white papers  |  severance and release agreements in a rif

Severance and Release Agreements in a RIF

Presented at June 2009 – ABA Annual Meeting
by Vanessa M. Kelly
Schwartz Kelly, LLC

Severance agreements with a full release of claims are an important way to contain legal risk in the event of a reduction in force (RIF). Such severance and release agreements can be a "win-win" for both employee and employer. The employee receives financial and perhaps other benefits to cushion the loss of employment. Employers obtain peace of mind knowing the risk of litigation has been minimized. But to be effective, the severance and release agreements must meet the legal requirements set by federal and state laws. And employers must realize that although not every claim can be waived, with careful drafting, risks can be limited.

Consideration Concerns

The severance agreement and release is a contract. And like all contracts, it must be supported by consideration – there must be an exchange of benefits or detriments by both parties. As such, it is important to appreciate the consideration being exchanged. The employee is giving up his or her right to sue. Typically, the employer is providing severance pay and other benefits, such as health care continuation or outplacement services. But, the severance must be something that the employee would otherwise not be entitled to receive. Thus, in the planning process, it is important to determine if the employer has any existing severance policies, formal or informal, that apply in the event of termination. If so, the consideration must be something more than the employee would receive under the traditional severance policy.

Example: ABC's Company Employee Handbook states: "Employees who are "laid off" or terminated other than for cause, will receive one week salary for each year of service as severance. In this case, any release would have to offer additional pay or benefits to be effective.

Example: ABC's Company has an unwritten practice of paying employees who are laid off or terminated without cause one week severance for each year of service. Even though not in writing, this practice means that the consideration offered in exchange for a release of claims will need to be in excess of that provided under the informal company practice.

Drafting Concerns

Releases of claims in the employment context are very different than releases used in personal injury, contract or property damage cases. The United States Supreme Court held in Alexander v. Gardner-Denver Co., that a release of claims under Title VII of the Civil Rights Act must be "knowing and voluntary."¹ While the Supreme Court articulated the standard, it failed to flesh out the details of what a knowing and voluntary waiver looks like. Since Alexander v. Gardner-Denver Co., federal courts have struggled with the standard. Today, most circuit courts apply a "totality of the circumstances" test to determine if a release is knowing and voluntary.² Under the totality of the circumstances test, courts examine the following, non-exhaustive list of factors:

1. The employee's education and business experience;
2. The amount of time the employee had, or had access to, the waiver before signature;
3. The role of the employee in deciding the terms of the severance agreement;
4. The clarity of the waiver;
5. Whether the employee actually consulted with, or was represented by, legal counsel; and
6. Whether the employee received consideration for the waiver that exceeded any benefits to which he or she was already entitled.³

As such, when drafting waiver of claims, the attorney should keep these principles in mind.

Drafting waiver of claims under the Age Discrimination in Employment Act (ADEA) requires additional details to ensure a knowing and voluntary release. ADEA prohibits discrimination of employment on the basis of age and applies to employees or applicants aged forty and above.⁴ In 1990, Congress amended ADEA to include the waiver provisions of Title II, The Older Worker's Benefit Protection Act (OWBPA), for any waivers of age discrimination claims. In order for a release of age discrimination claims to be effective, the release must:

1. Be in writing and understandable;
2. Specifically refer to ADEA rights or claims;
3. Not waive rights or claims that may arise in the future;
4. Be in exchange for valuable consideration;
5. Advise the individual in writing to consult an attorney before signing the waiver; and
6. Provide the individual at least 21 days to consider the agreement and at least seven days to revoke the agreement after signing it.⁵

Importantly, the release must be written in a manner that is understandable to employees who typically will be asked to sign it. Employers should take care to avoid technical language or legalese and avoid long complex sentences. The release cannot have the effect of misleading or confusing the signing employee.

If a release is used as part of a RIF, that is, a group of employees will be asked to sign waivers, ADEA and OWBPRA impose additional requirements. First, the employee must be given 45 days to consider the agreement. Again, the employee has 7 days within which to revoke his or her acceptance of the agreement. Employees may sign the release before the expiration of the review period, but they may not be threatened or coerced into doing so. There cannot be any pressure to sign the release before expiration of the review period, e.g. suggestions of taking the offer off the table.

Additionally, for group releases, the employer must provide the affected employees with information about the voluntary or involuntary program. The information includes:

1. the class, unit or group of individuals covered by the program;
2. any eligibility factors for the program;
3. time limits applicable to the program;
4. job titles and ages of all individuals eligible or selected for the program; and
5. the ages of all individuals in the same job classification or organizational unit who were not selected for participation in the program.

The regulations interpreting the OWBPA amendments to ADEA make clear that the issue of who should receive information about the RIF program is case-by-case and driven by the employer's unique "decisional unit." It is often difficult to characterize the potential pool of employees who may have been considered for the RIF, especially when employees perform multiple functions or employees who perform the same function are located at multiple locations.⁶

Example: Company A employs 30 customer service representatives at 5 locations. It has decided to offer a voluntary termination program to eliminate 15 positions. The affected decisional unit is all the customer service representative scattered among the 5 offices. Thus, program information should include the ages and titles of all the customer service representatives within Company A.

Example: But compare Company B's decision to close only one customer service office. Then the affected decisional unit is only the one office and all customer service representatives are subject to the program. There are no other comparable employees who were not selected for participation in the involuntary RIF.

The importance of meeting the requirements for an effective ADEA waiver is demonstrated by ADEA's prohibitions on tender back of consideration. If an employee challenges a waiver of an age claim, the claimant need not return the severance pay. The fact that the severance was received does not "ratify" a faulty waiver. Some courts may, but are not required to, use the severance already paid as a set-off against any additional monies received by the employee as damages.⁷

Claims That Are Not Waived in a Release

Importantly, claims under the Fair Labor Standards Act (FLSA) cannot be waived without court or Department of Labor supervision.⁸ Additionally, many states have adopted legislation that models the FLSA's prohibitions on waivers. Thus, many state wage and hour claims likewise cannot be waived without court or agency approval.⁹ While not effective as a release, the attorney should consider drafting language in the release where the employee acknowledges that he or she has been paid all wages, compensation, or benefits.

Example: By signing this Agreement, you affirm that you have been paid and have received all compensation, wages, bonuses, commissions, or benefits to which you may be entitled and that no other compensation, wages, bonuses, commissions or benefits are due to you, except as described in this Agreement.

Confidential Information

If the employee who is separated has knowledge of the company's confidential or proprietary information and has not signed a nondisclosure agreement, consider adding provisions to the release prohibiting the employee from using or disclosing this information. The waiver agreement may be used to reinforce the importance of promises that the employee has already made concerning confidential information. The employee can reaffirm those obligations in the severance and release agreement. Importantly, if the employee has already signed a nondisclosure agreement or other restrictive covenant take care in drafting so as not to void the protections of those other agreements. Typically waivers include integration clauses; i.e. a recitation that this is the only agreement that governs separation of employment. If there are other agreements that are designed to survive the termination of employment make sure there is a carve-out for these agreements in the waiver document.

Negotiation of the Release

Negotiation of a waiver and severance agreement by the employee or his or her attorney is not necessarily an inconvenience. Negotiation evidences that the employee has read and understood the agreement. And, significantly, it shows the employee has had a voice in the bargain. Where the negotiation is done by an employee's lawyer, it bolsters the knowing and voluntary nature of the agreement. Consider as options to negotiation of the severance pay, other supplemental benefits. For example, the employer can negotiate a positive employee-specific reference – departing from its typical neutral reference policy. It can provide outplacement training or agree not to contest unemployment claims.

Summary

Severance agreements with waivers can be an effective tool in the RIF process. As is true of the RIF itself, the waivers need careful planning. State and federal law should be consulted to ensure compliance with the legal aspects for releasing claims. Care should be taken to consider the employer's overall employment policies and practices, both written and non-written. The agreement must clearly communicate what is at stake. Information exchanged should be done with care and accuracy. And the process for giving employees the agreements and fielding any questions or concerns should be planned well in advance. If done well, severance agreements and waivers can soften the blow of a termination and preserve employer good will.

1. Alexander v. Gardner-Denver, 415 U.S. 36 (1974).
2. Coventry v. United States Steel Corp., 856 F.2d 514 (3d Cir. 1988); Stroman v. W. Coast Grocery Co., 884 F.2d 458, 462 (9th Cir. 1989); Bormann v. AT&T Communications, Inc., 875 F.2d 399, 403 (2d Cir. 1989); Torrez v. Public Service Co., 908 F.2d 687 (10th Cir. 1990); Gormin v. Brown-Forman Corp., 963 F.2d 323 (11th Cir. 1992); Pierce v. Atchison, Topeka and Santa Fe Railway Co., 65 F.3d 562 (7th Cir. 1995); Adams v. Philip Morris, Inc., 67 F.3d 580 (6th Cir. 1995); Smart v. Gillette Co. Long-Term Disability Plan, 70 F.3d 173 (1st Cir. 1995). Some of the circuit courts, the fourth and the eighth for example, follow a contract based approach to analyzing the legal effect of a release. Lancaster v. Buerkle Buick Honda Co., 809 F.2d 539 (8th Cir. 1987); O'Shea v. Comm. Credit Corp., 930 F.2d 358 (4th Cir. 1991).
3. Coventry, 856 F.2d at 523.
4. 29 U.S.C. § 623, 631 (a).
5. 29 U.S.C. § 626 (f); see, also 29 C.F.R. § 1625.22.
6. See 29 C.F.R. § 1625.22(f) for detailed information relating to the Informational requirements.
7. 29 C.F.R. § 1625.23.
8. 29 U.S.C. § 216(c); Brooklyn Savings Bank v. O’Neill, 324 U.S. 697, 704 - 07 (1945).
9. See, e.g., New Jersey Statutes Annotated 34:11-4.7.