With the downturn of the economy in California an issue has presented itself with more frequency as of late. Specifically, can a defendant take credit for sums paid under a severance agreement in lieu of paying temporary disability?

A recent case, Sompo Japan Insurance Company of America v. WCAB, 76 CCC 1247 (October 17, 2011, writ denied), provides some guidance on the issue. In Sompo, the applicant claimed to have sustained an industrial injury to his back and shoulder while employed as a repair person by the defendant. The date of injury was January 19, 2010. On January 22, 2010, the applicant entered into a severance agreement and general release contract with the defendant. The severance agreement provided full wages for 44 weeks but did not specifically mention the applicant’s workers’ compensation claim. The following month the applicant was released to return to work with restrictions but since the applicant had executed the severance agreement, there was no employment available for the applicant. The applicant subsequently filed a request for an Expedited Hearing on the issue of whether the defendant owed temporary total disability arising out of the January 19, 2010 injury. The defendants denied temporary disability was owed contending that they should be allowed a credit or offset for the sums paid the applicant pursuant to the terms of the severance agreement.

Ultimately, the judge ruled that the applicant was entitled to ongoing temporary disability benefits and that the defendant was not entitled to a credit or offset for the amounts paid under the severance agreement.

The defendants sought reconsideration contending that the applicant knowingly and willingly waived his right to pursue his workers’ compensation benefits by virtue of the severance agreement and further contended that the judge erred in failing to allow a credit for the sums defendant had paid under the terms of the severance agreement.

The Petition for Reconsideration was denied based on the judge’s recommendation on reconsideration. The judge pointed out that he was not convinced the payments tendered under the severance agreement constituted ongoing wages or payment of workers’ compensation benefits. The judge further concluded that such payments were probably pursuant to a form buyout severance agreement without any additional consideration factored in as a buyout of the applicant’s workers’ compensation benefits. There was not a clear showing that the applicant was aware or that he intended to abandon such rights and, at minimum, he would have expected the severance agreement would specifically mention workers’ compensation rights and benefits being waived. The judge noted that any ambiguity as to the purpose of such a payment should be construed in the applicant’s favor.

Another major consideration in the judge’s reasoning was that the defendant’s position was contrary to the public interest because the Workers’ Compensation Appeals Board was “vested with the sole authority to adjudicate the rights of injured workers to the subject benefits.” The judge further noted that the severance agreement was never approved by the Workers’ Compensation Appeals Board as an adequate settlement of the applicant’s workers’ compensation rights and even if it was submitted, most likely, it would not have been approved since the judge noted it contained a highly disfavored general release and waiver of the protection afforded to the applicant under the law.

Based upon the above, it would appear that severance agreements in and of themselves will not extinguish an applicant’s workers’ compensation benefits even if there is a general release in such an agreement. In that regard, if you are negotiating a severance agreement with an employee that has a workers’ compensation case, you cannot assume that such an agreement will extinguish any rights the applicant has in the workers’ compensation system. As Sompo pointed out, the judge took notice that there was no attempt by the defendants to obtain any type of approval of the severance agreement by a Workers’ Compensation Judge.

I have also seen this issue before in employment settings where an employer is attempting to negotiate a general release of all claims and pays consideration to do so. However, if that applicant has a workers’ compensation case, most likely, a general release will not be authorized unless it is approved by the Workers’ Compensation Judge. In that regard if you are negotiating a general release which is to include or eliminate any workers’ compensation benefits, it should be negotiated in such a way where it is subject to approval by the workers’ compensation court.

At minimum, the severance agreement or waiver should specifically mention the workers’ compensation benefits which are being eliminated or settled, and such language should be put clearly into the agreement. However, if it is not approved by the workers’ compensation court, you take a significant risk that the applicant, despite the agreement, will be able to pursue workers’ compensation benefits. In the future make general waiver agreements, severance packages, etc., subject to approval of the workers’ compensation court if you truly intend to settle workers’ compensation benefits.