Employers Considering Reductions In Force May Need To Reexamine Waiver Disclosures

Tuesday, November 1, 2005 - 01:00

It is common practice for employers engaging in a reduction in force ("RIF") to condition receiving severance benefits on the signing of a release. A recent Tenth Circuit decision has imposed a requirement that may call into question the validity of releases under the Age Discrimination in Employment Act (the "ADEA"). If your company does not include selection criteria for a program-wide downsizing in its disclosures to affected employees, your waiver may be ineffective with respect to claims under the ADEA.

Requirements For A Valid Release

In 1990, Congress enacted the Older Workers Benefit Protection Act (the "OWBPA") as an amendment to the ADEA. The OWBPA resolved disagreements among the courts as to the appropriate standard to determine whether a waiver of rights under the ADEA was "knowing and voluntary." Accordingly, the OWBPA imposes specific requirements for releases covering ADEA claims. As specified in the law, "an individual may not waive any right or claim under [the ADEA] unless the waiver is knowing and voluntary. [A] waiver may not be considered knowing and voluntary unless at a minimum it satisfies certain enumerated requirementsÉ" 29 U.S.C. § 626(f)(1). If the release is offered in connection with an exit incentive or other employment termination program, the OWBPA requires, inter alia, that employees be provided with information relating to the job titles and ages of those eligible for the program and the corresponding information relating to employees in the same job titles who were not eligible or not selected for the program. Additionally, other circumstances, outside the express statutory requirements, may impact whether a waiver under the OWBPA is knowing and voluntary.

Group Termination Program

What is a group termination program contemplated by the OWBPA? Unfortunately, the statutory text of the OWBPA does not define "exit incentive program or other employment termination program." According to the regulations, however, "'other employment termination program' refers to a group or class of employees who were involuntarily terminated and who are offered additional consideration in return for their decision to sign a waiver." 29 C.F.R. § 1625.22(f)(1)(iii)(A). Employers should treat reductions in forces as "other employment termination programs" for purposes of the OWBPA.

Kruchowksi v. The Weyerhaeuser Company1

Caselaw challenging releases under the ADEA is not voluminous. In part that may be because once former employees sign a release they believe they do not have any claims. Moreover, in cases where employees sign releases, two hurdles must be overcome to bring a successful age discrimination claim. First, the release must be found void. Second, the employee must establish a claim of age discrimination. There is no independent cause of action for violating the OWBPA. The remedy for overturning a release under the OWBPA is the ability to pursue an ADEA claim.

Despite these hurdles, 16 out of the 31 former employees selected for a RIF at the Weyerhaeuser Company's Mill facility, who had signed a release, challenged its validity under the OWBPA. At the time of their termination each plaintiff received, among other things, a list of those employees selected for termination and eligible for severance pay and those employees not selected for termination and therefore ineligible for severance pay.

The district court granted Weyerhaeuser's motion for summary judgment. Plaintiffs appealed the decision to the Tenth Circuit. They asserted that Weyerhaeuser failed to disclose, as required under the OWBPA, the correct decisional unit at the time of termination and did not provide any eligibility information. The Tenth Circuit addressed these arguments in that order.

Decisional Unit

Under the OWBPA, in connection with a group termination program, the employer must disclose the class, unit or group of persons considered for termination. This is referred to as the "decisional unit." Weyerhaeuser established the decisional unit as all salaried employees employed at the Mill, but later indicated that the decisional unit was only those salaried employees who reported to the Mill manager. The court found that these were two separate groups and that due to the change in the decisional unit, over ten percent of the employees were omitted from the termination notice provided to affected employees. Because the information Weyerhaeuser provided did not meet the strict requirements of the OWBPA, the Tenth Circuit held that the release was ineffective as a matter of law.

Eligibiliy Factors

The OWBPA also requires the employer to inform affected employees about the "class, unit, or group of individuals covered by [the] program, any eligibility factors for such program, and any time limits applicable to such program." 29 U.S.C. § 626(f)(1)(H)(i). Agreeing with the plaintiffs, the court stated that this information is critical to assessing the viability of a potential ADEA claim. Weyerhaeuser argued that it provided the eligibility factors by delineating the eligible pool as the salaried employees of the Mill. It also argued that the eligibility factors are program-wide parameters for selecting employees for severance, not an individualized personnel review of eligible employees.

Plaintiffs countered, and the Tenth Circuit agreed, that eligibility factors are different from the decisional unit. Relying on a footnote from Massachusetts v. Bull HN Information Systems, Inc.,2 the Circuit Court stated that:

The intent of the statute's information requirements is to alert affected employees to potential age-discrimination claims. [T]he term "eligibility factors" must refer to the factors used to determine who is subject to a termination program, not the factors used to determine who is eligible for severance pay after termination. Kruchowski, 2005 U.S. App. LEXIS 19722, at *12.

In answering interrogatories, Weyerhaeuser revealed that it had utilized factors, such as the leadership abilities, technical skills, and behavior of each employee and whether each employee's skills matched its business needs to determine which employees in the decisional unit to terminate. The Tenth Circuit held that "[t]hese undisclosed eligibility factors were the program-wide parameters for selecting employees for the RIF, [and] [d]efendant's failure to disclose this information rendered the Release ineffective as a matter of law." Id . at *13.

Import Of The Decision Decisional Unit

The Kruchowski decision did not break new ground in this area. Employers should ensure that the information provided to affected employees regarding the decisional unit is accurate. In this regard, employers need to analyze whether the RIF is individual or part of a cumulative program done over time. In the latter case, cumulative information should be provided to the affected employees. Kruchowski demonstrates that courts will continue to check whether the employer is trying to manipulate the information provided to employees to conceal information that would assist employees in assessing a potential ADEA claim.

Eligibility Factors

The Tenth Circuit is the only federal court of appeals to hold that an employer must disclose RIF selection criteria in order to have a valid waiver. How should employers deal with this decision?

There is an argument that the case was wrongly decided, and Weyerhaeuser has filed a petition for reconsideration with the Tenth Circuit. Indeed, the meaning of "eligibility factors" in the context of a RIF is not addressed in the legislative history of OWBPA or federal regulations. If an employer was required to provide selection criteria in a RIF, it should have been expressly stated in the law or at least in the regulations. The court in Kruchowski relied on a footnote in Bull, the only other decision to adjudicate this issue, that was not central to the District of Massachusetts court's decision. Even the Bull court noted that "the plaintiffs have not provided [the court] with any evidence clearly indicating that Bull actually employed program-wide eligibility factors in selecting which employees to terminate in 1998, 1999 and 2000." 143 F.Supp. 2d at 150. Thus, to the extent that program-wide criteria is not used, there may be grounds for not providing in writing each and every affected employee over 40 the individualized reasons why they were selected for the RIF.

Moreover, in Mahaffey et al. v. Amoco Corp.,3 Magistrate Gottschall of the Northern District of Illinois denied a motion finding that the employer's disclosure violated the information requirements of OWBPA where it provided only the names and job titles of those being selected and not selected for the RIF. A former employee challenged the waiver on the basis that the disclosure was misleading in that it included job titles and ages of employees who were transferred as not being impacted by the RIF. The Magistrate considered what level of detail must be provided concerning the employer's decisional process.

The Magistrate found that OWBPA "contains no explicit requirement that terminated employees be informed of all of the various determinations made during the course of an employer's reduction in force." Mahaffey, 1995 U.S. Dist. LEXIS 13766, at *53. Although the plaintiff in that case apparently did not challenge the failure to disclose eligibility factors, the Magistrate's decision may be interpreted to support a more limited reading of the term "eligibility factors" than the one made in Kruchowski.

While the Kruchowski decision is open to criticism, it is not necessarily inconsistent with the spirit and intent of the OWBPA. As stated in Bull the informational requirements "are intended to 'permit older workers,' who might otherwise 'have no information at all regarding the scope of the [employment termination] program or its eligibility criteria [,] . . . to determine whether the program gives rise to a valid claim under the ADEA." 143 F.Supp. 2d at 147.

Clearly, employers in the Tenth Circuit, which covers Wyoming, Utah, Colorado, Kansas and Oklahoma, must follow this decision. However, employers outside these jurisdictions should not ignore this decision. To the extent that program-wide selection criteria or parameters are used in a RIF, such employers should strongly consider providing such information in their disclosure to affected employees.

Of course, any such disclosure must be accurate. This will require employers to identify any such program-wide criteria in advance. It is always a sound practice to review the reasons why individuals were selected for a downsizing and why other employees in the decisional unit were retained. In light of the Kruchowski decision, this becomes an even more significant practice in order to prevent potential liability. If the criteria in a disclosure are not accurate the accompanying release could be deemed invalid. Additionally, plaintiffs could use inaccurate criteria in attempting to establish a claim under the ADEA.

Unfortunately, the OWBPA does not provide guidance on what to do if program-wide criteria parameters are not utilized. What if an employer simply cuts only a fraction of its workforce and allows the individual manager of its departments to make the decisions regarding which employees to terminate using their judgment? In such a case, the decisions are individualized and not made pursuant to specific criteria delineated in a company-wide program. When applied to reductions in force that utilize individualized decision making, the Kruchowski decision imposes an arguably undue burden on the employer to list every factor it may have utilized in making individual selections on employees that are included in a RIF.

In any event, employers considering a RIF need to seek counsel in order to assist them in navigating through these muddy issues. We continue to advise that employers carefully scrutinize the reasons communicated, as well as all written disclosures provided, to employees being terminated in connection with a RIF.

1 No. 04-7118, 2005 U.S. App. LEXIS 19722 (10th Cir. Sept. 13, 2005).

2 143 F.Supp. 2d 134, 147 (D.Mass. 2001).

3 No. 93c4587, 1995 U.S. Dist. LEXIS 13766 (N.D.Ill. Sept. 11, 1995).

The authors are attorneys in the New York-based firm of Davis &Gilbert LLP. Gregg A. Gilman is a Partner in and Co-Chair of the firm's Employment Practices Department. He may be reached at (212) 468-4840. Corey S. Biller, an Associate in the Employment Practices Department, may be reached at (212) 468-4896.

Please email the authors at ggilman@dglaw.com or cbiller@dglaw.com with questions about this article.