Waivers of Discrimination Claims in Employee Severance Agreements
Severance Agreements and Release of Claims
If your employer decides to terminate your job, you may be given a severance agreement. This agreement may require you to waive your right to sue for wrongful termination based on age, race, sex, disability, and other types of discrimination. Most signed waivers are enforceable if they meet certain contract principles and statutory requirements. However, an employer cannot lawfully limit your right to testify, assist, or participate in an investigation, hearing, or proceeding conducted by the EEOC. Also, an employer cannot lawfully prevent you from filing a charge of discrimination with the agency. Additionally, if you do file a charge, an employer cannot lawfully require you to return the money or benefits it gave you in exchange for waving your rights. This information is not intended to cover all of the issues that arise when your employer informs you that you are being terminated or laid off. However, this may help you decide whether or not to sign a waiver.
Severance Agreements Defined
- A severance agreement is a contract, or legal agreement, between an employer and an employee that specifies the terms of employment termination, such as a layoff.
- Sometimes this agreement is called a “separation” or “termination” agreement or “separation agreement general release and covenant not to sue.”
- Like any 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.
- To file a claim, there must be an addition to any of the employee's existing entitlements, such as something of value additionally offered. An example of consideration would be a lump sum payment of a percentage of the employee’s annual salary or periodic payments of the employee’s salary for a specified period of time after termination. You may not sue for something you are already entitled to as an employee, such as pension benefit or payment for vacation or sick leave.
- The employee’s signature and retention of the consideration generally indicates acceptance of the terms of the agreement.
What does a severance agreement look like?
A severance agreement often is written like a contract or letter and generally includes a list of numbered paragraphs setting forth specific terms regarding the date of termination, severance payments, benefits, references, return of company property, and release of claims against the employer.
If your employer decides to terminate you, it may give you a severance agreement similar to the one that follows:
Example 1: This letter sets forth our agreement with respect to all matters that pertain to your employment and separation from employment by [your organization] (“the Company”).
- Termination of Employment. You will cease to be employed by the Company on X date.
- Severance Payments. The Company agrees to pay you X weeks of severance pay. The severance pay will be in addition to the payment of unused accrued vacation pay to which you are entitled. You may elect to receive this severance pay in the form of a lump sum payment, or spread it over a number of weeks, less applicable deductions for taxes.
General Release. You agree that the consideration set forth above, which is in addition to anything of value to which you are or might otherwise be entitled, shall constitute a complete and final settlement of any and all causes of actions or claims you have had, now have or may have up to the date of this agreement including, without limitation, those arising out of or in connection with your employment and/or termination by the Company pursuant to any federal, state, or local employment laws, statutes, public policies, orders or regulations, including without limitation, the Age Discrimination in Employment Act, Title VII of the Civil Rights Act, the Americans with Disabilities Act, and [certain state] laws.
Agreements that specifically cover the release of age claims will also include additional information intended to comply with OWBPA requirements.
When a Waiver is Valid
Validity of Waivers
Most employees who sign waivers in severance agreements never attempt to challenge them. Some discharged employees may feel that they have no choice but to sign the waiver, even though they suspect discrimination or they may learn something after signing the waiver that leads them to believe they were discriminated against during employment or wrongfully terminated.
If an employee who signed a waiver later files a lawsuit alleging discrimination, the employer will argue that the court should dismiss the case because the employee waived the right to sue, and the employee will respond that the waiver should not bind her because it is legally invalid. Before looking at the employee’s discrimination claim, a court first will decide whether the waiver is valid. If a court decides that the waiver is invalid, it will decide the employee’s discrimination claim. However, it will dismiss the claim if it finds that the waiver is valid.
A waiver in a severance agreement generally is valid when an employee knowingly and voluntarily consents to the waiver. The rules regarding whether a waiver is knowing and voluntary depend on the statute under which the suit has been brought. The rules for waivers under the Age Discrimination in Employment Act are defined by statute – the Older Workers Benefit Protection Act (OWBPA). Under other laws, such as Title VII, the rules are derived from case law. Also, a valid agreement also must: (1) offer some sort of consideration, such as additional compensation, in exchange for the employee’s waiver of the right to sue; (2) not require the employee to waive future rights, and (3) comply with applicable state and federal laws.
To determine whether an employee knowingly and voluntarily waived his discrimination claims, some courts rely on traditional contract principles and focus primarily on whether the language in the waiver is clear.
Most courts, however, look beyond the contract language and consider all relevant factors – or the totality of the circumstances -- to determine whether the employee knowingly and voluntarily waived the right to sue. These courts consider the following circumstances and conditions under which the waiver was signed:
- 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.
- Although your severance agreement may use broad language to describe the claims that you are releasing, you can still file a charge with the EEOC if you believe you were discriminated against during employment or wrongfully terminated.
- In addition, 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.
Because provisions in 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, you cannot be required to return your severance pay - or other consideration - before filing a charge.
- 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.
- Under Title VII, the ADA, or the EPA, however, the law is less clear. 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.
- Even if a court does not require you to return the consideration before proceeding with your lawsuit, it may reduce the amount of any money you are awarded if your suit is successful by the amount of consideration you received for signing the waiver.
When You Get a Severance Agreement
What to Do When Your Employer Offers You a Severance Agreement
- Read the agreement to see if it is clear and specific. Be sure it does not contain 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 language or long and complex sentences.
- 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 at 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.)
- Even if you are parting amicably with your employer, you may want to seek others' 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.
- The main benefit to signing an agreement is that you should receive a cash payment or benefits in exchange for signing away your right to later bring 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 of bringing suit.
- 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).
Waivers of ADEA Claims
Waivers of ADEA Claims
In 1990, Congress changed the ADEA by adding the Older Workers Benefit Protection Act (OWBPA) to clarify that age discrimination is unlawful. OWBPA establishes specific requirements for a “knowing and voluntary” release of ADEA claims to guarantee that an employee has every opportunity to make an informed choice whether or not to sign the waiver. There are additional disclosure requirements under the statute when waivers are requested from a group or class of employees.
OWBPA lists seven factors that must be satisfied for a waiver of age discrimination claims to be considered “knowing and voluntary.”
At a minimum:
- A waiver must be written in a manner that can be clearly understood. EEOC regulations emphasize that waivers must be drafted in plain language geared to the level of comprehension and education of the average individual(s) eligible to participate. Usually this requires the elimination of technical jargon and long, complex sentences. In addition, the waiver must not have the effect of misleading, misinforming, or failing to inform participants and must present any advantages or disadvantages without either exaggerating the benefits or minimizing the limitations.
- A waiver must specifically refer to rights or claims arising under the ADEA. EEOC regulations specifically state that an OWBPA waiver must expressly spell out the Age Discrimination in Employment Act (ADEA) by name.
- A waiver must advise the employee in writing to consult an attorney before accepting the agreement.
- A waiver must provide the employee with at least 21 days to consider the offer. The regulations clarify that the 21-day consideration period runs from the date of the employer’s final offer. If material changes to the final offer are made, the 21-day period starts over.
- A waiver must give an employee seven days to revoke his or her signature. The seven-day revocation period cannot be changed or waived by either party for any reason.
- A waiver must not include rights and claims that may arise after the date on which the waiver is executed. This provision bars waiving rights regarding new acts of discrimination that occur after the date of signing, such as a claim that an employer retaliated against a former employee who filed a charge with the EEOC by giving an unfavorable reference to a prospective employer.
- A waiver must be supported by consideration in addition to that to which the employee already is entitled. If a waiver of age claims fails to meet any of these seven requirements, it is invalid and unenforceable. In addition, an employer cannot attempt to “cure” a defective waiver by issuing a subsequent letter containing OWBPA-required information that was omitted from the original agreement.
Even when a waiver complies with OWBPA’s requirements (see Question and Answer 6 above), a waiver of age claims, like waivers of Title VII and other discrimination claims, will be invalid and unenforceable 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.
Although severance packages often are structured differently for different employees depending on position and tenure, an employer is not required to give you a greater amount of consideration than is given to a person under the age of 40 solely because you are protected by the ADEA.
Your employer may offset money it paid you in exchange for waiving your rights if you successfully challenge the waiver, prove age discrimination, and obtain a monetary award. However, your employer’s recovery may not exceed the amount it paid for the waiver or the amount of your award if it is less.
EEOC regulations state that an employer cannot “abrogate,” or avoid, its duties under an ADEA waiver even if you challenge it. Because you have a right under OWBPA to have a court determine a waiver’s validity, it is unlawful for your employer to stop making promised severance payments or to withhold any other benefits it agreed to provide.
When employers decide to reduce their workforce by laying off or terminating a group of employees, they usually do so pursuant to two types of programs: “exit incentive programs” and “other employment termination programs.” When a waiver is offered to employees in connection with one of these types of programs, an employer must provide enough information about the factors it used in making selections to allow employees who were laid off to determine whether older employees were terminated while younger ones were retained.
- Typically, an “exit incentive program” is a voluntary program where an employer offers two or more employees, such as older employees or those in specific organizational units or job functions, additional consideration to persuade them to voluntarily resign and sign a waiver.
- An “other employment termination program” generally refers to a program where two or more employees are involuntarily terminated and are offered additional consideration in return for their decision to sign a waiver.
Whether a “program” exists depends on the facts and circumstances of each case; however, the general rule is that a “program” exists if an employer offers additional consideration – or, an incentive to leave – in exchange for signing a waiver to more than one employee. By contrast, if a large employer terminated five employees in different units for cause (e.g., poor performance) over the course of several days or months, it is unlikely that a “program” exists. In both exit incentive and other termination programs, the employer determines the terms of the severance agreement, which typically are non-negotiable
Your waiver must meet the minimum OWBPA "knowing and voluntary" requirements. In addition, your employer must give you - and all other employees who are being laid off with you - written notice of your layoff and at least 45 days to consider the waiver before signing it. Specifically, the employer must inform you in writing of:
- the "decisional unit" -- the class , unit, or group of employees from which the employer chose the employees who were and who were not selected for the program
The particular circumstances of each termination program determine whether the decisional unit is the entire company, a division, a department, employees reporting to a particular manager, or workers in a specific job classification.
- eligibility factors for the program;
- the time limits applicable to the program;
- the job titles and ages of all individuals who are eligible or who were selected for the program (the use of age bands broader than one year, such as "age 40-50" does not satisfy this requirement) and the ages of all individuals in the same job classifications or organizational unit who are not eligible or who were not selected.