All employers, at one time or another, will provide terminated employees with a severance payment for a release of all claims that employees may have against the employer, as well as other promises. Too often, employers blindly “copy and paste” language from old agreements that may contain outdated provisions that no longer comply with current law, or that were tailored to a factual setting different from the situation they are currently facing. Employers should review their standard settlement agreements, with the following non-exhaustive items to bear in mind.
Timing of Execution. An employee may not release future claims, i.e., claims that have not yet accrued. Employers sometimes provide severance agreements to departing employees while they are still employed. If the employee signs while employed, waiving any past claims, the waiver would not apply to any claims that accrue after the employee’s execution of the agreement. Thus, if the employee is subjected to improper conduct after executing the agreement (but while still employed), or does not receive a bonus or some other benefit to which the employee believes he or she is entitled, the employee’s release would not be a defense to such a claim. Accordingly, the employer should present the separation agreement to the employee on the last day of employment or after the employee has been terminated. In the alternative, the employer may present the separation agreement to the employee while employed, but include language in the agreement that requires the employee to sign the agreement after the employee has separated from employment.
Covenants Not to Sue. There are certain claims that are not waivable. For example, regulations interpreting the Age Discrimination in Employment Act (“ADEA”) prohibit employers from imposing any penalty against an individual for filing an ADEA claim. See 29 C.F.R. §1625.23(b). Moreover, at least one court has held, and the U.S. Equal Employment Opportunity Commission (“EEOC”) has long maintained, that a separation agreement that could be interpreted as prohibiting the employee from filing an EEOC charge is facially retaliatory. See EEOC v. Lockheed Martin Corp., No. 05CV0287 RWT, 2006 WL 2294540 (D. MD. Aug. 8, 2006). Thus, including a covenant not to file a discrimination charge risks invalidating the waiver contained in a separation or release agreement.
Non-Disparagement and Confidentiality Provisions. A non-disparagement provision should prohibit the former employee from making negative remarks regarding the employer or its employees, except with respect to truthful testimony or information provided pursuant to subpoena, court order, or similar legal process. A confidentiality clause bars the employee from disclosing the monetary terms of the separation or settlement agreement to anyone other than the former employee’s immediate family members, attorneys, and financial advisors. Given the importance of maintaining confidentiality, as well as the difficulty of proving damages for breach of the confidentiality provision, the employer should include a liquidated damages clause providing that the employee shall become immediately liable to the employer for an agreed-upon amount of money, as well as any costs, including reasonable attorneys’ fees, to deter the former employee from disclosing the confidential terms. The agreement should specify the liquidated amount, but the cannot be punitive or it will be invalid and unenforceable.
Former employees often ask that non-disparagement and confidentiality provisions be mutual, binding the employer as well as the employee. Employers should decline mutuality because agreeing would contractually bind all the company’s management-level employees to provisions when only a handful of management-level employees may even be aware of the agreement. If mutuality of the one of these provisions becomes a stumbling block in the negotiations, the employer may agree that only specified management-level employees (the employee often is concerned about only a particular supervisor making negative remarks) will be bound by such provisions, in which case the specificed management-level will have to become a signatory to the agreement.
Waiver of Future Employment with the Employer. It is critical to obtain a waiver from the former employee of the his or her right to apply for employment, or seek reinstatement, with the employer in the future. In the absence of such a contractual waiver, the former employee can accept the severance or settlement payment, re-apply for employment with the employer, and sue for retaliation (as well as on other bases) when the employer rejects the former employee’s application.
The Older Workers Benefit Protection Act. No publication dealing with separation and settlement agreements would be complete without some discussion of the Older Workers Benefit Protection Act of 1990 (“OWBPA”), which amended the ADEA. Generally speaking, to obtain a valid release of an age discrimination claim from an individual 40 years of age or older, the release agreement must comply with the following requirements: (1) The waiver must be part of an agreement between the individual and the employer that is written in a manner calculated to be understood by the employee or by the average person eligible to participate; (2) The waiver must specifically refer to rights or claims arising under the ADEA; (3) The waiver must state that the individual does not waive rights or claims that may arise after the date the waiver is executed; (4) The waiver must provide that the individual waives rights or claims only in exchange for consideration that is in addition to anything of value to which the individual is already entitled; (5) The waiver must state that the individual has been advised in writing to consult an attorney prior to executing the agreement; (6)(a) If the waiver is requested in the context of the settlement of a pending claim, or in the context of a resignation, termination, or job elimination involving only one individual, the waiver must give the individual a period of at least 21 days within which to consider the agreement; (b) On the other hand, if the waiver is requested in the context of an exit incentive or other employment termination program offered to more than one employee, it must give the individual a period of at least 45 days within which to consider the agreement; (7) The waiver must provide that, for a period of at least seven days following the execution of the agreement, the individual may revoke the agreement, and the agreement shall not become effective or enforceable until the revocation period has expired. See 29 U.S.C. §626(f). Keep in mind that the 21/45-day period may be waived by the individual, i.e, the individual may sign the release agreement upon receipt if he/she so desires, but the seven-day period may not be waived. Thus, the release agreement should provide that the severance or settlement payment will not become payable until the agreement becomes effective following the expiration of the revocation period.
If the waiver is requested in connection with an exit incentive or other employment termination program offered to more than one employee, the employer also must provide each employee in the group or class the following information: (1) The group, class or unit of individuals covered by the program; (2) Any eligibility factors for the program; (3) Any time limits applicable to the program; (4) The job title and ages of all individuals eligible for or selected for the program; and (5) The ages of all individuals in the same job classification or organizational unit who are not eligible or selected for the program. See 29 U.S.C. §626(f)(2)(H). Courts have invalidated releases where the employer’s OWBPA-related disclosures were under-inclusive, as well as where they have been over-inclusive. See, e.g., Pagliolo v. Guidant Corp., 483 F.Supp.2d 847 (D. Minn. 2007). The invalidation of releases in the context of a large RIF can be catastrophic for an employer. Under these circumstances, the terminated employees may not only file their age discrimination claims against the employer (most likely as a class action), but the employees may retain the severance benefits that they received in exchange for providing an invalid and useless waiver of claims. See Oubre v. Entergy Operations, Inc., 522 U.S. 422 (1998). Employers should consult with their employment counsel to assist them in determining the proper decisional unit any time they offer severance benefits to more than one individual in connection with the same termination program.
Finally, there may be state specific provisions that should also be included in separation and settlement agreements.