Does Collecting Severance in California Disqualify You From Unemployment?

Terminology matters, but interpreting the terminology matters more. A severance package with a cash payment or periodic payments may delay or decrease your unemployment benefits. In California, if the payment is “severance,” it doesn’t count against your unemployment benefits. If the payment is “wages in lieu of notice,” it counts as wage-continuation pay and the California Employment Development Department (EDD) subtracts the weekly amount from your unemployment compensation benefits.

California employers pay taxes to cover unemployment benefits. Because the contribution rate for unemployment taxes varies with benefits paid to former employees, the employer's taxes increase when employees receive benefits. It works to the employer’s advantage to keep unemployment claims low and claim any payment at the end of employment as wage-continuation pay or as wages in lieu of notice. Severance pay doesn’t give the employer any advantage with EDD beyond being fair to the employee.

When you apply to the EDD for unemployment benefits, disclose all money you received or are receiving as a result of your departure. What you think is severance pay may be wage-continuation pay or wages in lieu of notice.

Report all income you expect to receive from your former employer, as wages count when earned, not when received. Include holiday pay, vacation pay, bonuses, pensions, wages in lieu of notice, salary continuation and other types of payments so EDD can decide which payments affect your unemployment compensation benefits. You don’t want to pay back unemployment benefits erroneously received, so let EDD decide.

California doesn’t allow employers to game the system. If the company has a termination policy or plan to pay employees accrual of service pay for years of work, that’s probably not wage continuation pay and doesn’t affect your unemployment benefits. Wage-continuation pay that continues to accrue vacation pay, sick leave and seniority counts as wages and will affect your unemployment benefits.

Benefits that are usually $50 to $1,216 a week may drop to $0 until you get past the weeks covered by the wages. Don’t consider the terminology your former employer uses to name the payments you receive. The common name is "severance pay," but the name isn’t a deciding factor. The EDD bases its decision on the law and past decisions. You can appeal an unfavorable ruling if you believe the EDD made an error.

File your claim for unemployment compensation benefits by providing all of the information requested on the claim forms. You can file by telephone, online or by mail or fax. If you give false information or withhold information on your unemployment benefits claim form, the state may criminally prosecute you, force you to repay your benefits along with penalties and bar you from receiving unemployment benefits in the future. You could also find yourself in jail.

Termination wages are only subtractions from your potential weekly benefit. This is a far better outcome than losing your benefits altogether. If you receive unemployment benefits you're not entitled to, California collects overpayments and penalties by withholding state income tax refunds, lottery winnings or any other money the state owes you.