Legal Updates

Severance And Release Agreements: Six (6) Common Traps And A Rhetorical Question

When employers offer severance agreements to employees in order to “buy peace,” employers should beware of common traps.  As more employers prepare their own release agreements based on a prior model, we have seen certain issues “trip up” the employers.  But before discussing the six traps, first the rhetorical question.

Your Company Is Using A Severance And Release Agreement – Right?

Some employers offer severance – but do not use severance and release agreements.  At some level, this is a business decision, depending upon the culture of the workplace.  However, offering severance without getting a release may not always be a best practice.

Conventional wisdom suggests that if the employer is offering severance, it should get a promise not to sue, in exchange.  (The benefits of obtaining a release agreement could also include other promises, such as an agreement to provide future cooperation, or to refrain from competition or solicitation of customers and employees.)  When an employer does not get that promise not to sue, and then does get sued, it tends to have regrets about the decision to effectively fund the former employee’s lawsuit with the severance that was provided “free and clear.”

Thus, we generally recommend that employers use an appropriate severance and release agreement when they offer severance.  Generally, an employer does not have an obligation to offer severance, unless there is an employment agreement or severance policy in place requiring a severance package.  But even if there is such an agreement or severance policy, then the agreement or policy should also require the execution of a severance agreement in order to receive the severance pay and benefits.

Practical Tip:  Severance policies or plans that require the payment of severance should also require the former employee to sign a release agreement in exchange for the severance.

Traps to Avoid When Your Company Is Using Severance and Release Agreements

Now, for those employers who do offer severance in exchange for a release agreement – here are a few traps to avoid. 

Trap #1: The Release Fails To Protect All Relevant Parties

Make sure that the promise not to sue protects not just the employer, but all relevant related parties, including corporate parents, subsidiaries, directors, officers, agents, employees, etc., etc., etc.  Generally, the scope of the “Released Parties” should be as broad as possible – and generally there is standard boilerplate that covers this in every agreement.  However, it is important to pause to carefully consider this issue each time that the release is used, to confirm that the defined term is sufficiently broad.  For example, an employer that uses volunteers should be sure to include “volunteers” in the definition of Released Parties.

Practical Tip:  Carefully review the standard boilerplate for each agreement, to confirm that it is appropriate – and sufficient.

Trap #2:  The Agreement Requires The Released Parties To Pay Severance

Be careful to clearly distinguish the “Released Parties” from “the Company.”  Generally, release agreements use “the Company” as the defined term for the employer that agrees to pay the severance:  e.g., “the Company agrees to pay the following severance package . . . .”

Unfortunately, some release agreements also carelessly use the same defined term (“the Company”) for the “Released Parties”:  thus, e.g.,

“Employee promises not to sue ABC Corporation, its parents, subsidiaries, affiliates, officers, directors, agents, [etc., etc., etc.] (‘the Company’).”

The mixed-use of this defined term can have the potentially disastrous, presumably unintended consequence of obligating the “officers, directors, agents, etc.” of the Company to pay for the entire severance package.

Practical Tip:  Make sure to use a different defined term for (i) the party agreeing to pay severance, and (ii) the Released Parties.

Trap #3:  The Release Waives Claims In Violation Of Federal Or State Law

The scope of claims released must be carefully monitored for compliance with applicable state and federal laws.  In most instances, employers will want the release to be drafted as broadly as possible, covering any and all claims, known or unknown, from “the beginning of time” to the date of the execution of the agreement.  Although the broadest possible release is usually desirable, certain claims may not be waived in a release agreement – and it may violate the law to seek waivers of such claims.  For example:

• Claims under the Fair Labor Standards Act (“FLSA”) cannot be waived or settled without approval from the Department of Labor (“DOL”) or a court.  Any purported release of an FLSA claim that has not been approved by the DOL or a court will not be enforceable.

• Similarly, there is a split among courts about whether claims under the Family Medical Leave Act (“FMLA”) may be waived through a private agreement.  Most recently, the Fourth Circuit Court of Appeals (which encompasses Maryland, North Carolina, South Carolina, Virginia and West Virginia) has held that FMLA claims, like FLSA claims, may be waived only under DOL or court supervision.

• Under Massachusetts law, workers’ compensation claims cannot be waived in a standard release agreement.

However, an alternative to an express release of a claim, in these situations, can be to get the employee to explicitly acknowledge as true certain facts that would hopefully preclude an FLSA, FMLA and/or workers’ compensation claim.  For example, require the employee to acknowledge, in the agreement, that he does not have a workplace injury.

Practical Tip:  Consult with experienced labor and employment counsel to tailor the agreement to the particular circumstances, and to confirm the proper scope of legal claims that can be released, in light of the facts and circumstances of each former employee’s departure.

Trap #4:  The Release Violates The OWBPA

Claims under the Age Discrimination in Employment Act (“ADEA”) may be waived in a release agreement, but the release agreement must comply with all of the requirements of the Older Workers Benefit Protection Act (“OWBPA”).  Unfortunately, violations of the OWBPA remain some of the most common mistakes employers make in drafting severance agreements.

For example, the Eighth Circuit Court of Appeals (which encompasses Arkansas, Iowa, Minnesota, Missouri, Nebraska, North Dakota and South Dakota) recently invalidated a waiver agreement because it was confusing to the employee.  As the court indicated, the OWBPA requires that a release be drafted in clear and unambiguous terms – not legalese!  In this case, the employee attempted to get clarification from the employer’s corporate attorney about two apparently contradictory provisions – the release and the covenant not to sue provisions.  However, the attorney was “not comfortable” providing clarification.  Thus, the court invalidated the release, stating “[i]t seems axiomatic that if an agreement needs clarification, it is not written in a manner calculated to be understood.”  In light of this decision, employers should carefully consider whether their severance and release agreements should still include the familiar covenant not to sue.

In another recent decision, the Tenth Circuit Court of Appeals (which encompasses Oklahoma, Kansas, New Mexico, Colorado, Wyoming and Utah, plus those portions of Yellowstone National Park extending into Montana and Idaho) invalidated releases signed by the plaintiffs following a reduction-in-force where the employer failed to follow the technical group terminations requirements of the OWBPA.  Specifically, the employer failed to disclose the correct “decisional unit” in the release agreements and failed to list all of the “eligibility factors” used to determine who was subject to the termination program.  Here again, the releases “did not meet the strict and unqualified requirement of the OWBPA,” and thus were held ineffective as a matter of law.

Employers should also be mindful that the OWBPA regulations prohibit employers from imposing a penalty on the employee for challenging the validity of a release agreement.  Improper penalties in release agreements may include provisions requiring employees to tender back consideration received if an employee brings a suit challenging the validity of the release agreement, or a provision requiring employees to pay the employers’ attorneys’ fees and/or damages because of the filing of an ADEA suit.  29 C.F.R. §1625.23(b).  (Note, however, that if an employee successfully challenges the validity of the agreement, and prevails on the merits of an ADEA suit, a court may set-off any consideration paid to the employee as part of the release agreement against any damages awarded as part of the subsequent lawsuit.)

Practical Tip:  Consult with experienced labor and employment counsel to confirm that severance and release agreements are drafted clearly and appropriately for the individuals being asked to sign the agreements, and confirm that the agreement satisfies the applicable requirements of the OWBPA.

Trap #5:  The “Mutual” Non-Disparagement Clause

Release Agreements commonly include a “non-disparagement” clause – in which the employee agrees not to disparage “the Company.”  And employees often ask for a “mutual” non-disparagement clause.  Agreeing to such a mutual non-disparagement clause, without carefully drafting the language, can be a dangerous trap for employers.

A mutual non-disparagement clause in which “the Company agrees not to disparage the employee” is almost impossible for the Company to honor.  “The Company” is a broad defined term that includes many individuals, including officers, directors, employees, agents, etc.  Thus, the “mutual” non-disparagement clause could constitute the Company’s promise that every current and future officer, director, employee, etc. will not disparage the former employee.  This is an unreasonable obligation, and should be avoided!

Practical Tip:  The Company should instead (at most) promise only to instruct certain key individuals not to disparage the former employee.  Further, the Company should keep appropriate documents to show that it kept that promise. 

Trap #6:  The Current Employee Cannot Release Future Claims

When employees are provided severance agreements before their last date(s) of employment, employers are often in a hurry to get the employee’s signature on the agreement, even before the last date of employment.  Presumably, the employers in these situations want a resolution of some kind.

Unfortunately, however, a release of future claims is not enforceable.  Thus, if the employee signs the release a week before her last day and is thereafter sexually harassed (for example) during that last week of employment, then her release agreement would not prevent her from filing a lawsuit.

Practical Tip:  One solution is to include a provision in the agreement that expressly requires the employee to sign the agreement after her last day of employment.  Alternatively, if the employer wants to get a signature before the last day of employment, then the agreement should include terms that, among other things, expressly condition payment of the severance benefits on the former employee’s execution of an appendix releasing all claims and reaffirming the agreement – after the last day of employment.

 *     *     *

Severance and release agreements offer employers a valuable opportunity to avoid costly litigation, if the agreements are drafted properly.  To avoid unwelcome challenges, employers should update their agreements to ensure they comply with all applicable state and federal laws.

The state and federal laws governing release agreements are constantly evolving.  Indeed, a comprehensive discussion of the numerous state and federal laws governing the enforceability of releases, which can vary dramatically from state to state, is well outside the scope of this article.  Thus, as time goes by, employers are well-advised to continue to consult with labor and employment counsel to identify important changes in the law and to avoid using outdated model agreements when using severance and release agreements.

Please do not hesitate to contact the Firm with questions about this article or severance and release agreements.