New EEOC Guidance on Severance Agreements and Bias Claim Releases

Reacting to the persistent economic downturn and the inevitable reductions in force that have followed, the federal Equal Employment Opportunity Commission (EEOC) has issued guidance for employers regarding how to draft severance agreements that release potential bias claims.

A “severance agreement” is a contract between an employer and a departing employee, in which the employer pays the employee additional money in exchange for the employee releasing all known and unknown legal claims against the employer—including any claim that the employee was discriminated against on the job, or that the employee’s departure from the company was the result of bias or harassment.

This is why a properly drafted severance agreement, signed by employees under the right conditions, can be an employer’s very best defense against a lawsuit.

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But as the EEOC’s guidance memorandum makes clear, the key is making sure that the agreement is properly drafted, contains all of the elements that the law requires, and that employees sign the agreement “freely and voluntarily.” Otherwise, you will have paid the employee to sign an agreement that can’t be enforced and gives your company no legal protection.

There are three key components of a valid severance agreement:

1. The employee must be paid compensation or given a benefit—in addition to what the employee is already entitled to—in exchange for signing the agreement;
2. The agreement must be written in a way that the employee can fully understand (e.g. without a bunch of legalese), and presented to the employee without coercion or intimidation, and;
3. The terms of the agreement must comply with all state and federal employment laws.

In an upcoming issue of California Employer Advisor, we’ll tell you more about the EEOC’s detailed guidance, and give you a plain-English sample severance agreement tailored for California employers.