A Very Lawful Quid Pro Quo

Thursday, January 1, 2004 - 01:00

Introduction

If you pay an employee severance, you risk having your severance fuel the litigation against your organization, unless you make a general release for the quid pro quo for the severance. This kind of quid pro quo is both lawful and desirable. This article provides general guidelines on when releases are enforceable and parameters for their content.

The Issue Of Consideration

In order for a release to be enforceable, it must be supported by "consideration." This means something to which the employee is not already legally entitled. Consequently, in determining whether an employer can obtain a valid release, the first issue to be resolved is whether the employee is entitled to any severance in the absence of the release.

As a general rule, employees are not entitled to severance upon the termination of their employment. However, while the exception and not the rule, a few states have laws which mandate that severance be paid upon termination of employment under certain limited circumstances.

Even in the absence of a statutory mandate, an employer can create enforceable obligations for it to provide severance in three ways: (i) the employer's unilaterally adopted severance plan, (ii) a collective bargaining agreement, or (iii) an individual employment agreement.

If an employee is entitled to severance under any of the circumstances set forth above, an employer generally cannot require that the employee sign a release to get the severance to which he or she already is entitled. Failure to provide the severance without a release would be actionable.

Plus, even if the employee were to sign the release, the release would not be enforceable for lack of consideration. For this reason, it is generally recommended that severance plans, as well as employment agreements which provide for severance, require a general release as a condition precedent to payment.

The Release

Ordinarily, it is desirable for the release to be draft as broadly as possible so that it covers any and all conceivable claims, known or unknown, asserted or unasserted. In addition, the release should cover not only the legal entity by which the employee was employed but also any related, affiliated, parent or subsidiary entities. If such entities are not referenced, they may not be covered.

But the release should not be limited to corporate entities. Because individuals sometimes are sued in their personal capacities, they too should be covered.

While the release should be drafted broadly in terms of who is covered by it, the release should not be unlimited in terms of the time frame it covers. That is, the release cannot cover prospective claims which arise after its execution.

The Older Workers' Benefit Protection Act (OWBPA), which sets forth specific requirements with regard to waivers of age claims, expressly provides that a release of age claims will not enforceable if it covers claims which arise after the release is executed. (29 U.S.C. & 626(f)(1)(C)). Independent of the OWBPA, the courts have generally held that releases cannot cover prospective claims.

Accordingly, the release should be clear that it covers only claims arising out of events, occurrences or omissions prior to execution by the employee.

As important as who is protected by the release is what claims are waived by it.

The OWBPA states that a release of age claims will be enforceable only if the release specifically references age claims arising under the Age Discrimination in Employment Act. (29 U.S.C. 626(f)(1)(B)). Accordingly, a general statement that an employee waives all claims arising out of his or her employment and/or the termination of his or her employment will not, in and of itself, cover age claims.

No other federal employment law specifically requires that it be mentioned in order for a waiver of it to be effective. In other words, there is no statutory counterpart to Title VII or the ADA comparable to the OWBPA's application to the ADEA.

Rather, the courts generally determine whether the waiver of the claim at issue was "knowing and voluntary." With regard to both prongs, an employer's position is stronger if the claim it argues has been released is mentioned.

For this reason, even though not mandated per se, an employer is well advised to consider listing in the release some of the more common claims employees bring. Three examples follow:

1. Any claims relating to or arising out of the employee's employment and/or the termination of employment. This should be included, at the very minimum, in every release.

2. Any claims for unpaid or withheld wages, severance, benefits, bonuses, commissions and/or other compensation of any kind. This list should be customized to reflect the employer's compensation program, broadly defined.

3. Any claims for discrimination and/or harassment based on age, sex, race, religion, color, creed, disability, handicap, citizenship, national origin, ancestry, sexual orientation or any other factor protected by federal, state or local law, such as the Age Discrimination in Employment Act, 29 U.S.C. § 621 et seq., the Americans with Disabilities Act, Title VII of the Civil Rights Act, the [name of state non-discrimination law]. Note the reference not only to discrimination but also to harassment as well as the broad list of federal and state laws and corresponding protected groups. The above list is illustrative only and not exhaustive.

State Law Considerations

In drafting the release, employers must consider not only federal but also state and local laws. In some cases, there may be additional state or local requirements or restrictions.

As noted above, it is recommended that the employer make clear in the release that it covers "known and unknown" claims alike. If the release does not make clear that it covers unknown claims, the employee has an argument that it does not cover such claims.

In California, however, it is not enough for an employer simply to include such language. Rather, California has a law which specifically prohibits the waiver of unknown claims, unless the employee waives unknown claims pursuant to the law, which should be referenced in the agreement containing the release. (California Civil Code Section 1542.)

This is but one example highlighting the importance of looking to specific state and local laws in preparing the release.

Time To Execute The Release

The OWBPA sets forth specific requirements for the waiver of age claims. (29 U.S.C.§ 625(f)(1)). For example, in order for a release of age claims to be enforceable, the release must specifically reference age claims arising under the Age Discrimination in Employment Act.

The OWBPA also sets forth time frames for the employee to consider the employer's offer. More specifically, in order for a release of age claims to be enforceable, an employee must be given a minimum of 21 days to consider whether to sign the agreement. If the employee is not expressly told that he or she has 21 days or is given a shorter period of time, the release will not be enforceable as against age claims.

The employee is not required to use the 21 days. The key is that the employee must be given the opportunity to use up to the full 21 days.

Where there is a "group termination," the employee must be given 45 rather than 21 days to decide whether to sign the release. If the employee is not given 45 days to decide, then the release will not be effective as against age claims arising out of a group termination.

The EEOC and the courts have defined "group termination" broadly. It very well could apply to the layoff of as few as 2 employees, even if implemented on different days, if the product of the same decision-making process. (29 C.F.R. §1622(f)(1)(iii)(B)).

If there is a group termination, the employer not only must provide the employees with 45 rather than 21 days, but the employer also generally must provide information to the employees about the ages (not names) and job titles of the employees in the "decisional unit" (i) who were let go and (ii) who were not let go. Generally speaking, the decisional unit is the group of employees considered in deciding whom to let go.

Guidance on how to define the decisional unit and what must be in the decisional unit attachment can be found in 29 C.F.R. § 1625.22(f). This regulation is very detailed and deceptively complex, and therefore, should be read very carefully.

With regard to claims other than for age discrimination, the law generally does not impose a minimum number of days which an employee must be given to consider the employer's offer. There is no counterpart to Title VII or the ADA comparable to the OWBPA's application to the ADEA.

Rather, a more general test applies to non-age claims. The question is whether the release is "knowing and voluntary."

The more time an employee is given to decide whether to sign the agreement, the stronger the employer's argument relative to the "voluntary" prong. For this reason, many employers provide all employees, regardless of age, with 21 days (or 45 days in a group termination). There also may be a psychological benefit to offering all employees the same amount of time, regardless of age. By not treating employees differently based on their ages, the employer downplays the degree to which the law does.

This is not to suggest that a shorter time period may not be enforceable. It very well could be. However, the shorter the time period, the greater the potential legal risk.

Revocation

In order for a release of age claims to be enforceable under the OWBPA, an employee must be given seven days after he or she signs the agreement to revoke the agreement. A revocation period should be included in the agreement if the employer wants to ensure that the release is enforceable as against age claims.

In this regard, the timing of the payments required by the agreement need to be stated relative to the expiration of the revocation period as opposed to execution of the agreement. If they are stated in relation to the execution, then the payments could come due during the revocation period with the concomitant risk of breaching the agreement by not paying or paying and risking that the employee will revoke the agreement after the payments have been made. No revocation period is specifically required other than for age claims. Accordingly, most employers understandably do not offer revocation rights to employees who are under age 40. While offering such rights would provide additional legal protection if the employee does not make a timely election, it may not be worth the countervailing business risk that the employee will make a timely election.

Consultation With Counsel

The OWBPA requires that we advise employees of their right to consult with an attorney before they sign the release. If this is not expressly communicated to the employee, the release won't be effective as against age claims.

Again, outside of age claims, generally, there is no per se requirement that an employee be encouraged to consult with counsel. However, the inclusion of such language may be helpful in showing that the execution of the release was knowing and voluntary.

Some fear that encouraging an employee to consult with an attorney is like inviting a school of sharks to a blood drive. This might be true if the employee wouldn't consider consulting with an attorney if the employer doesn't raise the option.

However, the reality is that mentioning attorneys to them is not likely to encourage legal consultations which they otherwise would not have considered.

Conclusion

Providing severance is quintessential enlightened self-interest on the part of an employer, but only if the employer secures legal peace through a general release. Failure to obtain a general release as a condition precedent to making severance payments to which an employee is not otherwise entitled provides the employer with no legal protection and may end up being the plaintiffs' lawyers' retainer.

Jonathan A. Segal is a Partner in WolfBlock's Employment Services Practice Group. Author's Note: This article should not be construed as legal advice or as pertaining to specific factual situations.

Please e-mail the author at jsegal@wolfblock.com with questions about this article.