Separation and Settlement Agreements

Accordingly, the employer should present the separation agreement to the employee on his or her last day of employment or after the employee has been terminated. In the alternative, the employer may present the separation agreement to the employee while employed, but include language in the agreement that requires the employee to sign the agreement after he or she has separated from employment.

Do Not Include a Covenant Not to Sue

The regulations interpreting the Age Discrimination in Employment Act (“ADEA”) prohibit employers from imposing any penalty against an individual for filing an ADEA claim. See 29 C.F.R. ' 1625.23(b). Moreover, at least one court has held, and the U.S. Equal Employment Opportunity Commission (“EEOC”) has long maintained, that a separation agreement that could be interpreted as prohibiting the employee from filing an EEOC charge is facially retaliatory. See EEOC v. Lockheed Martin Corp., No. 05CV0287 RWT, 2006 WL 2294540 (D. MD. Aug. 8, 2006). Thus, including a covenant not to file a discrimination charge risks invalidating the waiver contained in a separation or release agreement.

There is little to be gained, and much to be lost, by including a covenant not to sue/not to file a charge in a separation or settlement agreement. True, the employer would be able to assert a counterclaim for breach of contract if the separation or settlement agreement contained a covenant not to sue, but the odds of collecting on such a claim from the garden-variety plaintiff are slim. Indeed, the value of such a counterclaim is dubious at best, given that a valid waiver is a complete defense to any charge or lawsuit that the employee may attempt to file, and an employer could pursue statutory sanctions under 28 U.S.C. ' 1927 and/or Fed. R. Civ. P. 11 if the employee has no good-faith argument for invalidating the release that bars the employee's claim. In sum, ensuring the validity of the waiver is the most important goal when drafting a separation or settlement agreement, and the inclusion of a covenant not to sue is not worth risking the validity of the waiver.

Non-Disparagement and Confidentiality Provisions

A non-disparagement provision should prohibit the former employee from making negative remarks regarding the employer or its employees, except with respect to truthful testimony or information provided pursuant to subpoena, court order, or similar legal process. A confidentiality clause bars the employee from disclosing the monetary terms of the separation or settlement agreement to anyone other than the former employee's immediate family members, attorneys, and financial advisers. The disclosure of such monetary terms to other employees, especially the amount of a settlement payment made to resolve pending litigation, can have the effect of encouraging other employees to bring frivolous claims against the employer in an attempt to secure a similar monetary settlement.

Given the importance of maintaining the confidentiality of such information, as well as the difficulty of proving the amount of damages in the event that the former does not comply with the confidentiality provision, the employer should include a liquidated damages clause providing that the employee shall become immediately liable to the employer for an agreed-upon amount of money, as well as any costs, including attorneys' fees, reasonably incurred by the employer in collecting that amount from the employee. The agreed-upon amount should be specified in the agreement and should not be punitive, since punitive liquidated damages provisions are invalid and unenforceable. Setting the amount of liquidated damages at 50% of the total amount of the severance or settlement payment made to the employee provides a strong deterrent to that employee while maintaining a low risk of a court invalidating the liquidated damages provision as punitive.

Former employees often ask that non-disparagement and confidentiality provisions be mutual, binding the employer as well as the employee. Employers should not agree to make such provisions mutual because doing so would contractually bind all management-level employees of the company to provisions of which only a handful of those familiar with the agreement would even be aware. If the mutuality of the one of these provisions becomes a stumbling block in the negotiations, the employer may agree that a specified management-level employee (the employee often is concerned about only a particular supervisor making negative remarks) will be bound by such provisions, in which case such person will have to become a signatory to the agreement.

Waiver of Future Employment with the Employer

When terminating a problem employee, or settling with a former employee who has sued the employer, it is critical to obtain a waiver from the employee of the employee's right to apply for employment, or seek reinstatement, with the employer in the future. In the absence of such a contractual waiver, the former employee can accept the severance or settlement payment, reapply for employment with the employer, and sue for retaliation (as well as on other bases) when the employer rejects the former employee's application. Including a waiver of future employment with the employer is the only way to ensure that the employee will not bring more claims against the employer in the future.

The Older Workers Benefit Protection Act

No publication dealing with separation and settlement agreements would be complete without some discussion of the Older Workers Benefit Protection Act of 1990 (“OWBPA”), which amended the ADEA. Generally speaking, in order to obtain a valid release of an age discrimination claim from an individual 40 years of age or older, the release agreement must comply with the following requirements: 1) The waiver must be part of an agreement between the individual and the employer that is written in a manner calculated to be understood by the employee or by the average person eligible to participate; 2) The waiver must specifically refer to rights or claims arising under the ADEA; 3) The waiver must state that the individual does not waive rights or claims that may arise after the date the waiver is executed; 4) The waiver must provide that the individual waives rights or claims only in exchange for consideration that is in addition to anything of value to which the individual is already entitled; 5) The waiver must state that the individual has been advised in writing to consult an attorney prior to executing the agreement; 6)(a) If the waiver is requested in the context of the settlement of a pending claim, or in the context of a resignation, termination, or job elimination involving only one individual, the waiver must give the individual a period of at least 21 days within which to consider the agreement; (b) On the other hand, if the waiver is requested in the context of an exit incentive or other employment termination program offered to more than one employee, it must give the individual a period of at least 45 days within which to consider the agreement; 7) The waiver must provide that, for a period of at least seven days following the execution of the agreement, the individual may revoke the agreement, and the agreement shall not become effective or enforceable until the revocation period has expired. See 29 U.S.C. ' 626(f). Keep in mind that the 21/45-day period may be waived by the individual (i.e, the individual may sign the release agreement upon receipt if he/she so desires), but the seven-day period may not be waived. Thus, the release agreement should provide that the severance or settlement payment will not become payable until the agreement becomes effective following the expiration of the revocation period.

If the waiver is requested in connection with an exit incentive or other employment termination program offered to more than one employee, the employer also must provide each employee in the group or class the following information: 1) The group, class or unit of individuals covered by the program; 2) Any eligibility factors for the program; 3) Any time limits applicable to the program; 4) The job title and ages of all individuals eligible for or selected for the program; and 5) The ages of all individuals in the same job classification or organizational unit who are not eligible or selected for the program. See 29 U.S.C. ' 626(f)(2)(H). The accompanying regulations provide the following additional guidance:

When identifying the scope of the “class, unit, or group,” and “job classification or organizational unit,” an employer should consider its organizational structure and decision-making process. A “decisional unit” is that portion of the employer's organizational structure from which the employer chose the persons who would be offered consideration for the signing of a waiver and those who would not be offered consideration for the signing of a waiver. The term “decisional unit” has been developed to reflect the process by which an employer chose certain employees for a program and ruled out others from that program. 29 C.F.R. ' (f)(3)(i)(B).

In practice, determining the “decisional unit” can be difficult and requires a close examination of the decision-making process used to select the individuals to be terminated. The courts have invalidated releases where the employer's OWBPA-related disclosures were under-inclusive, as well as where they have been over-inclusive. See, e.g., Pagliolo v. Guidant Corp., 483 F.Supp.2d 847 (D. Minn. 2007). The invalidation of releases in the context of a large Reduction in Force (RIF) can be catastrophic for an employer. Under these circumstances, the terminated employees may not only file their age discrimination claims against the employer (most likely as a class action), but may retain the severance benefits that they received in exchange for providing an invalid and useless waiver of claims. See Oubre v. Entergy Operations, Inc., 522 U.S. 422 (1998). Thus, employers should consult with their employment counsel to assist them in determining the proper decisional unit any time they offer severance benefits to more than one individual in connection with the same termination program.

Bill Wortel, a member of this newsletter's Board of Editors, has represented management in a variety of litigation at the administrative level, in state and federal courts and in the U.S. Court of Appeals. Mr. Wortel's experience includes defense of actions alleging violations of Title VII of the Civil Rights Act, the Age Discrimination in Employment Act, the Americans with Disabilities Act, the Family and Medical Leave Act, the Reconstruction Act of 1866, the Labor Management Relations Act, ERISA and the Illinois Human Rights Act.

The payment of severance to terminated employees, and settlement payments to resolve pending litigation are, to some extent, a cost of doing business in the United States. In exchange for such payments, the employer typically receives a global release of all claims that the employee may have against the employer, as well as other promises by the employee to take certain steps (e.g., voluntarily dismiss a pending lawsuit) or to refrain from engaging in certain conduct (e.g., making disparaging remarks about the employer to third parties). Too often, employers blindly “copy and paste” language from old agreements that may contain outdated provisions that no longer comply with current law, or that were tailored to a factual setting different from the situation they are currently facing. This article contains tips for drafting effective separation and settlement agreements that maximize the employer's return on its severance or settlement payments to departing or former employees.

The Timing of the Employee's Execution of the Agreement

It is well settled that an employee may not release future claims (i.e., claims that have not yet accrued/become actionable). Yet employers sometimes provide severance agreements to departing employees while they are still employed. If the employee signs the agreement while employed, thereby waiving any past claims against the employer that he or she may have, the waiver obtained from the employee would not apply to any claims that accrue after the employee's execution of the agreement. Thus, if the employee is subjected to harassment after executing the agreement (but while still employed), or does not receive a bonus or some other benefit to which the employee believes he or she is entitled, the employee's release contained in the previously signed agreement would not be a defense to such a claim.

Accordingly, the employer should present the separation agreement to the employee on his or her last day of employment or after the employee has been terminated. In the alternative, the employer may present the separation agreement to the employee while employed, but include language in the agreement that requires the employee to sign the agreement after he or she has separated from employment.

Do Not Include a Covenant Not to Sue

The regulations interpreting the Age Discrimination in Employment Act (“ADEA”) prohibit employers from imposing any penalty against an individual for filing an ADEA claim. See 29 C.F.R. ' 1625.23(b). Moreover, at least one court has held, and the U.S. Equal Employment Opportunity Commission (“EEOC”) has long maintained, that a separation agreement that could be interpreted as prohibiting the employee from filing an EEOC charge is facially retaliatory. See EEOC v. Lockheed Martin Corp., No. 05CV0287 RWT, 2006 WL 2294540 (D. MD. Aug. 8, 2006). Thus, including a covenant not to file a discrimination charge risks invalidating the waiver contained in a separation or release agreement.

There is little to be gained, and much to be lost, by including a covenant not to sue/not to file a charge in a separation or settlement agreement. True, the employer would be able to assert a counterclaim for breach of contract if the separation or settlement agreement contained a covenant not to sue, but the odds of collecting on such a claim from the garden-variety plaintiff are slim. Indeed, the value of such a counterclaim is dubious at best, given that a valid waiver is a complete defense to any charge or lawsuit that the employee may attempt to file, and an employer could pursue statutory sanctions under 28 U.S.C. ' 1927 and/or Fed. R. Civ. P. 11 if the employee has no good-faith argument for invalidating the release that bars the employee's claim. In sum, ensuring the validity of the waiver is the most important goal when drafting a separation or settlement agreement, and the inclusion of a covenant not to sue is not worth risking the validity of the waiver.

Non-Disparagement and Confidentiality Provisions

A non-disparagement provision should prohibit the former employee from making negative remarks regarding the employer or its employees, except with respect to truthful testimony or information provided pursuant to subpoena, court order, or similar legal process. A confidentiality clause bars the employee from disclosing the monetary terms of the separation or settlement agreement to anyone other than the former employee's immediate family members, attorneys, and financial advisers. The disclosure of such monetary terms to other employees, especially the amount of a settlement payment made to resolve pending litigation, can have the effect of encouraging other employees to bring frivolous claims against the employer in an attempt to secure a similar monetary settlement.

Given the importance of maintaining the confidentiality of such information, as well as the difficulty of proving the amount of damages in the event that the former does not comply with the confidentiality provision, the employer should include a liquidated damages clause providing that the employee shall become immediately liable to the employer for an agreed-upon amount of money, as well as any costs, including attorneys' fees, reasonably incurred by the employer in collecting that amount from the employee. The agreed-upon amount should be specified in the agreement and should not be punitive, since punitive liquidated damages provisions are invalid and unenforceable. Setting the amount of liquidated damages at 50% of the total amount of the severance or settlement payment made to the employee provides a strong deterrent to that employee while maintaining a low risk of a court invalidating the liquidated damages provision as punitive.

Former employees often ask that non-disparagement and confidentiality provisions be mutual, binding the employer as well as the employee. Employers should not agree to make such provisions mutual because doing so would contractually bind all management-level employees of the company to provisions of which only a handful of those familiar with the agreement would even be aware. If the mutuality of the one of these provisions becomes a stumbling block in the negotiations, the employer may agree that a specified management-level employee (the employee often is concerned about only a particular supervisor making negative remarks) will be bound by such provisions, in which case such person will have to become a signatory to the agreement.

Waiver of Future Employment with the Employer

When terminating a problem employee, or settling with a former employee who has sued the employer, it is critical to obtain a waiver from the employee of the employee's right to apply for employment, or seek reinstatement, with the employer in the future. In the absence of such a contractual waiver, the former employee can accept the severance or settlement payment, reapply for employment with the employer, and sue for retaliation (as well as on other bases) when the employer rejects the former employee's application. Including a waiver of future employment with the employer is the only way to ensure that the employee will not bring more claims against the employer in the future.

The Older Workers Benefit Protection Act

No publication dealing with separation and settlement agreements would be complete without some discussion of the Older Workers Benefit Protection Act of 1990 (“OWBPA”), which amended the ADEA. Generally speaking, in order to obtain a valid release of an age discrimination claim from an individual 40 years of age or older, the release agreement must comply with the following requirements: 1) The waiver must be part of an agreement between the individual and the employer that is written in a manner calculated to be understood by the employee or by the average person eligible to participate; 2) The waiver must specifically refer to rights or claims arising under the ADEA; 3) The waiver must state that the individual does not waive rights or claims that may arise after the date the waiver is executed; 4) The waiver must provide that the individual waives rights or claims only in exchange for consideration that is in addition to anything of value to which the individual is already entitled; 5) The waiver must state that the individual has been advised in writing to consult an attorney prior to executing the agreement; 6)(a) If the waiver is requested in the context of the settlement of a pending claim, or in the context of a resignation, termination, or job elimination involving only one individual, the waiver must give the individual a period of at least 21 days within which to consider the agreement; (b) On the other hand, if the waiver is requested in the context of an exit incentive or other employment termination program offered to more than one employee, it must give the individual a period of at least 45 days within which to consider the agreement; 7) The waiver must provide that, for a period of at least seven days following the execution of the agreement, the individual may revoke the agreement, and the agreement shall not become effective or enforceable until the revocation period has expired. See 29 U.S.C. ' 626(f). Keep in mind that the 21/45-day period may be waived by the individual (i.e, the individual may sign the release agreement upon receipt if he/she so desires), but the seven-day period may not be waived. Thus, the release agreement should provide that the severance or settlement payment will not become payable until the agreement becomes effective following the expiration of the revocation period.

If the waiver is requested in connection with an exit incentive or other employment termination program offered to more than one employee, the employer also must provide each employee in the group or class the following information: 1) The group, class or unit of individuals covered by the program; 2) Any eligibility factors for the program; 3) Any time limits applicable to the program; 4) The job title and ages of all individuals eligible for or selected for the program; and 5) The ages of all individuals in the same job classification or organizational unit who are not eligible or selected for the program. See 29 U.S.C. ' 626(f)(2)(H). The accompanying regulations provide the following additional guidance:

When identifying the scope of the “class, unit, or group,” and “job classification or organizational unit,” an employer should consider its organizational structure and decision-making process. A “decisional unit” is that portion of the employer's organizational structure from which the employer chose the persons who would be offered consideration for the signing of a waiver and those who would not be offered consideration for the signing of a waiver. The term “decisional unit” has been developed to reflect the process by which an employer chose certain employees for a program and ruled out others from that program. 29 C.F.R. ' (f)(3)(i)(B).

In practice, determining the “decisional unit” can be difficult and requires a close examination of the decision-making process used to select the individuals to be terminated. The courts have invalidated releases where the employer's OWBPA-related disclosures were under-inclusive, as well as where they have been over-inclusive. See, e.g., Pagliolo v. Guidant Corp. , 483 F.Supp.2d 847 (D. Minn. 2007). The invalidation of releases in the context of a large Reduction in Force (RIF) can be catastrophic for an employer. Under these circumstances, the terminated employees may not only file their age discrimination claims against the employer (most likely as a class action), but may retain the severance benefits that they received in exchange for providing an invalid and useless waiver of claims. See Oubre v. Entergy Operations, Inc. , 522 U.S. 422 (1998). Thus, employers should consult with their employment counsel to assist them in determining the proper decisional unit any time they offer severance benefits to more than one individual in connection with the same termination program.

Bill Wortel, a member of this newsletter's Board of Editors, has represented management in a variety of litigation at the administrative level, in state and federal courts and in the U.S. Court of Appeals. Mr. Wortel's experience includes defense of actions alleging violations of Title VII of the Civil Rights Act, the Age Discrimination in Employment Act, the Americans with Disabilities Act, the Family and Medical Leave Act, the Reconstruction Act of 1866, the Labor Management Relations Act, ERISA and the Illinois Human Rights Act.