Given the recent economy and resultant "rightsizing" of workforces, many employers are asking employees to sign releases in exchange for severance pay. Various statutes and cases regulate the enforceability of those release agreements. Consequently, employers should take care to assure that their separation agreements comply with the applicable legal requirements.
On July 15, 2009, the Equal Employment Opportunity Commission (EEOC) issued a guidance document, " Understanding Waivers of Discrimination Claims in Employee Severance," that addresses severance agreements offered in exchange for a waiver of actual or potential discrimination claims.
While these guidelines do not necessarily define any new release requirements, the EEOC guidance document highlights many ways in which employers can inadvertently fail to obtain enforceable releases from their employees.
Validity of Waivers — The “Knowing” and “Voluntary” Requirement
The EEOC guidance document notes that whether the employee “knowingly and voluntarily consented to the waiver” is critical to any evaluation of the validity of the waiver and release of Title VII, ADA, or EPA claims. The guidance document indicates that “some courts rely on traditional contract principles and focus on whether the language in the waiver is clear.” However, the guidance document further states that “most courts … look beyond the contract language and consider all relevant factors – or the totality of the circumstances – to determine whether the employee knowingly and voluntarily waived the right to sue.” The factors that are to be reviewed for this "totality of the circumstances" test that are presented in the guidance document include whether:
- the contract was written in a manner that was clear and specific enough for the employee to understand based on his or her education and business experience;
- the contract was induced by fraud, duress, undue influence or other improper conduct by the employer;
- the employee was given enough time to read and think about the advantages and disadvantages of the contract before signing it;
- the employee consulted with an attorney or was encouraged or discouraged by the employer from doing so;
- the employee participated in the negotiation of the contract; and
- the employer offered the employee consideration (e.g., severance pay, additional benefits) that exceeded what the employee already was entitled to by law or an existing (separate) contract, and the employee accepted the offered consideration.
The EEOC includes two specific case study examples that apply the “totality of circumstances” test. In particular, the two case studies contrast an employee who “graduated from college and completed paralegal classes that included a course in contract” with another case study in which the employee “was only high school educated and unfamiliar with the law.” The case study resulted in the finding that the waiver by the college graduate was knowing and voluntary and the waiver by the high school graduate was not knowing and voluntary and therefore invalid. (It also should be noted that the invalid waiver in the guidance document example “failed to specifically mention the release of employment discrimination claims.”)
It is critical that employers offer agreements that comply with the knowing and voluntary standard. If an agreement is ambiguous on this point, employers should consider including a specific section in the waiver and release by which the employee acknowledges with his or her initials the specific principles directly from the guidelines.
EEOC Affirms the Right to File a Charge After the Employee Signs a Valid Waiver
The EEOC guidance document affirms the Older Workers Benefit Protection Act (OWBPA) provisions that invalidate any release that prohibits an employee’s right to testify or participate in an investigation, hearing or proceeding conducted by the EEOC. Best practice dictates that an express clause affirming this right be included in any release agreements.
“Tender Back” Provisions Prohibited
The EEOC guidelines also affirm the OWBPA regulations principle that an employer may not insert “tender-back” requirements in any age discrimination release. Clearly stated, this means that any waiver and release that purports to allow the employer to discontinue promised severance payments, or to withhold any other benefits if the employee files a lawsuit challenging an age discrimination waiver in court, is invalid.
State Law Waiver Requirements
In addition to federal law, employers should make sure that their release agreements comply with applicable state law. The EEOC guidance document provides specific examples of state law waiver requirements using California and Minnesota as examples. The EEOC guidance document notes that “state law typically governs questions regarding the proper construction of a severance agreement and the validity of waivers” with examples involving Minnesota law (providing for a 15-day revocation period) and California law (preventing the release of unknown claims unless the waiver contains certain language specifically providing for such a waiver).
Waivers of Federal Age Discrimination Claims
The EEOC guidance document affirms without change the requirements applicable to age discrimination waivers under the federal Age Discrimination in Employment Act of 1967 (ADEA), which was amended by the OWBPA. Under the OWBPA, for an age discrimination waiver to be “knowing and voluntary” the waiver must:
- be written using clear language
- specifically refer to rights or claims arising under the ADEA
- advise the employee in writing to consult an attorney before accepting the agreement
- provide the employee with at least 21 days to consider the offer
- give an employee seven days to revoke his or her signature
- not include rights and claims that may arise after the date on which the waiver is executed
- be supported by consideration in addition to that to which the employee is already entitled
The EEOC warns, “If a waiver of age claim fails to meet any of these seven requirements, it is invalid and unenforceable.”
ADEA Group Termination – Additional Requirements
The EEOC guidance document affirms that additional OWBPA requirements are triggered when a waiver relates to an “exit incentive or other employment termination program” offered to a group or class of employees. (A group consists of two or more employees.) When this occurs, the consideration period must be 45 days rather than 21 days and the employer must make mandatory written disclosures identifying the “decisional units,” “any eligibility factors,” “any time limits” and “the job titles and ages of all individuals” eligible or selected, and not eligible or selected, for the program. [See 29 U.S.C. § 626(f)(1)(H); 29 C.F.R. §§ 1655.22(e), 2655.22(f)]. Creating this disclosure can be very complicated and may involve analysis of very subtle issues. Employers should strongly consider seeking advice to comply with this requirement.
The EEOC identifies in its guidance document several claims that are “nonwaivable” as a matter of law. Nonwaivable claims include: claims for unemployment compensation benefits; worker's compensation benefits; claims under the Fair Labor Standards Act; health insurance benefits under the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA); and claims with regard to vested benefits under a retirement plan governed by the Employee Retirement Income Security Act of 1974 (ERISA). Accordingly, employers should make sure their release agreements are not overly broad and not drafted to threaten the enforceability of properly waived claims.
Consistent with these new EEOC guidelines, prudent employers should take several steps, including:
- review existing release agreements for compliance with the EEOC guidelines
- draft a release that is enforceable under applicable state and federal law
- for employees 40 and over, confirm that the release complies with all provisions of the OWBPA
- seek appropriate advice when offering release agreements in a reduction in force context