Recent economic conditions have caused a number of employers to reduce staff. In response to this trend, the Equal Employment Opportunity Commission (EEOC), the agency that enforces Title VII of the Civil Rights Act of 1964, the Age Discrimination in Employment Act (ADEA), and the Americans with Disabilities Act (ADA), has issued guidance explaining some of the basics of waivers of discrimination claims in severance agreements. Let’s take a look at some of the key points from this guidance.
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What is a severance agreement and release of claims?
The guidance explains that such a severance agreement is a contract that must be supported by consideration. “Consideration” means something of value the employee doesn’t already receive that’s given in return for his agreement to forgo certain legal entitlements.
The EEOC guidance’s primary focus is on what is required for an employee’s waiver of discrimination claims to be valid. First, a waiver must be “knowing and voluntary.” Courts consider things like whether the agreement was written in a way that’s clear and specific enough for the employee to understand it based on his education and business experience. Courts also consider whether there was any fraud, undue influence, or other improper conduct by the employer to induce the employee to sign the waiver.
Other factors include whether the employee had sufficient time to read and consider the agreement before signing it and whether he consulted with an attorney or was encouraged to or discouraged from obtaining legal advice. If the employee provided input in negotiating the terms of the agreement, courts will take that into consideration as well. Finally, a court will evaluate whether the employer offered the employee some form of consideration, such as severance pay, to which he was not already entitled by law or contract.
In discussing what sort of language is clear and specific enough to be understandable to an employee, the guidance cites a federal court decision involving a company in New Mexico. The waiver in that case stated, “I . . . hereby release and discharge [my employer] from any and all claims which I have or might have, arising out of or related to my employment or resignation or termination.” The employee who signed the waiver later sued, claiming race and national origin discrimination. The court allowed the case to proceed because the agreement he signed didn’t specifically mention the release of employment discrimination claims.
The employee had only a high-school education and was unfamiliar with the law. He asserted that he believed he was merely releasing claims arising from his voluntary termination and the benefits package he accepted. The court found that “not an unreasonable conclusion.”
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EEOC charges not waivable
The guidance also addresses the fact that an employee who has signed a waiver of discrimination claims cannot, by law, be prohibited from filing an EEOC charge alleging discrimination based on a protected status like age, race, sex, or disability. The EEOC has taken the position that charge-filing rights aren’t waivable even for sufficient consideration. The guidance does acknowledge, however, that courts have held that employees who sign waivers can forfeit their right to recover from the employer either in their own lawsuit or in any suit filed on their behalf by the EEOC.
The guidance discusses what happens when an employee who has signed a waiver files an EEOC charge. The employee doesn’t have to return the severance pay at that time, even if the release included a waiver of charge-filing rights, because such a provision is unenforceable, according to the EEOC. The next question, then, is whether the employee must return any severance pay he received before filing a discrimination claim.
The U.S. Supreme Court has held that an employee isn’t required to return severance pay as a prerequisite to filing an age discrimination claim. The answer is less clear under Title VII and the Americans with Disabilities Act. Some courts have held that the employee cannot challenge the validity of his waiver without first returning any consideration he received, while other courts have allowed employees who haven’t returned severance payments to proceed with their claims.
Special requirements for age bias claims
The guidance provides some specific information on waivers of age discrimination claims since they are subject to special requirements. The Older Workers Benefit Protection Act (OWBPA) lists seven factors that must be satisfied for an age discrimination waiver to be considered “knowing and voluntary”:
- The waiver must be written in a manner that can be clearly understood. The EEOC states that the document must be geared to the level of comprehension and education of the average employee receiving the severance offer. The guidance cites a situation in which an employee asked his supervisor if certain language in the waiver he was asked to sign meant that he could still sue the company if he only asserted claims under the ADEA. The employer declined to provide the employee with any legal advice on this point. The court found that even though he had accepted the severance pay, he could still proceed with an age discrimination claim because the agreement wasn’t written in a manner calculated to be understood.
- The waiver must specifically refer to rights or claims arising under the ADEA. The EEOC’s position is that the waiver must expressly spell out the “Age Discrimination in Employment Act” by name.
- The waiver must advise the employee in writing to consult an attorney before accepting the agreement. The guidance cites an example of release language stating, “I have had reasonable and sufficient time and opportunity to consult with an independent legal representative of my own choosing before signing this Complete Release of All Claims.” That language was deemed insufficient because it didn’t proactively advise the employee to consult with an attorney; it merely required him to affirm that he had a chance to do so if he wished.
- Employees must have at least 21 days to consider the waiver. The EEOC notes that if significant changes are made to the final offer, the 21-day clock restarts.
- The waiver must give the employee seven days to revoke his signature. The seven-day revocation period cannot be waived by the employee.
- The waiver must not cover rights and claims arising after the date on which it is executed.
- The waiver must be supported by consideration beyond any compensation or benefit to which the employee is already entitled.
The guidance discusses other factors that may make an age claim waiver invalid and cites a situation in which an employee was told that his termination resulted from a reorganization. He signed a waiver in exchange for severance pay and later learned that a younger person had been hired to do his former job. After he filed a lawsuit alleging age discrimination, the company claimed the real reason for his dismissal was poor performance. The employee successfully argued that his waiver was invalid because he was offered a fraudulent reason for his discharge and acted on that information in signing the waiver.
On a more favorable note for employers, the guidance also addresses whether an employee’s financial problems and loss of employment constitute “duress” that would render a severance agreement invalid. Courts have held that the fact that an employee who was greatly in need of the severance payment he was offered isn’t sufficient to invalidate a waiver.
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Checklist for employees
The appendix to the guidance contains a checklist for employees to follow when they’re offered a severance agreement. The EEOC advises employees to:
- make sure they understand the agreement;
- check for deadlines and act promptly;
- consider having an attorney review the agreement;
- make sure they understand what they’re giving up in exchange for severance pay or benefits; and
- review the agreement to ensure it doesn’t involve a release of nonwaivable rights, which include:
- the right to file a charge, testify, assist, or cooperate with the EEOC;
- claims arising after the date the waiver is signed; and
- claims for unemployment or workers’ compensation benefits, claims under the Fair Labor Standards Act, health insurance benefits under COBRA, or claims involving vested benefits under a retirement plan governed by the Employee Retirement Income Security Act (ERISA).
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Employers should familiarize themselves with the EEOC’s guidance and use it as a checklist to evaluate whether their severance agreements are likely to stand up in court. Thoroughly reviewing your severance agreements before offering them to employees can prevent frustration down the road if an employee who has received severance pay files a lawsuit against your company arguing that his release is invalid.