New Legal Challenges to Waivers and Releases – Employers Beware!

Waiver and release agreements commonly used by many companies throughout the United States have been successfully challenged in several recent court decisions. The stakes in this area are high in terms of legal costs, potential damages and the large sums paid to employees in exchange for the “release” of all claims. All employers should carefully review these developments.

This LawFlash briefly describes the most recent legal challenges to waiver and release agreements and provides a summary of the most important legal requirements affecting the enforceability of waiver and release agreements. In light of the recent decisions, all employers should review their form agreements to ensure they are compliant with legal requirements and are applicable to the particular circumstances for which they are being used. Waiver and release agreements should be subjected to legal review, even if they have previously been approved by counsel.

Background: The Older Workers Benefit Protection Act

Waiver and release agreements are used by all employers throughout the United States and overseas in connection with individual employment terminations as well as group reductions-in-force. Releases are regularly referenced in employee benefit severance plans as a precondition to obtaining severance benefits.

After decades of litigation over the enforceability of waivers and releases, Congress seemed to settle the most significant questions in 1990, when it enacted the Older Workers Benefit Protection Act (OWBPA). Among other things, OWBPA amended the Age Discrimination in Employment Act (ADEA) by setting forth specific requirements for a release to be considered a valid waiver of federal age discrimination claims. OWBPA applies specifically to ADEA waivers, but the OWBPA requirements include elements that can affect the enforceability of other federal or state law waivers.

The U.S. Supreme Court, in Oubre v. Entergy Operations, Inc., 522 U.S. 422 (1998), opened the door to federal court litigation when it held that an employee need not tender back the money paid in exchange for a release in order to challenge the enforceability of a release under the OWBPA and pursue an ADEA claim. The Court also held that that every OWBPA waiver/release requirement must be completely satisfied or the release will be an invalid waiver of ADEA claims. Picking up on the Supreme Court’s lead, the EEOC issued regulations stating that OWBPA prohibits any restriction or monetary penalty associated with the filing of an ADEA lawsuit by employees who sign a release. In short, the ADEA – especially as interpreted by the Supreme Court in Oubre and by the EEOC regulations – recognizes the enforceability of waiver and release agreements, but only if the agreements comply with every technical requirement imposed by OWBPA. And restrictions on an employee’s right to sue (i.e., whereby employee could challenge a release’s enforceability) likewise create a high risk that the release will be deemed invalid under OWBPA.

What Release/Waiver Requirements Are Imposed by the OWBPA?

Under the OWBPA, an individual may not waive any ADEA right or claim unless the waiver is knowing and voluntary. To satisfy this standard, an ADEA waiver must meet certain minimum requirements. Specifically, the waiver must:

  • be written in a manner calculated to be understood by the employee;
  • specifically reference ADEA rights or claims;
  • advise employees to consult with an attorney before signing the agreement;
  • be supported by consideration or benefits to which the employee is not otherwise already entitled;
  • not seek to waive claims that arise after the date the agreement is executed; and
  • give employees at least 21 days (45 days in a group termination) in which to consider the waiver and a seven-day period after executing the agreement in which to revoke the agreement.

If a release is requested in connection with a group termination or exit incentive program, an employer must also provide: (1) specific information about the termination program (the covered group or decisional unit, eligibility factors and time limits); (2) the job titles and ages of individuals eligible or selected for the program; and (3) the ages of those in the same job classification or organizational unit who are not eligible or selected for the program. A group termination or exit incentive program is typically one in which an employer offers severance or other benefits to two or more employees in exchange for a release; it need not involve an ERISA plan.

The Most Recent Legal Challenges to Waivers and Releases

  • Syverson v. IBM, No. 0416449, 2006 WL 2506421 (9th Cir. Aug. 31, 2006): In this case the court found that IBM’s standard “General Release and Covenant Not to Sue” was not calculated to be understood by the recipient and was therefore invalid. Specifically, the court held that IBM’s use of the terms “release” and “covenant not to sue” was confusing, as was a statement in the document that the covenant not to sue (i) did not apply to actions based solely under the ADEA and (ii) did not preclude the filing of a charge with the EEOC. The court rejected IBM’s contention that any ambiguity was alleviated in part by specific language directing an employee to consult with an attorney. According to the court, an agreement is not written in a manner calculated “to be understood by the participant” if it requires the assistance of an attorney to understand the language.
  • Thomforde v. IBM, 406 F.3d 500 (8th Cir. 2005): The employee, Thomforde, was offered the same release executed by the Syverson plaintiffs. When Thomforde questioned the meaning of the ADEA “carveout” from the covenant not to sue, IBM declined to provide an interpretation; instead, IBM encouraged him to seek counsel. After consulting with an attorney, Thomforde executed the document and thereafter filed an EEOC charge alleging age discrimination under the ADEA. The Eighth Circuit (like the court in Syverson) concluded that the “release” and “covenant not to sue” language was confusing. The court also noted that “[o]nce IBM chose to use . . . legal terms of art in the agreement, IBM had a duty to carefully explain the provisions.”
  • EEOC v. Lockheed Martin Corp. , No. 05cv0287 RWT, 2006 WL 2294540 (D. Md. Aug. 8, 2006): In a particularly troubling decision, the court concluded it was unlawful retaliation to offer severance benefits, in exchange for a release, to an employee who had filed an EEOC charge, and the court held this rendered the release agreement facially invalid. The court rejected Lockheed’s argument that the release was enforceable because it did not explicitly prohibit employees from filing a charge with the EEOC (although the release waived an individual’s right to recover monetary damages against Lockheed which, the court recognized, would have been permissible).
  • Kruchowski v. Weyerhaeuser Co. , 446 F.3d 1090 (10th Cir. 2006), superseding, 423 F.3d 1139 (10th Cir. 2005): In this case, a release agreement was invalidated for failing to comply with OWBPA’s requirement – applicable to group termination programs – that affected employees must receive a list of job titles and ages of individuals eligible or selected for the program and of those individuals not eligible or selected. Weyerhaeuser also informed employees that the “decisional unit” was “all salaried employees” employed at a particular location when, in discovery, the company later described the “decisional unit” differently. (Among other things, the original “decisional unit” description encompassed 15 employees who were not actually part of the group considered for potential employment termination.) The court of appeals held that the inaccurate “decisional unit” description rendered the release invalid under OWBPA.

To illustrate the care with which employers must assemble and distribute mandatory OWBPA “group” disclosures, the Weyerhaeuser decision can be compared with the recent decision in Burlison v. McDonald’s Corp. , 455 F.3d 1242 (11th Cir. 2006). There, the court rejected the plaintiffs’ argument that they were entitled to nationwide age and position data. Because the employer’s decisions were made on a local or regional level, the court held that the mandatory OWBPA “group” disclosures could appropriately be limited to the “decisional unit” defined as that portion of the employer’s organizational structure from which the employer chose the employees to be separated.

  • Merritt v. FirstEnergy Corp. , No. 1:05CV00586, 2006 U.S. DIST. LEXIS 15089 (N.D. Ohio Mar. 31, 2006): Although a release was found to bar claims of race discrimination under federal and state law, as well as a public policy wrongful discharge action, the court held that the release did not comply with the strict requirements of the OWBPA and, therefore, did not bar the plaintiff’s age discrimination claim. The court found that the employer failed to provide “a description of how those to be terminated in [the] RIF were chosen over those to be retained,” and therefore failed to meet the OWBPA’s requirement that the employer provide the “eligibility factors” applicable to any group termination program.
  • O’Brien v. Star Gas Propane, L.P. , No. A035805T3, (N.J. Sup. Ct. App. Div. July 20, 2006): In this case, the state court held that a waiver and release failed to comport with OWBPA’s technical requirements and was invalid with respect to ADEA claims.

  • EEOC v. Ventura Foods, LLC, D. Minn., No. 05663, consent decree signed 9/1/06. Under an EEOC consent decree, Ventura Foods – a food processing company with 13 plants nationwide – recently agreed to eliminate a severance agreement provision that required departing employees not to pursue discrimination charges with the EEOC. The consent decree settled a 2005 lawsuit

in which the EEOC alleged violations of Title VII of the 1964 Civil Rights Act, the ADEA, and the Equal Pay Act.

Practical Considerations for Employers

Based on the OWBPA, relevant EEOC regulations, and recent interpretations and recent court decisions, all employers using release and waiver agreements should exercise caution and consider the following points:

  • Read your own waiver and release agreement. Once companies begin to use a particular waiver or release, the agreement in many cases assumes the status of “boilerplate” that may be used for years without being carefully read or reviewed by management. The recent cases make clear the need for every employer to carefully review its current waiver and release forms, and to have the agreements carefully reviewed by counsel for possible deficiencies.
  • The “Understandable” Standard. Many employers are very comfortable with form release agreements that attempt to cover every kind of contingency, particularly when the form includes a clear and specific direction to the employee to “consult with an attorney.” Unfortunately, as the recent cases underscore, this approach creates a tension with OWBPA’s requirement that releases be “understandable” to the “average individual” being asked to sign them.
  • Beware “covenants-not-to-sue.” In its regulations, the EEOC takes an aggressive posture against covenants-not-to sue. For that reason, employers must carefully consider to the risks before including any covenants-not-to-sue in waiver agreements.

  • Watch “tender-back” provisions. Although the EEOC does not preclude entirely tender-back provisions, the ability to recoup any amount from an employee who has signed a waiver and release is significantly limited. Any tender-back

provisions should be carefully drafted to ensure compliance with the applicable regulations.

  • Other Technical OWBPA Requirements. The cases above highlight the hyper-technical enforcement of OWBPA’s requirements, and there is no reason to believe that courts will be less strict in their interpretation of other waiver/release requirements. Although other OWBPA requirements might appear to be straightforward – calculating when a revocation or review period begins or ends, identifying applicable job titles and ages, defining the “decisional unit” – there can be a level of complexity to these requirements, particularly in large-scale reductions-in-force. Because the risk that any misstatement, inaccuracy, or inadvertent miscalculation can render all waivers invalid, it is critical to obtain assistance before disseminating any information to ensure that all required information is provided and is accurate.
  • Other Federal, State, and Local Laws and Legal Obligations. Certain states may impose additional requirements to obtain an effective waiver of certain state law claims. For example, under the Minnesota Age Discrimination Act, a release must provide for a 15-day revocation period, in contrast to the seven-day revocation period required by the OWBPA. Under California law, a waiver cannot release unknown claims unless the waiver agreement contains certain language specifically providing for such a waiver. In addition to waiver issues, reductions-in-force or other substantial business changes often trigger other legal obligations arising, for example, under the Worker Adjustment and Retraining Notification Act (WARN), the National Labor Relations Act (NLRA), ERISA, relevant benefit plans, labor contracts, and individual employment agreements, among other things.
  • Careful Review by Experienced Counsel. The law regarding waiver and release agreements is rapidly changing, and even one decision like those described above can significantly change longstanding principles. To further complicate matters, the law is not necessarily settled in every jurisdiction. Therefore, especially in the current climate, it is essential to consult with experienced legal counsel to ensure that any waiver and release agreement satisfies all OWBPA requirements – including the additional mandatory disclosures required in group employment termination situations – and conforms to the state and local requirements applicable to the jurisdictions where a particular release will be used.

Morgan Lewis’s Labor and Employment Law Practice Group has extensive experience drafting waivers and litigating waiver-related claims.

Our practice specifically devoted to this area – Morgan Lewis/Workforce Change – also manages the full spectrum of employment, labor, benefits and related issues confronting businesses involved in business restructuring and corporate transactions. Morgan Lewis/Workforce Change combines the resources of Morgan Lewis’s 1,250 attorneys with enormous real-world experience stemming from our involvement in thousands of reductions-in-force, reorganizations, deals, and similar restructuring situations. We can assist employers in their efforts to address waiver and release issues and to navigate all of these complex areas.

Please feel free to contact your Morgan Lewis attorney or any of the following individuals for more information about the issues discussed in this Morgan Lewis LawFlash:

CHICAGO
Philip A. Miscimarra 312.324.1165 [email protected]

LOS ANGELES
John S. Battenfeld 213.612.1018 [email protected]

MIAMI
Mark E. Zelek 305.415.3303 [email protected]

NEW YORK
David A. McManus 212.309.6824 [email protected]

PALO ALTO
Carol R. Freeman 650.843.7520 [email protected]

PHILADELPHIA
Michael J. Ossip 215.963.5761 [email protected]

SAN FRANCISCO
Karen H. Peteros 415.442.1650 [email protected]

WASHINGTON, D.C.
Gregory R. Talbot 202.739.5961 [email protected]

Morgan, Lewis & Bockius LLP

  • InternetBar.Org
  • Localiza