At its July 15, 2009 meeting, the Equal Employment Opportunity Commission (EEOC or Commission) issued guidance, primarily for employees, about waivers of discrimination claims typically found in severance agreements proposed to workers who are being laid off.

The EEOC began by noting that as with any other contract, a severance agreement must be supported by “consideration.”  “Consideration is something of value to which a person is not already entitled that is given in exchange for an agreement to do, or refrain from doing, something.”  A waiver in a severance agreement is valid only when an employee knowingly and voluntarily consents to the waiver. Whether a waiver is knowing and voluntary generally depends on the statute under which suit has been, or may be, brought.  For example, the Older Worker Benefits Protection Act (OWBPA) has specific rules for waivers of claims under the Age Discrimination in Employment Act (ADEA). 

The Commission observed that courts consider the “totality of circumstances” when determining if a waiver is valid.  According to the EEOC, courts typically look at the following factors:

• whether it was written in a manner that was clear and specific enough for the employee to understand based on his education and business experience;

• whether it was induced by fraud, duress, undue influence, or other improper conduct by the employer;

• whether the employee had enough time to read and think about the advantages and disadvantages of the agreement before signing it;

• whether the employee consulted with an attorney or was encouraged or discouraged by the employer from doing so;

• whether the employee had any input in negotiating the terms of the agreement; and

• whether the employer offered the employee consideration (e.g., severance pay, additional benefits) that exceeded what the employee already was entitled to by law or contract and the employee accepted the offered consideration.

The Guidance also addressed an employee’s right to file a charge with the EEOC even after signing a waiver of claims.  It confirmed that although the severance agreement may use broad language to describe the claims that are being released, an employee can still file a charge with the EEOC if the employee believes he or she was discriminated against during employment or wrongfully terminated.  The Guidance did not address the common language found in many severance agreements pursuant to which the employee waive the right to any monetary relief in connection with such a post-waiver charge.  The Commission did note that “no agreement between you and your employer can limit your right to testify, assist, or participate in an investigation, hearing, or proceeding conducted by the EEOC under the ADEA, Title VII, the ADA, or the EPA.  Any provision in a waiver that attempts to waive these rights is invalid and unenforceable.”

The EEOC also discussed the validity of so-called “tender back” provisions that require employees to return severance pay if they choose to challenge the waiver and sue their employer.   According to the Commission, “severance agreements that attempt to prevent employees from filing a charge with the EEOC or participating in an EEOC investigation, hearing, or proceeding are unenforceable.”  It is well-settled that under the ADEA an employee is not required to return severance pay – or other consideration received for signing the waiver – before bringing an age discrimination claim.  However, there is a split among the courts under other federal discrimination laws enforced by the EEOC.  Some courts conclude that the validity of the waiver cannot be challenged unless the employee returns the consideration, while other courts apply the ADEA’s “no tender back” rule to claims brought under Title VII and other discrimination statutes and allow employees to proceed with their claims without first returning the consideration.

The Guidance then discussed the specific requirements for a waiver of age discrimination claims under OWBPA, both for single and group terminations.  The Commission warned however, that just because a waiver meets the OWBPA requirements does not necessarily mean it will be considered “knowing and voluntary.”  For example, the waiver would be invalid “if an employer used fraud, undue influence, or other improper conduct to coerce the employee to sign it, or if it contains a material mistake, omission, or misstatement.”  The Commission offered the following example from a court case: 

An employee who was told that his termination resulted from “reorganization” signed a waiver in exchange for severance pay.  After a younger person was hired to do his former job, he filed a lawsuit alleging age discrimination.  The company then changed its position and claimed that the real reason for the employee’s discharge was his poor performance.  The employee argued that his waiver was invalid due to fraud and that if he had known that he was being terminated because of alleged poor performance, he would have suspected age discrimination and would not have signed the waiver.  The court held that fraud was a sufficient reason for finding the waiver invalid.

Finally in an Appendix to the Guidance, the EEOC offered the following “checklist” of what employees should do when offered a severance agreement from their employer:

• Make sure that you understand the agreement

  • Read the agreement to see if it is clear and specific, or if it is confusing because it contains terms you do not understand.

  • If you are 40 or older, inform your employer that the law requires your agreement to be written in a manner that makes it easy to understand. Usually this means that your agreement should not contain technical jargon or long, complex sentences.

• Check for deadlines and act promptly

  • The moment you are given a severance agreement, check to see if your employer gave you a deadline for accepting, or declining, the agreement. If you are 40 years old or older, federal law requires the employer to give you at least 21 days to review the agreement and make up your mind.

  • If your employer has not given you a reasonable amount of time, or rushes your decision, this is a red flag. An employer who is fair will understand that you cannot review or make decisions about an important document on a moment’s notice.

  • If you are being rushed, ask for more time. Put your request in writing. If you are 40 or older and your employer is asking you for a decision in fewer than 21 days, remind the employer that the law requires you to be provided at least 21 days. (If you and at least one other person are being laid off in a reduction in force (RIF) at the same time, you must be given 45 days to consider the agreement.)

• Consider having an attorney review the severance agreement

  • Even if you are parting amicably with your employer, you may want to ask for advice about whether you should sign it, whether the terms are reasonable, and whether you should ask your employer to change any of the terms.

  • If you decide that you want an attorney to review the agreement, promptly make an appointment. Do not wait until the last day before the deadline to review the severance agreement.

  • If you are at least 40 years old, the agreement must advise you to consult with an attorney.

• Make sure you understand what you are giving up in exchange for severance pay or benefits

  • The main benefit to signing an agreement is that you will receive a cash payment or benefits in exchange for signing away your right to bring certain legal claims against your employer.

  • Make sure that the agreement offers you something of value to which you are not already entitled.

  • If you think you have been wrongfully terminated because of age, race, sex, religion, or some other discriminatory reason, you may want to think twice about signing. The benefits of signing a severance agreement should be carefully weighed against claims you might have against your employer, the likelihood of winning a court case or settlement, and the probable costs.

• Review the agreement to ensure that it does not ask you to release nonwaivable rights

  • Confirm that your employer is not asking you to waive your right to file a charge, testify, assist, or cooperate with the EEOC.

  • Make certain that the agreement is not asking you to waive rights or claims that may arise after the date you sign the waiver.

  • Make sure that your employer is not asking you to release your claims for unemployment compensation benefits, workers compensation benefits, claims under the Fair Labor Standards Act, health insurance benefits under the Consolidated Omnibus Budget Reconciliation Act (COBRA), or claims with regard to vested benefits under a retirement plan governed by the Employee Retirement Income Security Act (ERISA).

Conclusion

Although the Guidance does not change the law or the EEOC’s position on any of the issues addressed, it virtually assures that an increasing number of employees who are offered severance agreements will review them and the surrounding circumstances more carefully to determine if they are valid and whether they are subject to challenge.  Accordingly, employers need to draft their agreements very carefully to comply with these requirements, and present them to affected employees in a manner that will ensure their validity.

The Arent Fox Employment Law Group regularly advises clients on implementing reductions in force and the drafting of severance agreements.  If you have any questions about any of these issues, please feel free to contact us.

Michael L. Stevens
stevens.michael@arentfox.com
202.857.6382