Vol. 49, No. 1
Timing—and taking your time—are essential to securing an enforceable release of claims.
Second in a two-part series.
The cost of providing severance payments: calculable. The value of the legal peace that comes from a release of claims: priceless. But that is true only if you carefully consider the details of the severance agreement and general release and follow a recommended—sometimes required—ritual in securing employee agreements.
Last month’s Legal Trends discussed ways to have terminated employees sign a general release of claims in exchange for “consideration”—severance or other compensation and benefits to which they otherwise would not be entitled. That lawful quid pro quo is the foundation of an enforceable release.
But consideration and a properly drafted release still represent only part of an enforceable bargain. Observing certain procedural formalities in obtaining employee agreement to a release will bolster the employer’s position that the agreement is knowing and voluntary. In addition, taking particular care with certain other terms and conditions of the severance agreement may affect its enforceability as well as have an impact on other independent legal rights of the employer. These matters are the focus of this month’s Legal Trends.
The procedural requirements for securing enforceable releases arise primarily from the Older Workers Benefit Protection Act (OWBPA), which sets specific rules for waiving claims under the Age Discrimination in Employment Act (ADEA). For example, for a release of age claims to be enforceable, the release must specifically mention age claims arising under the ADEA.
There is no counterpart to the OWBPA under Title VII of the Civil Rights Act of 1964 or the Americans with Disabilities Act. Rather, the question is whether the release is “knowing and voluntary.”
Nevertheless, some employers may choose to apply some of the OWBPA standards to all releases. Observance of these relatively high standards will go a long way toward establishing that an employee’s release satisfies the knowing-and-voluntary test.
Employers should weigh the pros and cons of applying OWBPA formalities in a particular case. Depending on circumstances, employers may find some of the standards to be minimally burdensome, while the burdens may outweigh the benefits of adopting others.
Game of ‘21’ (or 45)
Under the OWBPA, releases of age claims are enforceable only if they explicitly state that employees have 21 days—or 45 days in the case of a “group termination”—to consider whether to sign the agreement. The employees need not use the full number of days to consider the agreement, but they must be given the opportunity to do so. What constitutes a “group termination”? The courts and the Equal Employment Opportunity Commission (EEOC)—which enforces the ADEA—define the term “group termination” broadly. As a result, it can apply to layoffs affecting as few as two employees—even if implemented on different days—if the terminations were the product of the same decision-making process.
Conversely, the group termination rules probably do not apply to unrelated discharge decisions, even if they are implemented on the same day.
To minimize the risk that discharge decisions will be aggregated to form a group, your discussions and documentation should reflect the separateness of those decisions.
For claims other than age discrimination, the law generally does not require employers to give employees a specified minimum period to consider the employer’s offer, but simply relies on the more general knowing-and-voluntary test. However, time can be a big factor in meeting this test.
The more time employees are given to consider a release, the easier it is to argue that they knowingly and voluntarily signed it. The shorter the period is, the greater the risk that a judge or jury might determine that an employee was pressured into signing, which would render the release involuntary—and unenforceable.
Accordingly, many employers provide all employees—regardless of age—21 (or 45) days to consider a release. Offering this standard amount of time also may provide a psychological benefit: By treating all employees the same regardless of age, employers may downplay the degree to which the law differentiates on the basis of age.
In the event of a group termination, the employer not only must provide the employees with a 45-rather than a 21-day period to consider the offer, but also with information about the ages (not names) and job titles of the employees in the “decisional unit” who were let go and were not let go.
Generally speaking, the decisional unit is the group of employees that were considered in deciding whom to let go.
Guidance on how to define the decisional unit and what must be in the required decisional unit attachment can be found in 29 C.F.R. § 1625.22(f). This regulation is very detailed and confusingly complex. Read it very carefully.
When to Sign
Usually, employers present severance agreements on employees’ termination of employment. Sometimes, however, business reasons dictate giving employees advance notice of the termination and, along with it, a copy of the agreement.
In the latter case, employees might sign the release while they are still employed. This creates a potential legal problem for the employer: The release would not cover claims that might arise after the signing has taken place but before termination takes effect. (Note: The termination itself still would be covered because the termination decision was made and communicated prior to executing the release.)
In such situations, employers have three general options:
1. State in the agreement that employees must not sign the agreement until after the termination of employment. This avoids the legal risk that the release would not apply to certain claims, but it leaves open the possibility that the employee might decide not to sign.
2. Permit employees to sign during employment but make some element of the consideration offered contingent on the employee’s re-execution of the release agreement on termination of employment. This covers the legal risk, but can be complicated to explain and administer.
3. Take the legal risk and let the employee sign before termination. This lets you get the deal done, but doesn’t give you full legal protection.
There’s no right or wrong answer. What to do depends, among other factors, on your organization’s risk tolerance, your assessment of the particular employee’s litigiousness, and the amount of time between execution and termination.
Right to Revoke
As required by the OWBPA, employees should be allowed to revoke a release up to seven days after signing it. As a result, the agreement should specify that severance or other payments will be made at the end of—not during—the revocation period. Making it explicit that severance will be withheld until the end of the revocation period avoids the risk of employer breach for refusing to pay during the revocation period. Actually withholding the payment until that time avoids the risk that the employee will revoke the agreement after payments have been made.
Only releases of age claims specifically require a revocation period. The issue of revocation rights is one situation in which most employers probably will not be willing to extend OWBPA-style protection to employees who are under 40 and are not legally entitled to them. Unless the law mandates that you give an employee the chance to undo the deal, it probably doesn’t make business sense to give an employee that opportunity.
Even for employees over 40, some employers offer a revocation period that applies only to age claims. In these cases, some of the consideration is earmarked specifically for the age claims and is paid only at the end of the revocation period.
This option may be worth considering when employees have a relatively weak age claim, but more potentially viable claims in other areas. For example, assume an employee has potentially viable sex and race claims, but a weak age claim. Assume further that you offer the employee 26 weeks severance. You might want to offer the revocation period for ADEA claims only and allocate a certain number of weeks severance (for example, eight weeks) to such claims.
That way, if the employee revokes the ADEA component of the agreement, you still have a viable release for the sex and race claims, which present the greater risk.
Right to Consult Counsel
The OWBPA requires employers to advise employees of their right to consult with an attorney before they sign a release. If this is not expressly communicated to the employee, the release will not be enforceable against age claims.
While it is not statutorily required for claims other than those involving age, language that stipulates an employee’s right to consult counsel may help to prove that employees who sign a release did so knowingly and voluntarily.
Some employers are leery of encouraging employees to talk to a lawyer. But the sad reality is that many employees have their attorneys on speed dial. Mentioning the right to consult with an attorney is not likely to encourage legal consultations employees otherwise would not have considered.
Other Roadblocks To Enforcement
With an agreement that is based on lawful consideration and that includes all the appropriate OWBPA notices and time periods, employers will be most of the way toward an enforceable release of claims. But issues still may arise with respect to a few other common provisions, and employers should be aware of the consequences of including (or not including) certain language in their agreements. Two notable examples are a covenant not to sue and an integration provision stating that the agreement supersedes all other agreements.
Covenant not to sue. Sometimes employers include in their agreements not only a general release but also a covenant not to sue. The practical impact of the two provisions is essentially the same, but the EEOC draws a distinction between them.
As an initial matter, the law is clear that employees cannot be precluded from filing a charge with the EEOC, even though they can waive any damages that could result from filing a charge. Accordingly, some employers simply limit the covenant not to sue to court claims.
The EEOC, however, has taken the position that the employee might understand a broad covenant not to sue as precluding the employee from filing a lawsuit to challenge the enforceability of the release. That would be impermissible. Accordingly, the EEOC’s view is that a broad covenant not to sue not only is unenforceable but also may render the corresponding release invalid.
At least one court—the 3rd U.S. Circuit Court of Appeals—has disagreed with the EEOC’s extreme position on this issue. (Wastak v. Lehigh Valley Health Network, 342 F.3d 281 3d Cir. 2003)
While the court’s analysis in that decision is persuasive, other courts could come to different conclusions. Plus, there is still the potential cost of doing battle with the EEOC.
Accordingly, the safer option may be to dispense altogether with the covenant not to sue.
Integration provision. Appropriately, most severance agreements provide that the agreement sets forth the entire understanding between the parties, superseding any and all other agreements. The purpose of this language is to make sure that employees cannot credibly claim that promises of additional consideration were previously or contemporaneously made independent of the agreement.
However, there may be some agreements you don’t want to void. For example, if an employee has signed a confidentiality, non-competition or other agreement, you should identify it as an exception to the superseding clause. Indeed, you should state explicitly that such prior agreements survive the termination of employment and are incorporated by reference.
If you do not include the exception, you may inadvertently waive legal protections that are as important to the business as the release itself.
Almost There, But …
What happens if employees don’t sign? Many severance agreements talk about what happens only if employees sign the agreement, but say nothing about what happens if they don’t. This is potentially problematic for two reasons.
First, certain restrictions should apply to employees regardless of whether or not they sign. For example, they cannot use or disclose confidential and/or proprietary information they acquired in the course of their employment and that is not generally known by or readily accessible to the public. If the agreement does not clearly state that this restriction applies even if the employee does not sign, a negative implication may arise that it applies only if the employee does sign.
Second, if the employer does not make clear what payments and other benefits employees are entitled to, regardless of whether or not they sign the agreement (an example might be unused vacation), employees may believe that they must sign the agreement to get those payments or benefits. This could be the basis for an argument that the employee felt coerced to sign and, therefore, that the release was not voluntary.
Accordingly, severance agreements should state which rights and obligations remain in force even if the employee does not sign. Some examples are provisions acknowledging that:
- Employees will be paid (or already have been paid) for all time worked.
- Employees will be paid (or already have been paid) for accrued but unused vacation, in accordance with company policy.
- Employees will be eligible to continue participating in the employer’s group health plan, at their sole expense, pursuant to COBRA and subject to COBRA’s terms, conditions and restrictions. If the employer pays all or part of the premium, this payment could be contingent on employees signing the release.
- Employees can neither use nor disclose confidential information, as set forth above. This language should be included even if an employee did not sign a confidentiality agreement because the employee may have a common law duty independent of any agreement.
- Employees have the right to exercise vested stock options within the period of time defined by the plan and set forth in the agreement. This may help avoid lawsuits over what employees were or were not told with regard to such options if they fail to exercise them on a timely basis.
- Employees will receive whatever severance they may be unconditionally entitled to independent of signing the agreement, if applicable. If an employee is entitled to some severance under a plan or prior agreement and is offered additional severance/compensation for signing the release, the severance agreement should make clear which payments are unconditional and which are conditional on the employee signing a release.
It’s a long and winding road to drafting and securing a terminated employee’s enforceable agreement to release the employer from legal claims in exchange for severance pay or other valuable compensation or benefits. But it’s a road that leads away from the courthouse steps, so beware of taking any shortcuts.
Author’s note: This article should not be construed as legal advice or as pertaining to specific factual situations.
Jonathan A. Segal, Esq., a contributing editor of HR Magazine, is a partner in Philadelphia in the Employment Services Group of Wolf, Block, Schorr and Solis-Cohen LLP. His practice concentrates on counseling clients, developing policies and strategic plans.