Separation Agreements and General Releases

An enforceable release agreement must be supported by good and sufficient consideration over and above compensation and/or benefits to which an employee may otherwise be entitled. For example, accrued vacation or pay in lieu of notice under an employment agreement is not additional consideration. In addition, severance promised in an employment agreement, company policy, or even verbally, must be conditioned on a release in order to constitute consideration. The separation agreement should condition payment of the consideration on compliance with all of the promises in the agreement, including release of claims, agreement not to re-apply, compliance with restrictive covenants, and return of company property.

Release

The key component of a separation agreement is an enforceable release. The release should be as broad and clear as legally permissible, and cover all statutory, regulatory, contractual, tort, and other claims. The release should extend not only to the named employer, but also to a more broadly defined “company.”

Releases must be state-specific and include all claims under applicable state and local law. Some states require a statute to be named in order to be released effectively. New Jersey's Conscientious Employee Protection Act is one example. In addition, some states impose additional requirements on general release agreements. California agreements must include an acknowledgement that the release includes known and unknown facts or claims. In other states, such as New Jersey, judgments for child support may constitute liens against the net proceeds of settlements, which can include a severance payment conditioned on a release, and should be searched prior to making payment.

Recent court decisions have questioned whether some claims can be released at all. For example, in Taylor v. Progress Energy, Inc., the Fourth Circuit Court of Appeals held that a “catch-all” release implemented as part of a reduction of force did not effectively waive any claim or right an employee had under the Family and Medical Leave Act (FMLA). In addition, the court commented that releases of claims under the Fair Labor Standards Act (FLSA) would likewise be ineffective. More recently, in Butler v. Merrill Lynch Bus. Fin. Servs. Inc., the U.S. District Court for the Northern District of Illinois rejected the court's view in Taylor and upheld a prospective waiver of a FMLA claim. However, in light of these challenges, employers should include an acknowledgement that the departing employee is not entitled to any additional compensation or statutory leave.

Releasing Age Claims

The Older Workers' Benefit Protection Act (OWBPA) establishes certain, irreducible standards for enforceability of a release of a claim under the Age Discrimination in Employment Act (the ADEA). While simply meeting the minimum statutory requirements does not satisfy the burden of proving that the release is knowing and voluntary, failure to do so can be fatal to the enforceability of the release. The OWBPA requires, at a minimum, that the waiver agreement between the individual and the employer:

• be written in language easily understood by the average employee;
• specifically refer to rights or claims arising under the ADEA;
• not waive rights or claims that may arise after the date of the waiver is executed;
• provide for consideration in addition to anything of value to which the individual already is entitled;
• advise the individual in writing to consult with an attorney prior to executing the agreement;
• give the individual at least 21 days within which to consider the agreement; and
• provide for a seven-day revocation period.

The OWBPA imposes additional requirements in the context of a group or class termination. The employer must provide the departing employees with at least 45 days to consider the release and provide the employees with detailed information concerning those eligible and ineligible for the separation program. The latter information must include any class, unit or group of individuals covered by the program, any eligibility factors for the program, and any applicable time limits, as well as the job titles and ages of all individuals eligible or selected for the program, and the ages of all individuals in the same job classification or organizational unit who are not eligible or selected for the program. The purpose of the information is to provide older workers with enough information to decide whether a termination may be discriminatory before signing a release. If this information is inaccurate or if the employer does not define the job classification or unit properly, the age release may not be enforceable. In Peterson et al v. Seagate US LLC et al, the U.S. District Court for the District of Minnesota ruled 18 age releases invalid because the company represented that it laid-off 152 employees at one facility, when the correct number was 154, and because the company used confusing codes to identify the job classifications at issue.

Note that the above requirements do not need to be met where an employee is not releasing a claim under the ADEA, even if the employee is part of a group lay-off or reduction. Thus, where the employee is under age 40, the employer does not need to give the employee 21 (or 45) days in which to consider the agreement (although the employee should have a reasonable period of time in which to do so), and the employer does not have to permit the employee any revocation period. In such agreements, it is advisable for the employee to confirm his or her birth date.

Many separation agreements include broad release language requiring employees to agree not to institute any “proceeding, action, complaint, charge, or grievance” against the former employer “in any administrative, judicial, or other forum” with respect to any acts occurring before the date of the agreement. Some courts have held that a separation agreement including the foregoing language constitutes a per se violation of the anti-retaliation provisions of the named employment statutes because the purpose of filing an agency charge is not to seek recovery from the employer but to inform the administrative agency, such as the Equal Employment Opportunity Commission (EEOC), of possible discrimination.

Agreements Not to Reapply

Employers also should consider including a provision that the employee agrees not to seek reemployment. In the absence of such an agreement, should the employer later refuse to rehire the person, it could face a retaliation claim under the applicable federal or state anti-discrimination laws. It should be noted that the EEOC opposes such clauses.

Restrictive Covenants

Often, employers wish to include some restriction on an employee's ability to compete or to solicit other employees, customers, or vendors. Whether or not such restrictive covenants are enforceable depends on state law. For example, California will not enforce covenants not to compete. Enforceability in other states often depends on whether the restriction is geographically and temporally reasonable and protects certain interests of the employer (such as trade secrets or confidential information). What is reasonable and what constitutes a protectable interest are determined on a case-by-case basis. In addition, some states, such as Pennsylvania, will not enforce a restriction on competition against a terminated employee, unless the termination is “for cause.”

If an employee is subject to existing restrictive covenants under an employment or other agreement, the separation agreement should include or incorporate by reference the restrictions and should not inadvertently supersede them as part of an earlier agreement.

Return of Company Property

Severance payments should be conditioned on the return of company property. Employers should be mindful of employees' access to their interactive systems when implementing a termination.

Confidentiality

Many employers fear the “floodgates” will open if they settle a claim or provide a severance payment. Because different circumstances may warrant different consideration, separation agreements should require a departing employee to keep the circumstances and terms of the separation confidential.

Non-disparagement

Employers should also prohibit employees, to whom they are providing additional compensation, from “biting the hand that feeds them” and disparaging the company. Many employees seek to make non-disparagement clauses mutual. While in general employers should avoid releasing negative information about employees to outside parties in order to avoid defamation claims, in the context of a separation agreement, employers should limit its contractual assurances to designated job titles so as not to be liable for comments made by any employee.

Tax Treatment of Payments

Employers and employees are always looking for advantageous ways to structure payments to eliminate or reduce the amount of federal, state, and even local taxes on severance payments. While the general rule of thumb should be that all such payments are taxable and, in some instances, also subject to income tax withholding, there may be certain circumstances whereby all or a portion of a payment can be made on a non-taxable basis (e.g., where there are physical manifestations of emotional distress or a physical injury).

Tender Back of Payments

Severance agreements sometimes require a former employee to repay (a/k/a tender back) to the employer the monies under the agreement in the event the employee violates the terms of the agreement ' for example, by filing a complaint in court or breaching the confidentiality or non-compete provisions. Within the context of the ADEA, the EEOC has promulgated regulations that prohibit the enforcement of tender back rules with respect to the filing of administrative charges. Outside of the ADEA context, courts have frequently relied upon general contract principles to find that tender back provisions are appropriate and enforceable if properly drafted.

Employee Benefits Post Termination

Employers may want to provide group health insurance to employees post-termination. While nothing prohibits such action, care should be taken to make sure the provision of the benefit is done properly and effectively. While many group health insurance contracts permit “active” employees to participate in the benefit plan, most contracts do not cover terminated employees within the definition of eligible participant. As a result, the most effective and ultimately proper way to provide group health insurance to a terminated employee would be to have the employee exercise his or her right to COBRA continuation coverage and for the employer to then make the appropriate monthly premium payment on behalf of the employee (and his or her covered beneficiaries). The structure of this arrangement in any severance or settlement agreement should be very specific and cover various issues including, but not limited to, changes in benefit plans and premiums, the length of time of the employer's obligation to make the premium payment, and any conditions precedent to the employer's obligations.

Assignment

Severance agreements usually bind the employer. It is important, however, for the employer to reserve the right to assign its rights and obligations under the agreement. This assignment right should be set forth in the agreement itself because some states do not recognize a general right of assignment without language to that effect in the agreement. While this may not appear to be an important issue, it may rise to that level ' especially with respect to enforcement of covenants not to compete and confidentiality provisions.

Section 409A

In October 2004, President Bush signed into law the American Jobs Creation Act of 2004, which implemented extensive changes in the area of deferred compensation. These changes are codified in Section 409A of the Internal Revenue Code. Employers have been required to operate their deferred compensation plans in compliance with 409A since Jan. 1, 2005, and have until Dec. 31, 2008, to amend their deferred compensation plans for compliance in form with 409A. A full discussion of 409A is far beyond the scope of this article. However, suffice it to say that a separation agreement that provides for income deferral can be subject to 409A. Accordingly, if income deferral is part of the consideration for a separation agreement, businesses should seek legal review for compliance with 409A.

Conclusion

Employers can address the above issues in a separation agreement or a less formal letter format. While many agreements include the same provisions, employers should not treat a form separation agreement or letter as “one size fits all.” Each separation agreement should be reviewed in light of the unique circumstances of the individual or group termination at issue, and to ensure compliance with the frequently changing law regarding enforceability.

• Condition severance payments on a general release
• General releases must be state-specific.
• Releases of some claims may not be enforceable ' include an acknowledgement that the employee has received everything to which s/he is entitled.
• Individual or group releases for employees age 40 or older must meet the OWBPA requirements to be effective.
• Require the employee to return all company property before receiving any payment.

Further protect the company with restrictive covenants and confidentiality and non-disparagement clauses.

Anne Ciesla Bancroft is a partner in the Labor & Employment Department of Fox Rothschild LLP, resident in the Princeton, NJ, office.

Employee separations are increasingly more frequent in today's economic environment. At the same time, ever-expanding employee rights combined with a poor job market may make departing employees more likely than ever to sue. Many employers mitigate this risk by offering a severance payment to their departing employees in exchange for a release of claims, and other promises by the employee. In order to get what they pay for, businesses need to ensure that their agreements protect the company's interest to the fullest extent permitted by applicable law.

While this article cannot speak to the specifics of an individual termination, the subject thumbnails set forth below highlight key issues to consider when preparing separation agreements.

Consideration

An enforceable release agreement must be supported by good and sufficient consideration over and above compensation and/or benefits to which an employee may otherwise be entitled. For example, accrued vacation or pay in lieu of notice under an employment agreement is not additional consideration. In addition, severance promised in an employment agreement, company policy, or even verbally, must be conditioned on a release in order to constitute consideration. The separation agreement should condition payment of the consideration on compliance with all of the promises in the agreement, including release of claims, agreement not to re-apply, compliance with restrictive covenants, and return of company property.

Release

The key component of a separation agreement is an enforceable release. The release should be as broad and clear as legally permissible, and cover all statutory, regulatory, contractual, tort, and other claims. The release should extend not only to the named employer, but also to a more broadly defined “company.”

Releases must be state-specific and include all claims under applicable state and local law. Some states require a statute to be named in order to be released effectively. New Jersey's Conscientious Employee Protection Act is one example. In addition, some states impose additional requirements on general release agreements. California agreements must include an acknowledgement that the release includes known and unknown facts or claims. In other states, such as New Jersey, judgments for child support may constitute liens against the net proceeds of settlements, which can include a severance payment conditioned on a release, and should be searched prior to making payment.

Recent court decisions have questioned whether some claims can be released at all. For example, in Taylor v. Progress Energy, Inc., the Fourth Circuit Court of Appeals held that a “catch-all” release implemented as part of a reduction of force did not effectively waive any claim or right an employee had under the Family and Medical Leave Act (FMLA). In addition, the court commented that releases of claims under the Fair Labor Standards Act (FLSA) would likewise be ineffective. More recently, in Butler v. Merrill Lynch Bus. Fin. Servs. Inc., the U.S. District Court for the Northern District of Illinois rejected the court's view in Taylor and upheld a prospective waiver of a FMLA claim. However, in light of these challenges, employers should include an acknowledgement that the departing employee is not entitled to any additional compensation or statutory leave.

Releasing Age Claims

The Older Workers' Benefit Protection Act (OWBPA) establishes certain, irreducible standards for enforceability of a release of a claim under the Age Discrimination in Employment Act (the ADEA). While simply meeting the minimum statutory requirements does not satisfy the burden of proving that the release is knowing and voluntary, failure to do so can be fatal to the enforceability of the release. The OWBPA requires, at a minimum, that the waiver agreement between the individual and the employer:

• be written in language easily understood by the average employee;
• specifically refer to rights or claims arising under the ADEA;
• not waive rights or claims that may arise after the date of the waiver is executed;
• provide for consideration in addition to anything of value to which the individual already is entitled;
• advise the individual in writing to consult with an attorney prior to executing the agreement;
• give the individual at least 21 days within which to consider the agreement; and
• provide for a seven-day revocation period.

The OWBPA imposes additional requirements in the context of a group or class termination. The employer must provide the departing employees with at least 45 days to consider the release and provide the employees with detailed information concerning those eligible and ineligible for the separation program. The latter information must include any class, unit or group of individuals covered by the program, any eligibility factors for the program, and any applicable time limits, as well as the job titles and ages of all individuals eligible or selected for the program, and the ages of all individuals in the same job classification or organizational unit who are not eligible or selected for the program. The purpose of the information is to provide older workers with enough information to decide whether a termination may be discriminatory before signing a release. If this information is inaccurate or if the employer does not define the job classification or unit properly, the age release may not be enforceable. In Peterson et al v. Seagate US LLC et al, the U.S. District Court for the District of Minnesota ruled 18 age releases invalid because the company represented that it laid-off 152 employees at one facility, when the correct number was 154, and because the company used confusing codes to identify the job classifications at issue.

Note that the above requirements do not need to be met where an employee is not releasing a claim under the ADEA, even if the employee is part of a group lay-off or reduction. Thus, where the employee is under age 40, the employer does not need to give the employee 21 (or 45) days in which to consider the agreement (although the employee should have a reasonable period of time in which to do so), and the employer does not have to permit the employee any revocation period. In such agreements, it is advisable for the employee to confirm his or her birth date.

Many separation agreements include broad release language requiring employees to agree not to institute any “proceeding, action, complaint, charge, or grievance” against the former employer “in any administrative, judicial, or other forum” with respect to any acts occurring before the date of the agreement. Some courts have held that a separation agreement including the foregoing language constitutes a per se violation of the anti-retaliation provisions of the named employment statutes because the purpose of filing an agency charge is not to seek recovery from the employer but to inform the administrative agency, such as the Equal Employment Opportunity Commission (EEOC), of possible discrimination.

Agreements Not to Reapply

Employers also should consider including a provision that the employee agrees not to seek reemployment. In the absence of such an agreement, should the employer later refuse to rehire the person, it could face a retaliation claim under the applicable federal or state anti-discrimination laws. It should be noted that the EEOC opposes such clauses.

Restrictive Covenants

Often, employers wish to include some restriction on an employee's ability to compete or to solicit other employees, customers, or vendors. Whether or not such restrictive covenants are enforceable depends on state law. For example, California will not enforce covenants not to compete. Enforceability in other states often depends on whether the restriction is geographically and temporally reasonable and protects certain interests of the employer (such as trade secrets or confidential information). What is reasonable and what constitutes a protectable interest are determined on a case-by-case basis. In addition, some states, such as Pennsylvania, will not enforce a restriction on competition against a terminated employee, unless the termination is “for cause.”

If an employee is subject to existing restrictive covenants under an employment or other agreement, the separation agreement should include or incorporate by reference the restrictions and should not inadvertently supersede them as part of an earlier agreement.

Return of Company Property

Severance payments should be conditioned on the return of company property. Employers should be mindful of employees' access to their interactive systems when implementing a termination.

Confidentiality

Many employers fear the “floodgates” will open if they settle a claim or provide a severance payment. Because different circumstances may warrant different consideration, separation agreements should require a departing employee to keep the circumstances and terms of the separation confidential.

Non-disparagement

Employers should also prohibit employees, to whom they are providing additional compensation, from “biting the hand that feeds them” and disparaging the company. Many employees seek to make non-disparagement clauses mutual. While in general employers should avoid releasing negative information about employees to outside parties in order to avoid defamation claims, in the context of a separation agreement, employers should limit its contractual assurances to designated job titles so as not to be liable for comments made by any employee.

Tax Treatment of Payments

Employers and employees are always looking for advantageous ways to structure payments to eliminate or reduce the amount of federal, state, and even local taxes on severance payments. While the general rule of thumb should be that all such payments are taxable and, in some instances, also subject to income tax withholding, there may be certain circumstances whereby all or a portion of a payment can be made on a non-taxable basis (e.g., where there are physical manifestations of emotional distress or a physical injury).

Tender Back of Payments

Severance agreements sometimes require a former employee to repay (a/k/a tender back) to the employer the monies under the agreement in the event the employee violates the terms of the agreement ' for example, by filing a complaint in court or breaching the confidentiality or non-compete provisions. Within the context of the ADEA, the EEOC has promulgated regulations that prohibit the enforcement of tender back rules with respect to the filing of administrative charges. Outside of the ADEA context, courts have frequently relied upon general contract principles to find that tender back provisions are appropriate and enforceable if properly drafted.

Employee Benefits Post Termination

Employers may want to provide group health insurance to employees post-termination. While nothing prohibits such action, care should be taken to make sure the provision of the benefit is done properly and effectively. While many group health insurance contracts permit “active” employees to participate in the benefit plan, most contracts do not cover terminated employees within the definition of eligible participant. As a result, the most effective and ultimately proper way to provide group health insurance to a terminated employee would be to have the employee exercise his or her right to COBRA continuation coverage and for the employer to then make the appropriate monthly premium payment on behalf of the employee (and his or her covered beneficiaries). The structure of this arrangement in any severance or settlement agreement should be very specific and cover various issues including, but not limited to, changes in benefit plans and premiums, the length of time of the employer's obligation to make the premium payment, and any conditions precedent to the employer's obligations.

Assignment

Severance agreements usually bind the employer. It is important, however, for the employer to reserve the right to assign its rights and obligations under the agreement. This assignment right should be set forth in the agreement itself because some states do not recognize a general right of assignment without language to that effect in the agreement. While this may not appear to be an important issue, it may rise to that level ' especially with respect to enforcement of covenants not to compete and confidentiality provisions.

Section 409A

In October 2004, President Bush signed into law the American Jobs Creation Act of 2004, which implemented extensive changes in the area of deferred compensation. These changes are codified in Section 409A of the Internal Revenue Code. Employers have been required to operate their deferred compensation plans in compliance with 409A since Jan. 1, 2005, and have until Dec. 31, 2008, to amend their deferred compensation plans for compliance in form with 409A. A full discussion of 409A is far beyond the scope of this article. However, suffice it to say that a separation agreement that provides for income deferral can be subject to 409A. Accordingly, if income deferral is part of the consideration for a separation agreement, businesses should seek legal review for compliance with 409A.

Conclusion

Employers can address the above issues in a separation agreement or a less formal letter format. While many agreements include the same provisions, employers should not treat a form separation agreement or letter as “one size fits all.” Each separation agreement should be reviewed in light of the unique circumstances of the individual or group termination at issue, and to ensure compliance with the frequently changing law regarding enforceability.

• Condition severance payments on a general release
• General releases must be state-specific.
• Releases of some claims may not be enforceable ' include an acknowledgement that the employee has received everything to which s/he is entitled.
• Individual or group releases for employees age 40 or older must meet the OWBPA requirements to be effective.
• Require the employee to return all company property before receiving any payment.

Further protect the company with restrictive covenants and confidentiality and non-disparagement clauses.

Anne Ciesla Bancroft is a partner in the Labor & Employment Department of Fox Rothschild LLP, resident in the Princeton, NJ, office.