensation provided by an employer (Powell and Byrd v. Unemployment Insurance Appeals Board, (1965) 63 Cal. 2d 103).

Because severance pay is not considered a wage, receipt of the pay will not disqualify an individual from receiving UI benefits under most circumstances.

Severance Pay

According to the California Employment Development Department (EDD), payments to a former employee constitute severance pay if the following conditions are met:

• The payments are made in accordance with the provisions of a company plan or policy that provides for payment to employees who are terminated for specific reasons (for example, job elimination, reduction in force, closure);

• 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 (for example, to salaried employees, to hourly employees, to represented employees, to management, etc.); and

• The purpose of the payment must be to supplement unemployment insurance benefits. The plan, however, does not need to specifically state that the purpose is to supplement unemployment insurance benefits.

According to EDD, an individual is not precluded from receiving UI if he/she also is receiving severance payments the employer is providing in order to recognize past services, to provide additional financial assistance while the employee is seeking other work, or to provide a bridge between jobs or help ease the trauma of unemployment.

The Labor Law Helpline is a service to California Chamber of Commerce preferred and executive members. For expert explanations of labor laws and Cal/OSHA regulations, not legal counsel for specific situations, call (800) 348-2262 or submit your question at

Staff Contact: Ellen Savage

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Ellen Savage joined the CalChamber in 1990 and currently serves as an employment law expert. She has been assisting employers on the Helpline since 1993. She was the editor of eight editions of the California Labor Law Digest and author of the CalChamber's California Hiring to Termination Guide. Her experience also includes practicing at a large Sacramento law firm and presenting at dozens of employment law seminars statewide. She holds a J.D. from Lincoln Law School.