The United States Equal Employment Opportunity Commission (the “EEOC”) recently issued guidance in question and answer format entitled “Understanding Waivers of Discrimination Claims in Employee Severance Agreements” (the “Severance Agreement Guidance”). While the Severance Agreement 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.
When Is a Waiver Valid?
As recognized in the Severance Agreement Guidance, a waiver of claims generally 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, (a) has the severance agreement been written in a clear manner for the employee to understand the agreement based on his or her education and business experience, (b) has the employer induced the acceptance of the agreement based on improper conduct, (c) has the employee been given adequate time to consider the agreement, (d) has the employee consulted with an attorney or been encouraged or discouraged by the employer from doing so, and (e) has the employee been given the opportunity to negotiate the terms of the agreement? To be valid, the severance agreement must also offer some sort of consideration in exchange for the employee’s waiver in excess of what the employee already was entitled to by law or contract, not require the employee to waive future rights and comply with applicable state and federal laws.
The Severance Agreement Guidance expressly recognizes that an employee may file a charge with the EEOC if the employee believes 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, and any provision that attempts to waive such rights is invalid and unenforceable. In the event 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. See EEOC v. Watkins Motor Lines, Inc., 553 F.3d 593 (7th Cir. 2009).
The Severance Agreement Guidance also includes the EEOC’s position that an employee does not need to return his or her severance pay received under a severance agreement prior to filing a charge of discrimination with the EEOC, although it recognizes that an employee may waive in such an agreement the right to recover damages from the employer either in 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 does not have to return his or her severance pay if he or she files a claim in court under The Age Discrimination in Employment Act of 1967 (the “ADEA”), 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 any money awarded if the employee is successful in the action by the amount of consideration the employee receives under the severance agreement.
Waivers of Age Discrimination Claims Pursuant to the Older Workers Benefit Protection Act (“OWBPA”)
The Severance Agreement Guidance also identifies the factors necessary to obtain a valid release of claims under the ADEA: (a) the waiver must be written in a manner that can be clearly understood; (b) the waiver must specifically refer to rights or claims arising under the ADEA; (c) the waiver must advise the employee in writing to consult an attorney before accepting the agreement; (d) the employee must be provided with at least twenty-one days to consider the agreement; (e) the waiver must give the employee seven days to revoke his or her consent; (f) the waiver must not extend to rights or claims that may arise after the date on which the waiver is executed; and (g) the waiver must be supported by consideration in addition to that to which the employee already is entitled. In the event the release of claims is sought in connection with a group termination program (which the EEOC explains may include a program involving as few as two employees), (a) the employees must be provided with at least 45 days to consider the agreement and (b) additional information must be provided to the employees, including (i) the decisional unit for the program, (ii) the eligibility factors for the program, (iii) the time limits applicable to the program and (iv) the job titles and ages of all individuals who are eligible for or who were selected for the program and the ages of all individuals in the same job classifications or organizational unit who are not eligible or selected for the program. An appendix to the Severance Agreement Guidance provides an example of one way in which the required OWPBA information necessary for group termination programs may be presented to employees.
The most controversial aspect of the Severance Agreement 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.
Review Your Agreements
In light of the Severance Agreement Guidance, employees should review their form of severance agreements — both group termination agreements and forms used in connection with individual terminations — to ensure they are legally enforceable. In conducting this exercise, employers should ensure that:
- Their severance agreements are understandable by the average employee and no longer than necessary. Is that ten-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?
- Their severance agreements do 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 (see the article entitled “Releases: Be Wary of Not Getting What You Paid for” in the December 2006 Employment Law Update for a specific discussion of this issue). A valid general release of claims (which complies with the OWBPA, if applicable) will serve as a complete defense to claims an employee has or may have for any period prior to 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.
- They pay attention to state and local law requirements in their severance agreements. By way of example only, the Severance Agreement 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 fifteen 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.
- 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. In practice, however, an employer will likely frown on continuing to make such payments at the same time the benefit it bargained for — the release of claims — is frustrated. We encourage employers to contact counsel prior to cutting off the payment of severance benefits under a severance agreement.