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Time to Review Those Severance Agreements!

Whether parting ways with a single employee, or facing a large reduction in force, many employers commonly use severance agreements to clearly outline the terms of the separation, and to preclude future liability. Some companies use “boiler plate” forms for this purpose, and simply insert new names and numbers for each new separation. These standard forms are convenient, but they can also be dangerous. Sometimes changes in the law can render forms obsolete, and not all of these legal developments are well publicized. Consider, for example, the following cases that may have “slipped under the radar.” To put these new cases in context, a brief historical overview is necessary. The most important part of a severance agreement is the employee’s promise to waive or release any claims against the company. Although most employment-related claims may be waived with simple language, waivers of claims under the Age Discrimination in Employment Act (ADEA) must comply with the Older Workers Benefit Protection Act (OWBPA). The OWBPA contains numerous requirements for an enforceable waiver of ADEA claims. These mandatory criteria have not been subject to any significant modification since OWBPA was enacted 15 years ago. Recent federal court decisions, however, require a new look at two OWBPA provisions. Go Talk to a Lawyer! One of the OWBPA’s requirements is “the [employee] is advised in writing to consult with an attorney prior to executing the [waiver].” In the past, this language has not been quoted verbatim in severance agreements. Instead, the statute has been paraphrased, usually in an effort to make the agreement easily understood. For example, many standard severance agreements contain language such as: “Employee acknowledges that he has been advised to consult with an attorney prior to executing this agreement, and has either done so or has freely chosen not to do so.” This provision conveys the same message as the language of the statute, right? Wrong, say at least two federal courts. 1 The courts took issue with the use of the past tense “has been advised,” finding the use of the past tense was confusing, and did not adequately inform the employee to consult with an attorney. Because of this defect, the courts ruled that the release did not waive the employee’s ADEA claim. In another case, the court refused to enforce a waiver that stated “Employee understands that he should consult with an attorney prior to signing this agreement.”2 According to the court, this language was too passive to comply with the OWBPA. Fortunately, these courts have also provided guidance on how to fix what they perceive as defects, explaining that waivers should closely mirror the language of the statute, and affirmatively advise the employee to seek counsel. According to these courts, the following language should pass muster: “The company hereby advi-ses Employee in writing to consult with an attorney before signing this agreement.” Although this may seem to be form over substance, it can have very real and costly consequences. Accordingly, employers should carefully review any form documents they have been using to make sure they are still enforceable. Too Much Information? The other recent change in the law arises in the context of reductions in force (or other circumstances in which waivers are sought from more than one employee). To satisfy the OWBPA in a reduction in force (RIF) setting, employers must provide employees certain very specific information, including identification of the individuals selected and not selected for the RIF, in addition to the numerous other requirements mentioned above. These informational requirements are described in detail in published regulations. One of these requirements, however, has recently been given a new spin by a federal appeals court. The OWBPA states that an employer must notify employees of any “eligibility factors” for the “termination program.” “Termination program” is the term used in the regulations as a catchall description when multiple employees are being discharged and asked to sign waivers. In this context, “eligibility factors” have long been interpreted as any conditions or restrictions on the receipt of severance benefits in conjunction with a RIF. As a result, it has been common for employers to satisfy this disclosure requirement with a simple statement that, for example, all employees selected for the RIF are eligible for severance benefits. In September 2005, a federal appeals court rejected this interpretation, explaining that “eligibility factors” refers to the criteria the company used to determine which employees are selected in the RIF, not which employees would be eligible for severance benefits.3 In other words, at least according to this court, to have enforceable waivers of ADEA claims, employers must notify employees of the criteria used for selecting employees for the RIF. This is obviously a signifi-cant development, and one which will require careful planning when conducting a RIF. Take a Close Look at Those Forms! These recent changes in the law serve as a compelling reminder that HR practices and forms must be periodically reviewed to remain effective. No time like the present! _________________ 1 Thiessen v. General Electric Capital Corp., 232 F. Supp. 2d 1230 (D. Kan. 2002); Cole v. Gaming Entertainment, L.L.C., 199 F. Supp. 2d 208 (D. Del. 2002). 2 Williams v. Disco Hi-Tec America, Inc., 2005 WL 2259853 (N.D. Tex. 2005). 3 Kruchowski v. Weyerhaeuser Co., 423 F.3d 1139, 1144 (10th Cir. 2005).