Recent Court Decisions Require Greater Focus On Release Agreements And RIFs

Tuesday, November 1, 2005 - 01:00

Corporate counsel frequently are called upon to advise on individual or group termination decisions and draft separation agreements that are provided to departing executives or larger groups of employees who are being laid off in a reduction in force. As will be discussed below, recent court decisions have made this process increasingly complex.

Adverse Impact Claims Now Universally Recognized Under The ADEA

Before separation agreements are even provided to departing employees, the underlying termination decision(s) must be evaluated carefully to evaluate the risks of exposure if there is legal action. Obviously, the potential liability is often greater when a company is implementing a reduction in force.

Until recently, there was a split among the federal judicial circuits over whether claims of so-called "disparate impact" discrimination were recognized under the Age Discrimination in Employment Act (the "ADEA"), the federal law that prohibits discrimination based on age against workers who are 40 or older. Under this theory, facially neutral employment practices that have a disproportionately adverse impact on a protected group, such as race or age, are considered unlawful, unless they are justified by certain limited defenses.

In Smith et al. v. City of Jackson, Mississippi, et al., No. 03-1160 (U.S. March 30, 2005), the Supreme Court held that employment practices that have an adverse impact on older workers, even if unintended, may be unlawful. However, the Court confirmed that the ADEA permits employers to make differentiations if they are based on reasonable factors other than age ("RFOA"). 29 U.S.C. § 623 (f)(1).

The Court considered a pay plan that provided proportionately higher wage increases to more junior police officers, because the City was having a difficult time attracting and retaining new and junior officers under its current wage scale, and surveys indicated that its wage rates for junior officers were not competitive. The Court noted the similarity in language between the ADEA and Title VII of the Civil Rights Act of 1964, under which adverse impact claims long have been recognized.

However, the Court emphasized that two language differences between the ADEA and Title VII make it clear that disparate impact liability under the ADEA is narrower than it is under Title VII. The first is the RFOA provision, which is absent from Title VII. The second is the amendment to Title VII contained in the Civil Rights Act of 1991, which requires an employer to show that a challenged employment practice that has an adverse impact is "job related for the position in question and consistent with business necessity." 42 U.S.C. § 2000e-2(k).

Turning to the case before it, however, the Court rejected the plaintiffs' claims because they did not identify any specific practice within the pay plan that had an adverse impact on older workers. According to the Court, the employee is "responsible for isolating and identifying the specific employment practices that are allegedly responsible for any observed statistical disparities." The Court also found that the pay plan was based on RFOA.

The City of Jackson case may encourage more claims of adverse impact age discrimination. Nevertheless, plaintiffs in these cases will face several difficult challenges. First, they will have to show that there is a statistically significant adverse impact on older workers. Second, they will have to identify a specific employment practice that causes the alleged disparity. And finally, the employer will be able to defeat the claim if it can show that the employment practice was based on RFOA.

Before implementing a reduction in force, employers should first consider any viable alternatives, such as attrition or voluntary termination programs, which may accomplish the same goal with less risk. Assuming the RIF must go forward, however, the employer should focus on the positions and skills it needs to operate its business after the layoffs, and use legitimate nondiscriminatory criteria that are as objective as possible to select the positions for elimination. The focus should be on the elimination of positions and functions, not on people. After preliminary decisions are made, the employer should conduct an adverse impact analysis for age and other protected factors, such as race and sex, and if there is a disparate impact, determine if the decisions are justified by the available defenses.

Releases Of FMLA Claims May Not Be Valid

It is common for employers who are terminating one or more employees to provide them with severance benefits in exchange for a release of claims. Recent court decisions have indicated that these separation agreements must be drafted with great care.

In Taylor v. Progress Energy, Inc., No. 04-1525 (4th Cir. July 20, 2005), the Fourth Circuit ruled that a release of claims under the Family and Medical Leave Act (the "FMLA") is not valid unless it is approved by a court or the U.S. Department of Labor ("DOL").

In Taylor, an employee who had missed several weeks of work due to a medical condition and received a poor performance evaluation for productivity was laid off during a reduction in force. In exchange for severance benefits, she signed a general release of claims against her employer. Nevertheless, she later sued her employer for violation of the FMLA. After the district court granted summary judgment for the employer, Taylor appealed to the Fourth Circuit.

Taylor argued that the DOL's regulations under the FMLA made her release invalid. Indeed, 29 C.F.R. § 825.220(d) provides in pertinent part that "[e]mployees cannot waive, nor may employers induce employees to waive, their rights under [the] FMLA." Relying on a decision by the Fifth Circuit in Faris v. Williams WPC-I, Inc., 332 F.3d 316 (5th Cir. 2003), the district court had reasoned that the DOL's regulation prohibits only the prospective waiver of substantive rights to take job protected leave under the FMLA. According to the district court, the regulation did not apply to the retrospective waiver or release of FMLA claims, or to the waiver or release of claims that an employer has discriminated or retaliated against an employee for the exercise of her substantive FMLA rights.

The Fourth Circuit held that "[t]he regulation's plain language prohibits both the retrospective and the prospective waiver or release of an employee's FMLA rights. In addition, the regulation applies to all FMLA rights, both substantive and proscriptive (the latter preventing discrimination and retaliation)." Because the FMLA's enforcement scheme is similar to that under the Fair Labor Standards Act (the "FLSA"), the Fourth Circuit accepted the DOL's position that the regulation "permits the waiver or settlement of FMLA claims only with the prior approval of the DOL or a court." In so holding, the Fourth Circuit noted that the Supreme Court consistently has held that FLSA rights cannot be waived by a private agreement between an employer and an employee, but only when supervised by the DOL or a court.

It is unclear what, if any, effect this decision will have. In the Fourth Circuit (covering Maryland, North Carolina, South Carolina, Virginia and West Virginia), employers should examine their release agreements to determine if they create issues under the FMLA. In the Fifth Circuit (covering Mississippi, Louisiana and Texas), releases of FMLA claims should continue to be valid. Ultimately, issues of this nature often are resolved by the Supreme Court or Congress.

Until this issue is resolved one way or the other, employers should consider a number of alternatives. First, at least in those states covered by the Fourth Circuit, they could exclude FMLA claims from their standard release agreements, particularly where there is little or no risk of an FMLA claim being asserted. Second, they could include a severability clause in their release agreements, to ensure that the entire agreement is not invalidated if a release of FMLA claims is considered unenforceable. Third, they could consider a "tender back" provision that requires the refund of severance benefits in the event an employee asserts released claims or in the event the release is deemed invalid. Such provisions, however, may not be enforceable in all jurisdictions. Finally, employers can consider obtaining DOL or court approval of releases of FMLA claims.

When Is A Release Knowing And Voluntary For ADEA Purposes?

The Older Workers' Benefits Protection Act ("OWBPA") requires that releases of ADEA claims be "knowing and voluntary," and in order to meet that standard, they must satisfy certain enumerated requirements, 29 U.S.C. § 626(f). Among other things, the OWBPA requires that if the employee's waiver is made in connection with an exit incentive or other employment termination program, the employer must provide written information concerning the group of individuals or "decisional unit" covered by the program as well as any eligibility factors.Two recent cases indicate that employers must be careful to comply with these requirements.

In Kruchowski v. The Weyerhauser Co., 2005 WL 2212312 (10th Cir. September 13, 2005) a group of 31 employees who were laid off and signed release agreements in exchange for severance benefits sued Weyerhauser for age discrimination. After the district court ruled for the company on summary judgment, the plaintiffs appealed to the Tenth Circuit, which held that the releases were invalid with respect to ADEA claims in two respects.

First, the releases incorrectly identified the "decisional unit" as all salaried employees: it turned out that the unit actually consisted of all salaried employed who reported to the manager of the mill in question. Second, the court found that the notices failed to adequately describe the "eligibility factors" used in making the layoff decisions, which apparently included leadership abilities, technical skills, behavior of each employee and whether each employee's skills matched the Company's business needs. This ruling is very troubling, because historically, many employers have not disclosed the actual criteria they considered in selecting employees for layoffs in their OWBPA notices. Moreover, the EEOC's regulations do not seem to require this level of detail. Indeed, the EEOC regulations suggest that it is sufficient to advise employees who are eligible for the termination program, and not the reasons why they were selected. See 29 C.F.R. § 1625.22.

In Hartger v. IBM, 2005 WL 2095774 (N.D. Tex. August 31, 2005), a former IBM employee who was laid off and signed a release in exchange for six months of pay and benefits filed a claim against the company under the ADEA. Citing the release, which expressly referenced ADEA claims, the company filed a motion to dismiss. The Court denied the motion, because in her complaint, Hartger simply alleged that she understood she executed a "limited release of legal rights," not including her age discrimination claim. The Court noted that on a motion to dismiss, the court must accept all of the well-pleaded allegations to be true and view them in the light most favorable to the plaintiff. The Court also noted that it was IBM's burden to prove that the release was knowing and voluntary, and it failed to come forward with proof that it had complied with all of the other requirements of the OWBPA. Nevertheless, the court observed that the Company might still be able to prevail on a motion for summary judgment.

Lessons Learned

Termination decisions, whether individual or group, are the type of employment actions that generally present the greatest amount of exposure from an employment law perspective. Although the risks of potential liability can be managed effectively through separation agreements and releases, recent court decisions make it clear that these documents must be drafted very carefully to ensure they are enforceable.

Michael L. Stevens is a Partner in the Labor and Employment Law Group in the Washington, DC office of Arent Fox PLLC. He may be reached at (202) 857-6382.

Please email the author at stevens.michael@arentfox.com with questions about this article.