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New EEOC Regulations on Waivers of ADEA Claims

The Equal Employment Opportunity Commission (the “EEOC”) recently issued new regulations regarding waivers of rights and claims under the Age Discrimination in Employment Act (“ADEA”) and the Older Workers’ Benefits Protection Act (“OWBPA”).  See 65 Fed. Reg. 77437-77447 (Dec. 11, 2000).  The regulations, which became effective on January 10, 2001,  purport to prohibit all contractual limitations on an employee’s right to challenge in court the validity of a waiver of the right to assert ADEA claims.  While the EEOC targeted contractual requirements that an employee “tender back” consideration paid for a waiver, the regulations also seek to prohibit all limitations on an employee’s right to challenge the validity of a waiver or covenant not to sue, including agreements that employees pay the employer’s attorney fees if the employee should not prevail in challenging the release.

Under the regulations, employers also are precluded from recovering the consideration paid for an ADEA waiver, except as an offset where the employee actually prevails on an ADEA claim, and obtains a monetary award on that claim.  Finally, the regulations purport to preclude employers from “abrogating” or avoiding their duties to honor agreements to pay all consideration for a release, even where the employee has sued the employer to challenge the validity of the release.  Thus, according to the EEOC, an employee can keep all consideration received in exchange for a waiver  while the employee sues the employer first to invalidate the waiver and then to pursue a claim that was supposedly “released.”  


There are significant issues as to whether the new regulations are consistent with Congressional intent in enacting ADEA and OWBPA.  Most importantly, employers can be expected to argue that these new regulations improperly weaken the affirmative defense of waiver, an important defense which always has been permitted by ADEA, OWBPA and the Supreme Court’s decision in Oubre v. Entergy Operations, Inc., 522 U.S. 422 (1998).   In addition, the regulations contravene an important policy underlying the ADEA by making consensual resolutions of ADEA claims more difficult and expensive.


This article analyzes the new regulations and sets forth some drafting tips employers may consider in seeking to comply with the regulations.  


Background

OWBPA, enacted in 1990, imposes specific requirements for a “knowing and voluntary” release under the ADEA.  See 29 U.S.C. § 626(f).  Specifically, under OWBPA an ADEA release is “knowing and voluntary” if it: (1) is written in a manner calculated to be understood by the individual employee; (2) refers specifically to the ADEA; (3) does not constitute a release or waiver of any rights or claims that may arise after its execution; (4) is supported by adequate consideration; (5) advises the employee to consult with an attorney; (6) gives the employee twenty-one days to consider the release (or forty-five days if the release is “in connection with an exit incentive or other employment termination program offered to a group or class of employees”); and (7) gives the employee seven days following execution to revoke the release and provides that the release will not become effective until the seven-day revocation period has expired.  The statute imposes additional requirements on waivers obtained in connection with an exit incentive or employment termination program.  

In 1998, the EEOC issued regulations addressing several issues under OWBPA, particularly in connection with the law’s application to group termination programs.  The 1998 regulations were silent, however, on the “tender back” issue.


Oubre Rejects “Tender Back”

In Oubre, the Supreme Court held that employees are not required to return – or tender back – the consideration received in exchange for an ADEA waiver prior to challenging the validity of the waiver in Court.  Under the “tender back” principle applied in contract law, an employee who refused to return the payment received for the waiver would be deemed to have “ratified” the waiver, regardless of any defects in the waiver itself.  In Oubre, the Supreme Court rejected the application of this principle in the context of ADEA waivers.  

As part of a termination agreement, Oubre had signed a release of her age discrimination claims in exchange for a severance payment of $6,258.  The release did not comply with OWBPA’s requirement for a “knowing and voluntary” waiver.  Specifically, the release did not expressly state that it was a waiver of Oubre’s rights under the ADEA, it provided Oubre only 14 days (and not the statutory 21 days) to consider the agreement, and it did not provide for the mandatory 7-day revocation period.  Oubre subsequently filed a charge of age discrimination with the EEOC, followed by a lawsuit in federal court.  The employer conceded that the release failed to comply with OWBPA, but moved for summary judgment on the theory that Oubre had ratified the defective waiver by failing to return or to offer to return the $6,258 severance payment.  The District Court granted summary judgment for the employer, and the Fifth Circuit affirmed.  

The Supreme Court reversed, however, holding that Oubre’s mere retention of the severance payment did not constitute a ratification of the defective waiver.  The Supreme Court held that an employer cannot invoke the tender back principle to excuse its own failure to comply with OWBPA’s strict requirements for a “knowing and voluntary” waiver and that an employee cannot be required to tender back consideration as a pre-condition to challenging the validity of an ADEA waiver.  


Regulatory Expansion of Oubre
Under the new regulations, an employee’s retention of consideration does not constitute ratification of a defective ADEA waiver.  In addition, the retention of consideration does not preclude the employee from challenging the validity of the waiver.  Moreover, the new regulations apply not only to waivers, but to covenants not to sue and “other equivalent arrangements.”  Specifically, the new regulation provides:
 
An individual alleging that a waiver agreement, covenant not to sue, or other equivalent arrangement was not knowing and voluntary under ADEA is not required to tender back the consideration given for that agreement before filing either a lawsuit or a charge of discrimination with EEOC or any state or local fair employment practices agency acting as an EEOC referral agency for purposes of filing the charge with EEOC.


Final Rule, 29 C.F.R. § 1625.23(a).  The expansion of Oubre to include covenants not to sue and other agreements is based on the EEOC’s position that these agreements are indistinguishable from waivers insofar as they serve to waive an employee’s rights under the ADEA.  


The new regulations also go far beyond Oubre’s limited discussion of the common law principle of tender back by purporting to bar all limitations on an employee’s right to challenge the validity of a waiver.  The new regulation provides:  

No ADEA waiver agreement, covenant not to sue, or other equivalent arrangement may impose any condition precedent, any penalty or any other limitation adversely affecting any individual’s right to challenge the agreement.  This prohibition includes, but is not limited to, provisions requiring employees to tender back consideration received, and provisions allowing employers to recover attorneys’ fees and/or damages because of the filing of an ADEA suit.  This rule is not intended to preclude employers from recovering attorneys’ fees or costs specifically authorized under federal law.


Final Rule, 29 C.F.R. § 1625.23(b) (emphasis added).  According tothe EEOC, this provision is necessary to avoid contract provisions that lead employees to mistakenly believe that they do not have the absolute right to seek a judicial determination concerning the validity of their ADEA waivers and to avoid the “chilling effect” of penalties that “could give life to waiver agreements that were not compliant with OWBPA.”  65 Fed. Reg. 77437, 77742-4 (Dec. 11, 2000).  


Thus, under the new regulations, an employee may retain any severance or other type of benefit or payment received in exchange for an ADEA waiver or covenant not to sue, even if that employee subsequently challenges the validity of the waiver or covenant not to sue.  In addition, employers are barred from imposing any penalty or condition precedent on employees’ right to challenge waivers or covenants not to sue, including the recovery of attorneys’ fees.  

Severability

The new regulations do not address the question of whether a court may sever any provision in an ADEA waiver agreement that is found to be contrary to the new regulations but where the agreement otherwise complies with the requirements in OWBPA for a valid release of ADEA claims.  However, in its commentary accompanying the final regulations, the EEOC proffered its belief that “a strong argument” exists that inclusion of a provision that is contrary to its new regulations in an ADEA waiver agreement should invalidate the ADEA waiver.  65 Fed. Reg. at 77441.

Non-ADEA Waivers
Settlement and other agreements between employers and employees often contain waivers unrelated to the employees’ rights under the ADEA.  The EEOC clarified in its final regulations that the regulations are not intended to extend beyond the ADEA and do not cover covenants not to sue connected to non-compete or trade secret provisions.  In addition, the EEOC also noted that many non-disparagement and confidentiality clauses contain liquidated damage provisions for breach.  The EEOC cautioned that a “reasonable employee must be able to determine that any liquidated damages provisions for breach of non-ADEA clauses have no effect on the employee’s ability to bring an ADEA charge or lawsuit challenging the waiver.”  65 Fed. Reg. at 77444.  

Restitution, Recoupment and Setoff

The new regulations provide that an employer can recoup consideration payments made to an employee only after the employee successfully challenges the validity of the waiver and prevails on the merits of his or her ADEA claim, and then only at the discretion of the court.  In such cases, the court may reduce the plaintiff’s monetary award by the amount of consideration the employee received for signing the waiver.  Reductions are limited, however, to the amount recovered or the amount of consideration, whichever is less.  See 29 C.F.R. § 1625.23(c).  

The EEOC reasoned that the prospect of tendering back consideration after successfully challenging the validity of an ADEA waiver but before pursuing a claim for employment discrimination would deter those who lack funds from pursuing good faith ADEA claims.  See 64 Fed. Reg. at 77444-5.  Thus, the EEOC refused to change its position that recoupment be permitted only to the extent that the employee  ultimately obtained a damages award for employment discrimination.

There are two notable consequences that result from employers’ compliance with this regulation.  The first is that employers must wait to recoup any payments made in consideration for an ADEA waiver until after the employee both (a) challenges the validity of the waiver, and (b) actually prevails on the underlying ADEA claim. Second, in cases where the employee’s age discrimination claim ultimately is defeated, the regulations leave the employer with no ability to seek recoupment of consideration payments, despite having had to incur defense costs in two lawsuits.  In such cases, the EEOC recognized that prevailing employers have the right to seek attorneys’ fees as authorized in the limited circumstances available under federal law.  See 29 C.F.R. § 1625.23(b).


Abrogation
Finally, the new regulations state that an employer cannot abrogate its duties under a severance or settlement agreement that contains an ADEA waiver by ceasing to make consideration payments, even if the employee is challenging the validity of the waiver.  Thus, where severance or settlement payments are made over time, as opposed to in a lump sum, the employer cannot cease payments if the employee decides to challenge the validity of the ADEA waiver contained in the agreement.  
See 29 C.F.R. § 1625(d).


Drafting Considerations

As described above, the new regulations purport to expand on the Supreme Court’s ruling in Oubre and seek to preclude the recoupment of any payment made in consideration for ADEA releases except in those cases where the employee ultimately has prevailed on his or her discrimination claim.  The new regulations not only seek to prevent waivers and releases that do not comply with OWBPA’s requirements for “knowing and voluntary” waivers, they also seek to prohibit all limitations or penalties on employees seeking to make claims under the ADEA, whether valid or invalid.  

In light of these new regulations, employers may wish to review any boilerplate language currently used in release agreements to weigh the costs and benefits of maintaining the following types of extant provisions:  1) provisions requiring employees to tender back consideration paid in the event the employee sues under the ADEA,  2) provisions requiring employees to pay the employer’s costs and attorneys’ fees in the event an employee sues under the ADEA,  3) provisions allowing the employer to cease paying severance benefits in the event the employee sues under the ADEA, and  4) covenants not to sue to the extent such covenants state that the employee may not challenge the validity of an ADEA release.  If employers wish to use any such provisions, they should be aware that the EEOC regulations purport to prohibit such provisions and, if the regulations are upheld by the courts, from relying on the release as a defense to the employee’s ADEA claims.  It will be years before the courts can be expected to fully sort out the validity of the regulations.

One way employers may mitigate the potentially draconian and burdensome effects of the new regulations is to take advantage of the fact that the EEOC has stated that its new regulations are intended to apply only to contractual provisions affecting waivers of ADEA claims, not to provisions affecting waivers of non-ADEA claims.  Thus, employers may consider preparing a release agreement for age discrimination claims in a document separate from the release agreement covering all other claims for relief.  The two agreements would also require separately stated consideration.  While the ADEA release might omit the “tender back” requirement and the convenant not to sue, the release of non-ADEA claims might continue to require “tender back” as a condition to suing for non-ADEA claims and the convenant not to sue.  


Alternatively, if employers wish to continue using a single release agreement, the parties may draft a provision which states that the “tender back” requirement and any “covenant not to sue” shall not apply to preclude the employee from suing under the ADEA or the OWBPA.  The provision also may state the amount of the consideration being paid for the release of ADEA claims and that such consideration need only be paid back to the employer in the event that the employee sues and prevails on any ADEA claim.

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