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Waivers—A Valuable Friend
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Dionne Warwick, Stevie Wonder, Gladys Knight and Elton John sang about them. So did James Taylor, Carole King and the Rembrandts.
Employment law waivers? Well, no. But they all did sing about friends, and just as friends shouldn’t be forgotten, HR professionals shouldn’t neglect waivers—particularly statute-of-limitations waivers, which have served as longtime friends to employers.
You might not have to flash back too far for the following scenario to ring true: Imagine that your company is defending a lawsuit brought by a former secretary. She claims that she was sexually harassed by her supervisor, who allegedly not only fired her when he heard that she had complained to the Equal Employment Opportunity Commission (EEOC), but also gave a completely false negative reference to a prospective employer, who consequently did not hire her. Her lawsuit includes claims for sex discrimination under federal and state law, as well as state law claims including wrongful discharge, assault and battery, defamation, intentional infliction of emotional distress, and tortious interference with contract.
Your company’s lawyer has told you that these state claims are particularly troublesome because, unlike Title VII claims, there is no cap on damages for pain and suffering and punitive damages, and local juries have awarded seven-figure verdicts in similar cases.
To make matters worse, the supervisor died in a car accident a year after the plaintiff’s termination; as usual, no one witnessed the alleged harassment.
This type of circumstance is far from uncommon and is one more reason for the old mantra to “document, document, document” to preserve institutional memory.
But there’s a more proactive approach that can help ensure that employment claims are brought quickly, while evidence can be preserved and institutional memory may be far more focused. It takes the form of an old friend of employers and HR professionals: the waiver. More specifically, a statute-of-limitations waiver.
All lawsuits must be started by the end of a fixed period of time—the “statute of limitations”—after the occurrence of the events giving rise to a legal claim—called a “cause of action.”
Different statutes of limitations apply to different causes of action, as determined by Congress for federal law and the legislatures of the various states for state law.
Parties to a contract can agree to a statute of limitations that is shorter than that set by the legislative body, unless prohibited by law. Such a shortened, private statute of limitations is called a statute-of-limitations waiver. Some state laws prohibit the use of waivers in certain types of contracts, but only a few states, including Mississippi (Miss. Code Ann. §15-1-5) and South Carolina (S.C. Code Ann. §15-3-140), have statutorily banned their use in any type of agreement.
Employers burdened under the growing mountain of employment litigation have sought relief in mandatory arbitration, jury trial waivers and, increasingly, statute-of-limitations waivers. An effective waiver can be the basis for the dismissal of all or part of a lawsuit. Unlike jury trial waivers or arbitration agreements, a statute-of-limitations waiver can eliminate the risk of a resolution on the merits by a fact-finder, be it a judge, jury or arbitrator.
Furthermore, early resolution and dismissal of even part of a lawsuit will, at a minimum, reduce the time and expense of litigation, and it may, at best, drive a favorable settlement. Even if a court rules that the waiver is not enforceable, the employer has not lost other possible procedural and substantive defenses.
Statute-of-limitations waivers are not exactly new. The U.S. Supreme Court has been endorsing their use in commercial disputes since at least 1869. In a 1913 decision, the court pointed out that shortened statutes of limitations serve the useful purpose of preserving both documents and testimony while memories are fresh and witnesses are still available.
This objective is particularly applicable to employment litigation, where live testimony is usually critical for both parties. When the Supreme Court last visited the issue—in 1947—it held that statute-of-limitations waivers are enforceable as long as there is no applicable statute that prohibits their use and as long as they are reasonable.
Therefore, state and federal courts developing rules about the enforceability of statute-of-limitations waivers have long accepted the general concept. In the past few years, several courts, particularly in Michigan, have approved statute-of-limitations waivers in the employment context.
Here again, the concept is not completely new. As far back as 1920, the Supreme Court of California enforced a waiver in an employment agreement to dismiss a claim for unpaid commissions (Beeson v. Schloss, 183 Cal. 618 (1920), which was recently cited by the 9th Circuit in enforcing an employment-related waiver,
Soltani v. Western & Southern Life Ins. Co., 258 F.3d 1038 (9th Cir. 2001)).
Many lower courts have developed a three-factor test for the “reasonableness” of a statute-of-limitations waiver:
The first two factors are easy to meet, since employees usually know fairly quickly if they have been terminated or harassed, and they have a good idea of damages based on their compensation.
However, an appellate court in Michigan has abandoned the “reasonableness” test, announcing that a waiver is enforceable as long as no public policy prevents it. The court then found that no public policy prevented the waiver in the employment case at issue, a state law age discrimination claim (Clark v. DaimlerChrysler, 706 N.W.2d 471 (Mich. Ct. App. 2005)).
Don’t Make a Federal Case out of It
Employers have had less success enforcing statute-of-limitations waivers where the only claims are under certain federal laws enforced by the EEOC, such as Title VII, the Americans with Disabilities Act (ADA), and the Age Discrimination in Employment Act (ADEA) (collectively, “EEO statutes”), because of the third prong of the reasonableness test. The enforcement scheme of these statutes requires filing a charge within 300 days in deferral states (180 days in nondeferral states). Thereafter, a claimant must wait at least 180 days (60 days for ADEA claims) to obtain a right-to-sue notice, unless the agency chooses to issue one sooner.
Because plaintiffs need the right-to-sue notice to file a lawsuit, but cannot compel the EEOC to issue it sooner than 180 days after the charge is filed, a six-month statute-of-limitations waiver effectively nullifies the right to file a lawsuit under these statutes.
Waivers have been enforced with respect to other federal claims, however. At least two federal courts, using the three-part “reasonableness” analysis, have dismissed race discrimination claims brought under 42 U.S.C. §1981 (Badgett v. Federal Express Corp., 378 F.Supp.2d 613 (M.D.N.C. 2005);
Thurman v. DaimlerChrysler Inc., 397 F.3d 352 (6th Cir. 2004)).
Statute-of-limitations waivers against claims brought under the Family and Medical Leave Act (FMLA) are an unsettled area of law. The Department of Labor (DOL), which enforces FMLA’s two-year statute of limitations (three years for willful violations), has issued regulations prohibiting employer interference with, and employee waiver of, FMLA rights. At least one court has said that statute-of-limitations waivers are just such prohibited interference or waiver (Lewis v. Harper Hosp., 241 F. Supp.2d 769 (E.D. Mich. 2002)). Another court, however, has reasoned that because the FMLA statute of limitations is really for the benefit of employers, it is not an employee right, so there can be no interference or waiver (Badgett).
Proceed cautiously with the FMLA. Courts have disagreed over whether any type of waiver obtained without DOL or court approval is valid; compare
Taylor v. Progress Energy, 415 F.3d 364 (4th Cir. 2005), vacated and rehearing granted (June 14, 2006) with
Faris v. Williams WPC-I Inc., 332 F.3d 316 (5th Cir. 2003).
Quite frequently, moreover, plaintiffs sue under both state and federal causes of action. The fact that the statute-of-limitations waiver will not be enforced as to EEO statutes may not excuse a plaintiff from filing within the shortened time period as to any other claims.
A plaintiff with both federal and state claims could file the lawsuit within the shortened statute of limitations, and either include Title VII claims initially while requesting a stay pending receipt of the right-to-sue notice, or leave the Title VII claims out initially and later amend the complaint to include them after receiving the notice. Either way, the plaintiff will not be prejudiced because, as one district court candidly pointed out, the action is likely to still be pending when the EEOC proceedings are done (Badgett).
Fitting into Strange Situations
Statute-of-limitations waivers have been enforced even in some unusual situations. Looking to the fact that there was substantial similarity of operations and continuity of corporate identity, among other factors, a court enforced a pre-merger waiver against the employee of a merged entity (Mayes v. DaimlerChrysler, No. 05-70249 (E.D. Mich. 2005)).
Following a U.S. Supreme Court decision holding that a collective bargaining agreement will not necessarily supersede an individual employment agreement, waivers have been enforced against union-represented employees who bring private lawsuits (Mayes; Thurman).
While statute-of-limitations waivers have been enforced, stringent internal notice provisions have not.
One national company’s employment agreement contained, along with a six-month statute-of-limitations waiver, a requirement that an employee give 10 days’ written notice prior to filing an employment action or a lawsuit. In unrelated lawsuits against this company, two courts, while differing as to whether the waiver should be enforced, agreed that the 10-day notice provision, which applied no matter when the cause of action arose and could not possibly allow enough time for an internal investigation, was invalid because it had no discernible purpose except to prejudice employees. The court in Soltani, a wrongful-discharge case, enforced the waiver; the court in
Mabry v. Western & Southern Life Ins. Co., 232 F.R.D. 531 (M.D.N.C. 2005), an ADA claim, did not.
Don’t Get Too Short With Employees
Employers considering the use of a statute-of-limitations waiver must decide on the length of the shortened statute of limitations, the wording and how to obtain it. They must also determine whether the waiver is enforceable in any applicable jurisdiction.
How short can a shortened statute of limitations be? Most recent cases have upheld a period of six months as reasonable, except when this conflicts with enforcement of EEO statutes.
Several courts have pointed out that six months, or 180 days, is the statute of limitations selected by Congress for filing administrative charges under Title VII in nondeferral states, and for unfair labor practice charges under the National Labor Relations Act. Courts have also looked to these statutory limitations periods to find that a six-month waiver period is permissible when analyzing waivers under both “unconscionability” and “reasonableness” standards.
The waiver must be in clear, unambiguous language. One typical provision that was found enforceable by a Michigan appellate court in
Williams v. Traverse Pavilions, No. 247063 (Mich. Ct. App. 2004, unpublished)) reads as follows:
“I agree that any action or suit against the organization arising out of my employment or termination of employment, including but not limited to claims arising under state or federal civil rights statutes, must be brought within 180 days of the event giving rise to the claims or be forever barred. I waive any limitation periods to the contrary.”
Setting the waiver period as “the shorter of 180 days or any applicable statute of limitation” avoids inadvertently extending the 90-day right-to-sue period under the EEO statutes.
However, a provision stating that the employee would not “commence any action or suit relating to [his employment] more than six months after the termination of such employment” was held to be ambiguous in Soltani when applied to a discrimination claim based on actions taken during employment, such as promotion.
Let’s Make a Pact
The actual wording of the waiver provision is not the only factor in determining enforceability. Courts frequently comment favorably on the fact that the waiver, if in an employment application, is directly above the applicant’s signature or, if in an employment agreement, on the first page.
Either way, printing the waiver in boldface, all caps, italics or large print also goes far to convince a judge that the waiver is “knowing and voluntary,” a prerequisite for enforcing any kind of contract.
Waivers can be effective whether in an employment application or in a formal employment agreement. Recent decisions have analyzed waivers contained in an employment application the same way as those in an employment agreement.
Most courts find that an employment application creates a contractual relationship. Because the application is an agreement, courts will apply general contract principles to hold employees to the terms contained therein even if they claim they never read it because they were signing dozens of pre-employment forms, and even if they claim that they did not realize that the application was an agreement.
Although a court might hesitate to enforce a waiver in an employment application signed decades earlier, one court held that the passage of time since the employment application was signed, in that case five years, was irrelevant to a decision on the reasonableness of the waiver (Thurman). If the waiver is in an employment agreement rather than an application, a severability clause should be used to prevent the possibility that a court hostile to such waivers might invalidate the entire agreement.
Whether the waiver should apply to all employees, or only to new hires, presents issues similar to those in adopting a mandatory arbitration program. If the waiver is used only in an application, the employer may have to wait a long time, depending on the rate of employee turnover, before most of the workforce is covered. Using employment agreements may be a better way to cover the entire workforce immediately. Because not all states will accept continued employment as consideration for agreements made after an employee is hired, employers need to decide whether any additional consideration, such as a bonus, should be given before seeking a statute-of-limitations waiver from current employees. Additional consideration may be advisable for employee relations reasons even if not required.
That’s What Friends Are For
Statute-of-limitations waivers are advantageous, even if they may not be enforced with respect to claims under the EEO statutes, because state law claims against which they generally will be enforced often have longer statutes of limitations than federal law, and often provide for uncapped compensatory and/or punitive damages. Such damages may be far greater than back pay and other economic damages available under the EEO statutes.
If the hypothetical secretary whose claim was considered earlier worked for a company with more than 200 but fewer than 501 employees, and the state law claims were dismissed due to an effective statute-of-limitations waiver, the company’s maximum liability would be $200,000 for compensatory and punitive damages, plus any back pay. That is a lot less than the seven-figure verdict that the employer might otherwise face, making an effective statute-of-limitations waiver a great return on a small investment.
So, in a nutshell, don’t neglect an old friend!
Judith Ann Moldover is an attorney with the firm of Ford & Harrison LLP in New York.
SHRM article: The Jury's Still Out-Way Out (HR Magazine)
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