When employers decide to reduce the size of their workforces, or to terminate an employee who is over 40 years of age, they often offer severance pay in exchange for a release and waiver of legal claims by the terminated employees. In 1990, Congress passed the Older Workers Benefit Protection Act ("Older Workers Act"), which established procedural rules employers must follow in seeking such a waiver from employees who are over 40 years of age. Those rules provide, for example, that an employee must be given 21 days to consider the waiver, 45 days if it is offered as part of an exit incentive program, and must be given 7 days to revoke the waiver after it is signed. The waiver must also be written in understandable language and the employee must be advised to consult with an attorney before signing it.
In a 1998 decision, the United States Supreme Court ruled that an employee who receives severance pay and signs a release of claims that is technically defective under the Older Workers Act can keep the severance pay and still sue for age discrimination. Responding to that decision, some employers required employees to sign "covenants not to sue" rather than waivers, in exchange for severance pay. These covenants also required employees to agree that if they sued their former employer in violation of the covenant, they would be liable for attorneys' fees, court costs and other penalties.
Effective in January, the Equal Employment Opportunity Commission ("EEOC") has promulgated new regulations interpreting the Older Workers Act. The regulations are important because they clarify some of the rules employers must follow in obtaining releases from terminated older workers.
In particular, the regulations declare that "covenants not to sue" will be treated in the same manner as releases and waivers under the Older Workers Act. Accordingly, no matter how the release of claims or covenant not to sue is worded or characterized, it must still comply with all of the procedural requirements of the Older Workers Act. The regulations further provide that an older worker may retain severance or other benefits paid in exchange for the release or covenant not to sue, even if he or she challenges the validity of that agreement under federal age discrimination law. Employers also may not require older workers to agree to pay damages to the employer or pay the employer's attorneys' fees if, after signing the release, the employee nevertheless sues for age discrimination.
The regulations also make clear that an employer may not avoid the duties to which it agreed in the release, even if the release is challenged in court. For example, an employer must still continue to make the retirement or other severance payments it agreed to provide to the older worker over time, even if the older worker challenges the waiver in court before all the payments have been made. Finally, the regulations also make clear that, if an employee successfully challenges the waiver and obtains a damages award for age discrimination, the amount paid by the employer pursuant to the waiver can be deducted from that award.
Some employer business groups have predicted that these rules will make downsizing employers unwilling to offer severance packages to departing employees. The EEOC, on the other hand, defends the regulations as a compromise that successfully balances the interests of employees and employers. It is true that the regulations will permit employees to accept severance pay or early retirement benefits as part of a waiver and then sue for age discrimination without automatically being liable for court costs or attorneys' fees. Nevertheless, a careful employer can still negotiate severance pay terms and obtain an enforceable waiver that will effectively preclude an employee from successfully litigating claims he or she has waived.