The Equal Employment Opportunity Commission (EEOC) recently issued guidance in question and answer format entitled "Understanding Waivers of Discrimination Claims in Employee Severance Agreements". While the guidance does not break much new ground, it provides a useful summary of the requirements for a legally enforceable severance agreement and the potential pitfalls into which an employer may stumble.
As recognized in the guidance, in general a waiver of claims is valid when an employee knowingly and voluntarily consents to the waiver. Most courts look beyond the language of the severance agreement and consider the totality of the circumstances to determine whether an employee has knowingly and voluntarily waived the right to sue the employer. For example, the courts consider whether:
- the severance agreement has been written clearly so that the employee can understand the agreement based on his or her education and business experience;
- the employer has induced the acceptance of the agreement based on improper conduct;
- the employee has been given adequate time to consider the agreement;
- the employee has consulted an attorney or has been encouraged to do so or discouraged from doing so by the employer; and
- the employee has been given the opportunity to negotiate the terms of the agreement.
To be valid, in exchange for the employee's waiver the severance agreement must:
- offer some sort of consideration in excess of what the employee was already entitled to by law or contract;
- not require the employee to waive future rights; and
- comply with applicable state and federal laws.
The guidance expressly recognizes that an employee may file a charge with the EEOC if the employee believes that he or she has been discriminated against on any protected basis, even if the employee has signed a waiver releasing the employer from all claims. Accordingly, an agreement should not purport to limit the employee's right to testify, assist or participate in an investigation, hearing or proceeding conducted by the EEOC; any provision that attempts to waive such rights is invalid and unenforceable. In the event that the employee settles his or her claims and files a charge of discrimination with the EEOC, the EEOC may nevertheless conduct an investigation and pursue claims against the employer.(1)
The guidance also includes the EEOC's position that an employee need not return severance pay received under a severance agreement prior to filing a charge of discrimination with the EEOC, although it recognizes that in such an agreement an employee may waive the right to recover damages from the employer in either his or her own lawsuit or any action brought on the individual's behalf by the EEOC. The EEOC also takes the position that the employee need not return the severance pay if he or she files a claim in court under the Age Discrimination in Employment Act of 1967, but the agency acknowledges that the law is less clear under other federal statutes. The EEOC further recognizes that even if a court does not require the employee to return the consideration before proceeding with the lawsuit, the court may reduce the amount of money awarded if the employee is successful in the action by the amount of consideration that the employee receives under the severance agreement.
The guidance identifies the factors necessary to obtain a valid release of claims under the Age Discrimination in Employment Act:
- The waiver must be written in a manner that can be clearly understood;
- The waiver must specifically refer to rights or claims arising under the act;
- The waiver must advise the employee in writing to consult an attorney before accepting the agreement;
- The employee must be given at least 21 days to consider the agreement;
- The waiver must give the employee seven days to revoke his or her consent;
- The waiver must not extend to rights or claims that may arise after the date on which the waiver is executed; and
- The waiver must be supported by consideration in addition to that to which the employee is already entitled.
In the event that the release of claims is sought in connection with a group termination programme (which the EEOC explains may include a programme involving as few as two employees), the employees must be provided with at least 45 days to consider the agreement. Additional information must also be provided to the employees, including:
- the decisional unit for the programme;
- the eligibility factors for the programme;
- the time limits applicable to the programme; and
- the job titles and ages of all individuals who are eligible for or who were selected for the programme and the ages of all individuals in the same job classifications or organizational unit who are not eligible or selected for the programme.
An appendix to the guidance provides an example of one way in which the required Older Workers Benefit Protection Act information necessary for group termination programmes may be presented to employees.
The most controversial aspect of the guidance concerns the EEOC's position with respect to the employer's continuing obligations under the severance agreement if the employee challenges the age discrimination waiver. The EEOC takes the position that if an employee challenges an age discrimination waiver in court, the employer must continue to comply with its obligations under the severance agreement, including the continuation of severance payments under the agreement.
In light of the guidance, employees should review their form of severance agreements – both group termination agreements and forms used in connection with individual terminations – to ensure that they are legally enforceable. In conducting this exercise, employers should ensure the following:
- Severance agreements should be understandable by the average employee and no longer than necessary. Is a 10-page form of agreement necessary or can the main goal of the agreement from the employer's perspective – a legally enforceable release – be effectuated in a much shorter agreement?
- Severance agreements should not expressly limit the employee's ability to challenge the release, file a charge with the EEOC (or analogous state or local agency) or testify, assist or participate in an investigation, hearing or proceeding conducted by the EEOC. A severance agreement that includes a covenant not to sue in addition to a general release of claims potentially creates confusion for the employee and unnecessary headaches for an employer. A valid general release of claims (which complies with the Older Workers Benefit Protection Act, if applicable) will serve as a complete defence to claims that an employee has or may have for any period before the individual's execution of the release, but is less likely to cause the sort of confusion created by inclusion of a covenant not to sue.
- Employers should pay attention to state and local law requirements in their severance agreements. For example, the guidance notes that under California law, a waiver cannot release unknown claims unless the severance agreement contains certain language specifically providing for such a waiver; and under the Minnesota Age Discrimination Act, a release must give the employee 15 days after signing the agreement to revoke it. Employers should review their agreements to ensure that their severance agreements are compliant with the requirements in all applicable jurisdictions.
- Employers should consider whether their agreements should state that the severance payments or other benefits cease if the employee challenges the agreement. The EEOC may be more inclined to take interest in a charge of discrimination in which the agreement being challenged includes such a provision. However, in practice, an employer is likely to frown on continuing to make such payments at the same time that the benefit for which it bargained for (ie, the release of claims) is frustrated.
For further information on this topic please contact Kevin B Leblang or Robert N Holtzman at Kramer Levin Naftalis & Frankel LLP by telephone (+1 212 715 9100), fax (+1 212 715 8000) or email (firstname.lastname@example.org or email@example.com).