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Are Waivers Under Severance Agreement Enforceable?

Employers frequently offer severance packages to discharged employees.  Some offer these packages to protect the company’s reputation within the community, while others are motivated by bona fide efforts to assist an individual now forced to look for a new job or transition into new circumstances.  In all cases, however, employers point to one overarching salutary benefit:  a former employee waives any legal claims and rights that she may have against the company, and in exchange for the severance agreement, the company is immunized from all potential claims arising out of the employment arrangement.  To borrow a line from an unlikely source of employment law advice, ESPN College Game Day host Lee Corso, “Not so fast, my friend.”

Recently, severance agreements have been successfully challenged in courts, often resulting in the worst of all possible outcomes from the employer’s perspective:  the waiver or release of claims is invalidated and the employee can keep the severance pay and pursue legal claims against the former employer.  The principal focus of attack has varied from substantive claims to technical violations and has mainly highlighted the invalidity of releases under the Age Discrimination in Employment Act (“ADEA”) and the Family and Medical Leave Act (“FMLA”), as well as the right to file a charge of discrimination with the Equal Employment Opportunity Commission.  Now that the doors to litigation have been flung wide open, employers should carefully review these developments before taking comfort in an executed agreement in which an employee waives such rights.  This article is the first of a two-part series that surveys some of the recent decisions in this area.  In part one, we look at the case law in the most actively litigated arena:  challenges to releases of ADEA claims.  In part two, we focus on waiver of FMLA claims and the EEOC’s increased efforts to preserve severed workers’ rights to file charges of discrimination.

OWBPA

Following a great deal of litigation about the enforceability of waivers and releases generally, Congress enacted the Older Worker Benefit Protection Act of 1990 (“OWBPA”), 29 U.S.C. § 626(f), hoping to settle this controversial issue with respect to the ADEA.  Among other provisions, the OWBPA amended the ADEA by establishing specific requirements for a release to be considered a valid waiver of federal age discrimination claims.  Courts considering the enforcement of severance agreements involving ADEA claims have been careful to ensure that the OWBPA’s requirements have been strictly satisfied, and  even technical violations have been found sufficient in certain cases to vitiate an otherwise effective release.

According to the OWBPA, in order for a waiver to be enforced, it must be deemed “knowing and voluntary.”  This requires, at a minimum, that the waiver:  (1) is part of an agreement between the employer and employee and is written in a manner understandable to the individual signing the agreement, or to the average individual eligible to participate; (2) specifically reference rights or claims arising under the ADEA; (3) not include rights or claims that may arise after the date on which the waiver is executed; (4) provide consideration to the employee to which she would not have otherwise been entitled; (5) advise the employee to consult with an attorney prior to executing the agreement; (6) give the individual a period of at least 21 days (45 days in a group termination) within which to consider the agreement; and (6) allow the employee a seven-day period following the agreement’s execution during which she can revoke the agreement.  29 U.S.C. § 626(f)(1)(A)-(G).

In the context of a group termination or exit incentive program, the employer is required to provide the employee with information about (1) the individuals, class, or unit covered by such program, any applicable eligibility factors, and any related time limits; and (2) the job titles and ages of all individuals who are both eligible and not eligible for the program.  29 U.S.C. § 626(f)(1)(H).

The Supreme Court, in Oubre v. Entergy Operations, Inc., 522 U.S. 422 (1998), not only enforced these strict requirements for a knowing and voluntary waiver of any right or claim under the ADEA, but also held that traditional contract provisions requiring “tender-back” of payments when challenging the validity of a waiver or other legal agreement did not apply to suits under the ADEA.  Id. at 428-29.  In Oubre, the employee had signed a release of all claims against her employer in consideration for receipt of severance pay.  Id. at 424.  According to the Supreme Court, the agreement did not give the employee enough time to consider her options, provide for seven days after she signed the agreement for the employee to change her mind, or make specific reference to ADEA claims.  Id.   As a result, the agreement was not made knowingly and voluntarily.  The court also held that the employee’s retention of the monies obtained pursuant to the agreement did not amount to a ratification equivalent to a valid release of her ADEA claims, “since the retention did not comply with the OWBPA any more than the original release did.”  Id. at 428.  The employee was not required to tender back the money paid in exchange for a release in order to challenge its enforceability or pursue an action under the ADEA.

An employer cannot evade a “no tender back” clause by using other methods of limiting or inhibiting an employee’s right to challenge a waiver agreement, such as requiring that the employee pay damages or attorneys’ fees for filing suit.  EEOC regulations state that an employer’s ability to recover consideration paid and/or attorneys’ fees are limited to the following kinds of circumstances:

  • An individual alleging that a waiver agreement or covenant not to sue was not knowing and voluntary under the ADEA is not required to tender back the consideration paid for that agreement before filing suit or a charge with EEOC.
  • A waiver or covenant not to sue specifying that the employee is required to tender back consideration received or allowing the employer to recover attorneys’ fees or damages in the event any ADEA suit brought by the employee is invalid.
  • At the discretion of the court, an employer may recoup consideration paid to an employee only if the employee successfully challenges the validity of the waiver or covenant not to sue, prevails on the merits of an ADEA claim and receives a damages award.  In such instances, the court may reduce the plaintiff’s award by the amount of consideration the employee received for signing the waiver.  Such reductions are limited to the lesser of the amount recovered by the employee or the amount of consideration.
  • If an employee challenges the validity of the waiver or covenant not to sue but does not prevail on the ADEA claim, the employer cannot recoup the consideration paid to the employee.  However, an employer would be entitled to attorneys’ fees if the employee’s suit were brought in bad faith. 1[T2] 

Recent ADEA Cases

In several recent cases following the Supreme Court’s ruling in Oubre, courts have confirmed that releases of claims must be written strictly in accordance with the OWBPA’s provisions in order to uphold the agreement’s prohibitions on filing ADEA claims.  In Ricciardi v. Electronic Data Systems Corp., 2007 U.S. Dist. LEXIS 11758 (E.D. Pa. 2007), for example, the court held that a release agreement signed by an employee sufficiently satisfied both the strict criteria established by the OWBPA, as well as the “totality of the circumstances” inquiry a court in the Third Circuit must conduct to ensure that the agreement was made knowing[ly] and voluntary[ily].”  Id. at *19.  

By contrast, the Sixth Circuit in Thomforde v. IBM, 406 F.3d 500 (6th Cir. 2005), found that the language contained in a severance agreement was not “written in a manner calculated to be understood by such individual, or by the average individual eligible to participate.”  Id. at 503.  The waiver language in the agreement at issue clearly stated that the employee “released” IBM from all “claims…of whatever kind,” including claims under the ADEA, and that the employee agreed never to “institute a claim” against IBM.  Later in the paragraph, however, the agreement referenced “covenants not to sue” and stated that “[t]his covenant not to sue does not apply to actions based solely under the [ADEA].”  Id.

According to the court, one could plausibly read this document as requiring that the employee release IBM from all ADEA claims and agree not to institute any claims against IBM, except that the employee may still bring an action based solely under the ADEA.  Thomforde, 406 F.3d at 504.  It would not necessarily have been clear to the employee that the phrase creating an exception to the covenant to sue did not apply to the entire release because the average reader may not have understood the difference between the “release” and “covenant not to sue.”  The court also noted that “[o]nce IBM chose to use…legal terms of art in the Agreement, IBM had a duty to carefully explain the provisions.”2  Id.  The terms were further susceptible to confusion because the sections were not separated in any manner.  Given this lack of clarity, the court held that the agreement was ineffective as a matter of law to constitute a knowing and voluntary waiver of the employee’s rights under the ADEA.  Id. at 505.3 

The decision in Thomforde demonstrates how careful an employer must be to draft severance agreements that define all terms and use a comprehensible structure in accordance with the agreement’s meaning.  In Kruchowski v. Weyerhaeuser Co., 446 F.3d 1090 (10th Cir. 2006), employees were discharged in connection with a reduction-in-force (“RIF”) program.  The court held that the signed agreement was invalid because it failed to describe correctly the “unit” eligible for participation in the program, as is required by § 626(f)(1)(H)(i).  Id. at 1096.  Employees had been told that the “decisional unit” subject to the RIF consisted of all “salaried employees of defendant employed at the Valliant Containerboard Mill,” but interrogatory responses subsequently revealed that the “decisional unit” actually consisted of those “salaried employees reporting to the Mill manager.”  Id. at 1094.  This error meant that fifteen employees, which constituted more than ten percent of the company’s employees who were believed to be included in the decisional unit, actually were excluded.  The court held that this inaccurate description of the decisional unit rendered the release invalid.  Id. at 1096.  Notably, where limits on “decisional units” are clearly described in the agreement, and where such limits are in accordance with the company’s organizational unit, courts have upheld release agreements.

In Burlison v. McDonald’s Corp., 455 F.3d 1242 (11th Cir. 2006), plaintiffs claimed that information they obtained regarding a group termination did not contain nationwide data and therefore failed to comply with 29 U.S.C. § 626(f)(1)(H)(ii).  Id. at 1244-1245.  According to the court, the “decisional unit” disclosed to employees was appropriately limited to local or regional, and not nationwide data, because that was the portion of the employer’s organizational structure from which the company chose employees to be considered for the agreement.  Id. at 1249.  The court therefore upheld the enforceability of the release agreement and granted defendant’s motion for summary judgment in the ADEA suit.

The requirements imposed by the OWBPA also have been used to invalidate agreements involving ADEA claims even in instances where the agreements have been found validly to bar other federal and state claims.  In Merritt v. FirstEnergy Corp., 2006 U.S. Dist. LEXIS 15089, at *7 (N.D. Ohio. Mar. 31, 2006), the Court found that a waiver was sufficiently voluntary to bar claims of race discrimination under both Title VII and Ohio law, as well as a wrongful discharge action, but that the waiver failed to meet the stricter requirements imposed by the OWBPA.  29 U.S.C. § 626(f)(1).  Id. at *8-*10.4  The OWBPA requires that agreements offered in connection with exit incentive programs must detail the program’s eligibility factors and applicable time limits.  By failing to include these requirements, the agreement was ineffective in waiving the employee’s ADEA claim.  Id. at *11. 

Recent decisions serve as a chilling reminder to employers as to the sometimes Draconian consequences of failing to comply strictly with the OWBPA’s requirements.  In part two of this article, we will examine recent developments regarding waivers of FMLA claims in the context of severance agreements, as well as the EEOC’s efforts to challenge covenants which seek to preclude filing charges of discrimination with the agency.

 

Reprinted with permission from the June 4, 2007 edition of the New York Law Journal© 2007 ALM media Properties, LLC. All rights reserved. Further duplication without permission is prohibited.

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[1]  See 29 C.F.R. § 1625.23(a)-(c).  Questions and Answers:  Final Regulation on “Tender back” and Related Issues Concerning ADEA Waivers, available at  http://www.eeoc/gov/policy/regs/tenderback-qanda.html. See also 65 Fed. Reg. 77438.

[2]  Notably, the employee who signed the agreement had requested that IBM provide an interpretation of the “carve-out” from the covenant not to sue.  IBM, however, declined to provide an explanation and instead encouraged the employee to seek counsel.  406 F.3d at 502.

[3] Interestingly, the same release agreement was at issue in a subsequent case in the Ninth Circuit in Syverson v. IBM, 472 F.3d 1072 9th Cir. (2007).  In this putative class action, the court similarly held that IBM’s “General Release and Covenant Not to Sue” was invalid because the difference between a “release” and a “covenant not to sue” was confusing to a lay reader.  As a result, the agreement was not written in a manner calculated to be understood by the average employee eligible to participate in the agreement and was therefore not signed “knowing[ly] and voluntar[ily]” as required by 29 U.S.C. § 626(f)(1).  Id. at 1087.

[4] In evaluating the discrimination and wrongful discharge waivers, the court examined factors considered by other Sixth Circuit courts to determine whether the agreement was voluntary, including (1) the employee’s experience, background, and education; (2) the amount of time the employee had to consider the release, including whether the employee had time to consult an attorney; (3) the clarity of the release’s language; (4) the consideration received for the release; and (5) the totality of the circumstances.  Merritt, 2006 U.S. Dist. LEXIS 15089, at *7. 


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