This article will address responding to and resolving employment disputes after the employee has asserted a claim following termination of employment. We will discuss reducing the risk of claims by the use of provisions in severance policies and individual employment agreements that contain a "prepackaged" severance arrangement.
In addition, we will discuss provisions that provide for the forfeiture of compensation (such as stock options) if the employee does not provide the employer with a general release. We also will discuss the pros and cons of using different forms of dispute resolution, including mediation and arbitration.
Next, our discussion will turn to the use of releases. We will discuss the key legal principles and practical guidelines to follow to obtain an enforceable release by the employee of all employment claims. Special attention will be paid to the provisions of the Older Workers' Benefit Protection Act (OWBPA).
Finally, we will turn to a review of tax issues that exist as a result of Congress' recent amendment to Section104 of the Internal Revenue Code and the effect this amendment has on the taxability of settlement payments to former employees. The article ends with a discussion of litigation strategies and factors to consider when evaluating a case for settlement.
Using Severance Policies, Individual Employment Agreements, and Alternative Dispute Resolution to Reduce Claims
Prehire Arbitration Agreements
Consider having employees/applicants sign agreements to arbitrate or mediate suits, or agreements to waive jury trials. The civil trial process for employment claims is long and difficult. Even those employers who prevail after a jury trial sustain substantial costs and disruption in business in so doing. The risk of a truly aberrant verdict is always present.
Many employers, since the United States Supreme Court's decision in Gilmer v. Interstate/Johnson Lane Corporation, 500 U.S. 20 (1991), are implementing employment arbitration agreements to deal with employment disputes proactively. These agreements are not foolproof; the enforceability of arbitration agreements between employers and employees under the Federal Arbitration Act, 9 U.S.C. §§1-14 (Act or FAA), is an unresolved and hotly contested issue due to a provision in the Act that renders at least some agreements relating to employment not subject to the Act.
Section 1 of the Act excludes from coverage the employment contracts of workers engaged in the movement of goods in interstate commerce. Historically, courts had held that the FAA excluded almost all employment contracts, as essentially every worker is engaged in the movement of goods in interstate commerce.
Since Gilmer, however, every circuit court to squarely address the issue has interpreted the "employment exception" narrowly, applying it only to workers actually, physically engaged in the movement of goods in interstate commerce.
The cases after Gilmer have been mixed, and many of the cases involve the securities industry due to the type of agreements mentioned above that the NASD requires brokers to execute in exchange for registration. Although the entire impact of Gilmer is not yet apparent, the case already has had a substantial impact in the employment context, with the majority of decisions favoring enforceability of an arbitration clause.
Not surprisingly, the EEOC has taken the position that such mandatory arbitration agreements are unenforceable. See, e.g., Duffield v. Robertson Stephens & Co., No.C-95-0109-EFL (N.D. Cal. 1995) (amicus brief filed by EEOC); Cosgrove v. Shearson Lehman Bros., 105 F.3d 659 (6th Cir. 1997) (amicus brief filed by EEOC). In Duffield, the EEOC's position was stated as follows:
The Commission strongly favors the voluntary use of arbitration and other forms of alternative dispute resolution (ADR) and believes that properly used it can speed and simplify the process of adjudicating discrimination claims. However, arbitration that is not knowing and voluntary deprives individuals of substantial rights provided by Congress, especially where - as alleged here - the procedures are unfair and specifically designed not to safeguard statutory rights.
A number of courts have sided with the EEOC's view, despite the majority view to the contrary. Additionally, even some decisions upholding mandatory agreements generally to arbitrate strike certain provisions of those agreements as unenforceable.
For instance, in Cole v. Burns International Security Services, 105 F.3d 1465 (D.C. Cir. 1997), the court considered to what extent an employee can be required, as a condition of employment, to:
- waive all rights to a jury trial in a court of competent jurisdiction with respect to any dispute relating to recruiting, employment, or separation from employment, including claims of employment discrimination; and
- sign an agreement providing that, at the employer's option, any such dispute must be arbitrated.
Essentially, the court considered the enforceability of a provision that required employees to arbitrate claims involving violations of statutory rights. The court held that the agreement to arbitrate was enforceable, but that a provision requiring the employee to bear the full cost of the arbitration was unenforceable.
To assess the value of mandatory arbitration agreements in resolving employment-related claims, an employer must evaluate the positive attributes of such agreements in light of the negatives.
Negatives of Arbitration Agreements
While the following is by no means an exhaustive list of the possible detrimental effects of mandatory arbitration agreements, a few of the more troubling issues follow.
- Some have argued that employees, stirred by the convenience, cost-effectiveness, and availability of the alternative dispute resolution (ADR) mechanism of arbitration, may become encouraged to pursue questionable claims.
- Another potential detraction is that an arbitration decision is binding. Thus, if the employer does not like the decision that is rendered by the arbitrator, only limited appellate or court review of the decision is available to challenge it.
- A number of legal commentators have noted that the pool of traditional arbitrators upon which the company would likely be drawing are labor industry arbitrators who have grown comfortable with the concept of "just cause." The employer's failure to use "progressive discipline" prior to termination might creep into the arbitrator's analysis or influence the arbitrator's opinion.
- Having primarily functioned in an environment where the goal is to preserve a long-term relationship between the parties, labor arbitrators may be swayed to "split the baby" in individual employment disputes, giving some issues to the employee and others to the employer. This type of decision can be quite harmful in the average employment case.
- Last, many arbitrators are used to "hearing the merits" of a dispute and are not receptive to legal and technical arguments, such as timeliness defenses, or other "technical" arguments that are prevalent in employment suits. Employers who have a compelling argument on a particular point of law are often surprised to receive "short thrift" from the arbitrator when presenting it.
A few benefits of arbitration of employment disputes follow.
- On the other hand, an arbitrator's history in the labor field can have certain benefits for the employer. Given their history with labor agreements, which do not provide for awards of punitive or compensatory damages, many arbitrators are hesitant to award them.
- Arbitrators also tend to err on the conservative side when awarding damages and tend to avoid giving plaintiffs a "windfall" (e.g., no offset against back pay for unemployment earnings).
- One particularly important benefit, according to many employers who have had experience in this area, is that it is easier to predict and estimate the outcome, liability, and exposure value of cases in arbitration.
- Quicker and less expensive. Court litigation, depending on complexity, can span a decade and can cost hundreds of thousands of dollars. Further, formal litigation acts as a drain on human resources in the organization. Arbitration of discharge or other claims generally occurs within one year of the dispute being raised, and since extensive discovery and motion practice is not generally permitted, arbitration tends to be much less expensive than court litigation. Also, due to the fact that arbitration tends to occur in a compressed time frame, with less litigiousness between the parties, the hostility that contentious litigation engenders is less likely to occur.
- Lack of adverse publicity. Court plaintiffs often release copies of the pleadings in the case to newspapers to generate interest in their stories and to create community backlash towards the employer-defendant (generally a large company). Threats of "going public" or "to the media" are bantered by plaintiff’s counsel and used as leverage to effectuate favorable forced settlements for the plaintiff. Arbitration, however, is a private process, and rulings are not generally released to the public without the consent of both parties.
- Last, while many issues litigated in one court forum can be binding on the employer in future cases, that is not generally the case with arbitration, where the decision in one case is typically not binding precedent in another involving the same employer.
Mandatory Mediation vs. Arbitration
Much of what has just been discussed with respect to arbitration applies equally with respect to mandatory mediation. Clearly, these alternatives involve a tradeoff between the risk that the agreement will be held unenforceable and that the agreement, if enforceable, will reduce the employer's risk of liability by providing the broadest prospective waiver of or alternative to an employee's right to a judicial forum.
Clauses to arbitrate, mediate, or waive jury trials should be carefully drawn, and issues of adequate legal consideration (monetary or other benefits supporting the employee's agreement) should be fully developed and discussed with legal counsel before implementation.
Of course, in the event that a prehire agreement with such clauses was not entered into in advance of a dispute being raised, the parties are always free to agree to other methods of alternative dispute resolution after the dispute has arisen.
Discussed below are the essential differences between the various forms of alternative dispute resolution, from the least coercive - mediation - to the most coercive - arbitration.
Forms of Alternative Dispute Resolution That Can Be Implemented in Employer-Employee Disputes.
- A cooperative, interest-based process of negotiation managed by a neutral third party with the goal of mutually resolving the problem in a way that is satisfactory to both sides.
- The parties make all decisions for themselves. The mediator simply assists the parties in examining their needs and interests and in exploring options for settlement of the dispute that address the needs of all parties. The mediator does not make decisions for the parties.
- The parties retain control of the conflict-resolution process and speak for themselves. Sometimes the parties use counsel to assist them during the presentation and decision-making process.
- Procedural rules concerning participants' confidentiality, disclosure of information, the effect of any settlement agreement, caucusing, and the like are developed on a case-by-case basis and are tailored to meet the needs of all parties. The mediator will often present simple "protocols" for consideration.
- The parties reach agreement based on an exploration of resolution options that address the needs and interests of all parties.
- The mediator centers discussions on the present, not the past, and on how to best plan for the future. The mediator also focuses discussions on the common interests and bonds of the parties.
- This process is one in which two parties settle their differences by themselves, without a "neutral" third party. Negotiation can be approached either competitively or cooperatively.
- The parties make all decisions for themselves.
- The parties may choose to speak for themselves, or they may each have an advocate (e.g., an attorney) to negotiate on their behalf.
- The parties create their own rules of negotiation.
When a competitive approach is taken, positional bargaining is used and often results in each side giving up something (compromising) so that neither side feels as if they have won (i.e., a lose-lose outcome).
- When a cooperative approach is taken, the parties try to find solutions that address each of their concerns and needs, with the objective that both sides conclude that the outcome is satisfactory (e.g., a win-win outcome),
- The parties enter the process voluntarily.
- The focus can be on either the past, present, or future, or a combination of all three.
- This process, the benefits and disadvantages of which were discussed above, is an adversarial contest where the goal of each party is to win at the expense of the other.
- A third person (a single arbitrator or arbitration panel) determines the victor and the vanquished. The parties relinquish control over the outcome.
- Again, the parties often turn control of the process over to an advocate.
- The rules are less formal than those in litigation, but they still control and determine the issues to be examined, the evidence that can be presented, and the outcomes that can be considered.
- Positional bargaining is used. As discussed above, arbitrators often "split the difference" in an attempt to give something to both sides.
- One party is often an involuntary participant.
- The focus is on the past, and the goal is to assign liability or fault.
When approaching cases with mediation or negotiation, it is important to keep in mind that most people tend to operate from a competitive framework. That is, it is a cultural issue in that our society has been programmed from so many sources to believe that strong people with principles act in a hard-and-fixed way about their beliefs, while weak-willed people act in a soft or compromising way about their beliefs.
Therefore, many feel that engaging in mediation or in cooperative negotiations may seem like an indication of weakness or failure. In fact, these processes can often bring about a quick resolution.
In our court system, where thousands of lawsuits are filed each day, judges, participants, and administrative agencies realize that if new approaches are not utilized, much of the time, neither side will prevail.
ADR Utilized by Courts and Agencies
Due to the impact of the explosion in employment and other litigation, certain court dockets have become extremely backlogged. In response, administrative agencies and most federal and state courts have promulgated rules or processes that encourage expedient resolution of claims through a variety of mechanisms, including mediation, arbitration, and other forms of alternative dispute resolution (ADR).
Settlement Week and Local Rules of Procedure for ADR
The American Bar Association has stressed the importance of alternative dispute resolution as a complement to litigation. A few state and federal courts in Ohio, New York, Florida, Texas, Minnesota, and Washington, D.C. have implemented "Settlement Weeks," in which the participating courts drastically cut back on the docket of civil trials and contested hearings to permit selected cases to be mandatorily mediated by members of local bar associations, who volunteer their time in an effort to assist parties to settle cases promptly and fairly, before trial and with less expense and time.
Additionally, a few federal district courts were selected to participate in a pilot ADR project that permitted the parties to engage in arbitration at any time during the course of the litigation. Ten districts were subject to nonbinding arbitration (unless otherwise agreed to by the parties) and another 10 districts were subjected to binding arbitration.
The consensus with respect to the project in the districts where nonbinding arbitration rules were utilized was that few parties took advantage of the program because the arbitration result is nonbinding unless otherwise agreed to by the parties.
Plaintiffs' counsel has criticized the system as giving the defendant a chance to "try out" the strength of the plaintiff's case without having to live with the results, and management attorneys' negative comments have centered on the issue of the process being one in which the plaintiff obtains the benefit of free discovery and then has the chance to put their client through it all again, the next time in court, if the plaintiff does not like the results.
Equal Employment Opportunity Commission
Over 400 discrimination charges previously filed with the EEOC were offered in 1997 for resolution through mediation under an agreement between the EEOC and the Federal Mediation and Conciliation Service (FMCS).
This agreement is a step in the EEOC's process of establishing a viable alternative dispute resolution program. Currently, many of the agency's district offices have also developed ADR programs, all of which are a part of the agency's new charge prioritization procedures, and conciliation procedures are an attempt to meet that goal as well.
The agency has focused on referring prime cases to mediation. The ideal type of charge for mediation is a situation where the employee is still employed by the employer, as both sides have an immediate interest in working out a solution. The process is voluntary for the charging party and the employer.
Prior to mediation, the parties sign a mandatory agreement specifying that each will participate in the mediation program and that they have been informed that the proceedings are totally confidential.
Each mediation period can last a maximum of 60 days, but if a resolution is not reached during that time, the charge will be returned to the EEOC and will be processed as a new charge.
If the parties resolve the dispute, the settlement is reduced to writing and executed by the parties and the mediator. The EEOC district director's signature is required, but not as a sign of approval as to the "content" of the agreement. The agreement is a binding document and it is enforceable like any other contract.
Commercial Arbitration Services
A number of commercial firms, such as the American Arbitration Association (AAA) and Judicate, provide alternative forms of dispute resolution. Parties can voluntarily submit their dispute to such services on a fee-for-service basis.
Generally, each such ADR organization has rules that govern the choice of the "neutral," the proceedings, procedure, and disposition of the matter. See National Rules for the Resolution of Employment Disputes, American Arbitration Association (effective June1, 1996).
The American Bar Association's ADR Due Process Protocols
The American Bar Association's House of Delegates approved an ADR Due Process Protocol (Protocol) on February 3, 1997, for the mediation and arbitration of employment-related claims involving statutory rights.
The Protocol noted that the Task Force created to develop the due-process standards was not able to reach a consensus on whether an agreement to mediate or arbitrate such claims can be a condition of the employee's initial or continued employment. The Task Force was able to agree that such agreements should be knowingly made.
The following due-process standards were approved:
- The procedure adopted should specify that: (1)Employees should have the right to be represented by a spokesperson of their own choosing; and (2) the procedure should include reference to organizations that might offer assistance in locating a spokesperson.
- Any fee agreements should be negotiated between the spokesperson and the employee. However, the arbitrator should have the authority to provide for fee reimbursement by the employer as part of the remedy.
- Adequate but limited pre-trial discovery should be encouraged, and employees should have access to all information reasonably relevant to the resolution of their claims.
- A roster of mediators and arbitrators experienced in employment matters should be established by the relevant organization (e.g., the AAA). Further, mandatory training should be provided periodically to ensure knowledge of the statutory environment in which these disputes arise.
- Mediators and arbitrators on the roster must be impartial and free of conflicts of interest. They should reject cases if they believe the procedure provided lacks the requisite due process.
- Impartiality is best assured by parties equally sharing the fees and expenses of the mediators/arbitrators. In the event of nonagreement between the parties as to this issue, the arbitrator/mediator should determine the appropriate allocation of fees and expenses.
- The arbitrator's award should be final and binding, and the scope of review of the award should be limited.
- Mediators and arbitrators should be selected from a list using an alternate striking procedure, after the parties have had an opportunity to review information about the panel. If used in selecting an arbitrator, the information should include a list of parties/representatives in recent cases decided by the arbitrator.
- The arbitrator should be bound by applicable agreements, law, and rules of procedure of the designating organization.
- The arbitrator should be empowered to award whatever relief would be available in court under the law, and he/she should issue an opinion and award.
Consider a Written "Open-Door" Policy
An "open door policy" is a tool for the earliest resolution of conflicts between workers and their employers. Problems in the workplace will eventually come to management's attention. An open door policy permits the issue to be addressed at the earliest possible moment before it reaches catastrophic proportions.
Careful consideration needs to be given to the drafting of such a policy. A non-exhaustive list of issues to review when establishing this communication link are
- Who in the organization will have an "open door" (the "receiver");
- What methodology will be employed by the receiver of the issue;
- What kind of training will the receiver have;
- What types of problems will the receiver be equipped/authorized to deal with; and
- How will issues that go beyond the open door policy be addressed/handled? and how formal/informal will the process be?
Consider Instituting a "Peer Review" Program
Another option for internalizing workplace concerns that can be utilized in addition to or apart from an open door policy is a "peer review" process where an employee's peers are asked to review and decide his/her issue of concern.
Many employers believe that a number of employer/employee issues can be resolved through employee participation and shared responsibility. Commentators on peer review procedures have noted that such a process can assist in keeping a non-union employer union-free.
Although the details of such programs vary from company to company, shared characteristics generally include:
- non-management employees form a majority of the panel;
- the panel's decision is final and binding;
- all proceedings are confidential; and
- peer panelists are volunteers who receive formal training.
There are several ways in which peer review may reduce litigation and assist in resolving workplace concerns. The mere availability of peer review may disincline employees towards seeking court redress.
If an employee's concern is heard fully but resolved in a manner unfavorable to him/her in a peer review process, the employee may be less likely to sue because he or she has had a full and fair opportunity to be heard.
Courts and/or agencies may turn away employees who have not availed themselves of an existing peer review process or may refuse to hear a case following a final and binding peer review "verdict." At a minimum, a peer review program will likely improve the "equities" favoring an employer in any subsequent adversarial proceeding.
However, keep in mind that a potential downside to this type of program includes manager morale issues. In a peer review process, managers' collective decision-making is no longer final. Exposing manager decision-making to employee scrutiny could be threatening. An effective communications and training effort among management would be important to acceptance.
Severance Pay Conditioned on Execution of a Release
Settlements of employment discrimination allegations or other employment-related disputes raise special concerns. Unlike other types of claims, employment-related disputes generally involve claims by an employee or former employee about an act of the employer, for example, termination, layoff, demotion, or denial of raise or promotion. Employers are often concerned that resolving such disputes may, therefore, be seen as an admission that the company did something unlawful.
In addition, employers are often concerned that settlement of employment-related litigation on a monetary basis, perhaps more than other types of litigation, will encourage more charges or lawsuits to be filed. Many employees do not accept responsibility for the reasons for their termination or their performance failings in the workplace.
Thus, there is always a supply of potentially disgruntled, and perhaps litigious, employees. For this reason, absent real assurance of confidentiality, the traditional "nuisance value" may not apply as readily to employment cases, because the cost of the individual matter may not accurately reflect the far-reaching cost of settlement.
Despite these concerns, there are many disputes that, from a defense perspective, should be settled, or dealt with, before they turn into litigation. No procedure can be uniformly used in resolving such disputes; nor is any one procedure a surefire way of preventing litigation. Discussed below, however, is one such procedure.
Using Separation Releases in Exchange for Severance Pay
By offering and entering into a release agreement, even prior to the institution of formal charges, the employer gives additional compensation (above and beyond what the employee is entitled to by law or other agreement, policy, or practice of the employer) to the employee and, in return, receives a commitment from the employee to release the employer of all claims and not to file suit against the employer, among other things.
Releases of claims have to be "voluntary and knowing," a standard historically developed through common law. However, in 1990, OWBPA was enacted to regulate the process of negotiating a release of claims under the ADEA by establishing eight minimum conditions for a "knowing and voluntary" ADEA release, which are listed below.
While it is true that the statutory requirements of the OWBPA apply only to ADEA releases, it is the only federal statutory guidance as to the standard of "knowing and voluntary" that currently exists. Thus, cautious employers should consider following some or all of these requirements (modified to include the release of all claims) when requesting releases of other statutory or common-law claims in addition to those arising under the ADEA. The requirements of the OWBPA are:
- the waiver is part of an agreement between the individual and the employer that is written in a manner calculated to be understood by such individual, or by the average individual eligible to participate;
- the waiver specifically refers to rights or claims arising under the ADEA;
- the individual does not waive rights or claims that may arise after the date the waiver is executed;
- the individual waives rights or claims only in exchange for consideration in addition to anything of value to which the individual already is entitled;
- the individual is advised in writing to consult with an attorney prior to executing the agreement;
- the individual is given a period of at least 21 days within which to consider the agreement; or
- if a waiver is requested in connection with an exit incentive or other employment termination program offered to a group or class of employees, the individual is given a period of at least 45 days within which to consider the agreement;
- the agreement provides that for a period of at least seven days following the execution of such agreement, the individual may revoke the agreement, and the agreement shall not become effective or enforceable until the revocation period has expired; and
- if a waiver is requested in connection with an exit incentive or other employment termination program offered to a group or class of employees, the employer informs the individual in writing in a manner calculated to be understood by the average individual eligible to participate, as to:
- any class, unit, or group of individuals covered by such program, any eligibility factors for such program, and any time limits applicable to such program; and
- 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.
Also note that since little guidance exists as to the definition of a "group" of employees, many cautious employers have treated terminations of as few as two employees as a group termination. Accord, EEOC Draft Notice of Proposed Rulemaking, 29C.F.R. §1625.22(f)(1)(C).
Since the OWBPA is a relatively new statute, extensive case law has not developed as to the meaning of various provisions of the statute. In response to the uncertainty generated by the statute, the EEOC organized an advisory panel to draft proposed regulations on waivers under the ADEA. See Draft Notice, supra.
Although much criticism has been directed at the committee's draft proposal, the regulations (if adopted) will provide guidance in an area that is currently plagued by doubt.
An Offer of a Severance Package in Exchange for a Release of Claims May Be Used Against an Employer in a Later Proceeding
One of the drawbacks to offering a severance agreement in exchange for a release is that, in certain circumstances, if agreement is not achieved and an employee pursues the claim, the employee may argue that the attempt to secure a release is evidence of a guilty conscience.
For example, in Cassino v. Reichold Chemicals, Inc., 817 F.2d 1338, 1342 (9th Cir. 1987), cert. denied, 484 U.S. 1047 (1988), the Court of Appeals for the Ninth Circuit held that when an employment relationship is terminated and the employer offers a contemporaneous severance package in exchange for a release of potential claims, including claims for discriminatory acts that may have occurred at or before the termination, those agreements are relevant to the circumstances surrounding the alleged discriminatory employment decision itself.
In short, such agreements can be argued to be "probative of the issue of discrimination." Id., 817 F.2d at 1342. Other courts disagree with this approach. See DiBiase v. Smith-Kline Beecham Corp., 48 F.3d 719, 728 n.10 (1995).
Admissibility Is Not an Issue If a Claim Has Been Interposed
If a claim has been raised in any fashion except in an administrative or court forum (e.g., a letter from the employee's attorney), evidentiary rules exist, both on the state and the federal level, that prohibit the use of agreements or negotiations between the parties relating to settlement of the claim from being later utilized as evidence against the opposing party. The rules that bar settlement negotiations as evidence of the employer's liability serve the purpose of encouraging early and expedient resolution of disputes.
Waivers and Releases
It is instructive to discuss some other problem areas that are raised by the use of severance waiver and release agreements, as well as the types of provisions generally contained in such documents. (See Appendix, Form No.27.) Discussed below are a number of provisions that can be included in a waiver and release agreement and some of the issues associated with such provisions.
Agreements Not to File Charges or Cooperate With an Administrative Agency
Obviously, in giving substantial consideration to the departing employee, employers seek assurances that the employee will not take those resources and utilize them to wage war on the employer.
Thus, releases frequently contain a provision that prohibits the employee from prosecuting or instituting charges at an administrative level regarding any events that occurred prior to executing the release, or from cooperating with an agency in the investigation of a charge, relating to the employee or others similarly situated.
However, some courts have taken a dim view of such provisions. For instance, the Court of Appeals for the First Circuit recently ruled that employees who sign releases that contain "nonassistance" clauses with respect to agency investigations may still cooperate with investigations and volunteer information to such agencies. EEOC v. Astra USA, Inc., 94 F.3d 738 (1st Cir. 1996).
Astra had been the target of complaints about widespread sexual harassment. The EEOC was investigating three separate charges alleging the company violated Title VII of the Civil Rights Act of 1964. The employer entered into settlement agreements with employees relating to charges of sexual harassment in which the employees promised not to file, or assist anyone in any way with filing, a charge of discrimination.
Other employees filed charges of discrimination, and during the EEOC investigation, the employees who signed the foregoing agreements declined to cooperate with or provide information to the EEOC in the investigation of these charges. The EEOC asked the court not to enforce the release provisions that prohibited the employees from cooperating in the investigation process.
The First Circuit held that " non-assistance" covenants that prohibit communication with the EEOC are "void as against public policy." However, the court further ruled that the employees who settled privately with the company should not also be able to file individual charges with the EEOC.
The First Circuit ruled that "[a]s long as enforcement of the non-assistance covenants is enjoined, the EEOC's current investigation will not be impeded even if settling parties cannot file additional charges."
Providing for Payment of Employers' Costs or Other
Compensation Upon Breach
Another common waiver and release provision deals with the consequences to an employee if he or she breaches the agreement not to initiate a suit. These provisions usually provide that the employee will agree to pay all costs and expenses incurred by the company in defending against the suit, including reasonable attorney fees.
Although few cases have been decided with respect to the enforceability of this type of clause, in Astor v. IBM Corp., 7 F.3d 533 (6th Cir. 1993), the court held that the employer was entitled to recover attorney fees when the employee breached an agreement not to sue.
Under some circumstances, these "recoupment" provisions can also provide for an assignment of deferred compensation or "phantom stock" in the event of a breach by the employee. This issue is complicated and involves ERISA concerns beyond the scope of this article. Clearly, any inclusion of such language in a waiver agreement should be reviewed by an employee benefits attorney.
Many executive employment agreements also contain a clause relating to forfeitures of stock options in the event that the employee breaches the employment agreement. For instance, many employment agreements contain a promise that the employee will execute a waiver and release agreement in exchange for a stated amount of severance at the termination of employment.
The agreement may also provide that if the employee breaches, the stock option forfeiture clause of the employment agreement will be implemented.
Ratification of an Otherwise Invalid Voidable Release
Some courts have held that even if an ADEA waiver is not in technical compliance with the OWBPA's requirements, if an employee accepts or retains the consideration provided by the employer, the waiver has been "ratified."
A valid waiver, whether by reason of ratification or technical compliance with statutory mandates, should prevent the employee from rescinding upon the agreement and suing his/her employer. Whether an employee otherwise ratifies an invalid ADEA release by keeping the settlement monies is still an issue on which much disagreement among federal courts exists.
In order for a waiver and release to be valid, the employee must receive "consideration." The consideration must be something of value to which he or she is not already entitled. For instance, an employee's last paycheck cannot be used as consideration because the employee is already entitled to receive that payment under the law.
A written severance plan, if properly written, may provide consideration for a release. To do this, the employer must condition payments under an existing plan upon the employee signing a release. Generally, employers may amend severance plans to state that a release is required before payment of severance will be made.
Agreements Not to Apply for Future Positions or Seek Reemployment
Releases also often contain provisions that are intended to permanently sever the employment relationship between the parties. The courts have not finally resolved whether an employee can contractually agree to remove himself or herself from the employer's future labor pool. The EEOC has previously said that a clause prohibiting reapplication to the employer, if requested in connection with an ADEA waiver, is unlawful. See EEOC Opinion Letter, December15, 1983.
The 21-Day or 45-Day Requirement
Another open issue is whether the release is "knowing and voluntary" if the employee signs the release within the 21-day window period, so long as the employer gives the employee 21 days to "consider" the release. The best answer to this question is yes, although it is not entirely free from doubt.
The draft guidance from the EEOC advisory panel states that an employee can execute the waiver before the mandated time period if the decision is made without coercion from the employer. See EEOC Draft Notice of Proposed Rulemaking, 29 C.F.R. § 1625.22(e)(6).
The notice also states that material changes in the release will cause the 21- or 45-day waiting periods to begin all over again, but that the parties can agree that material changes will not start that time period running anew. That provision also states the panel's position that the seven-day revocation period cannot be shortened, even by mutual agreement.
For those instances where the employer makes the business decision to accept a release from the employee within the 21-day window period, we suggest that the employer consider implementing the following practices to avoid a future claim by the employee of age discrimination contending that the release is invalid.
First, counsel management employees not to pressure the employee to sign the release within the window period and that ambiguous statements made by employers to employees about when the release must be returned will be interpreted by the employees in a light most favorable to them in the event of subsequent litigation.
For those employers who want an employee to have the option of signing within the 21-day window period (most do), to reduce the risk that the employee will sign the release and then sue, claiming the release is invalid, it is advisable to include the provision noted above, whereby the employee agrees to pay any counsel fees if the employee breaches the promise to sue.
Further, it is advisable to include a provision in which the employee acknowledges he or she signed the release within the 21-day window period voluntarily and without coercion.
Information to Be Provided in 45-Day Situation
The information, including job titles and ages of individuals selected and individuals not selected for an employment termination program, which the employer is required to provide to terminated employees in order for their waiver of ADEA rights to be knowing and voluntary under the OWBPA, is a confusing obligation, as different employers have their workplace and workforce set up differently.
Recently, a court held that such information could include information concerning employees outside a single facility. The wording of the statute does not restrict naturally broad definitions of "job classification" or "organizational unit" to a single plant, and inclusion of employees from other facilities might be consistent with OWBPA's purpose of permitting older workers to make informed decisions about releases. See Griffin v. Kraft General Foods Inc., 62 F.2d 368 (11th Cir. 1995).
The Draft Notice devotes more than two pages to this portion of the statute and provides illustrative examples. It cautions that "[e]ach informational disclosure must be structured based upon the individual case, taking into account the corporate structure, the population of the decisional unit and the requirements of [the informational section of the statute]," Draft Notice, 29 C.F.R. §1625.22, at (f)(4)(G), and that when "identifying the population of the decisional unit, the employer acts on a case-by-case basis, and thus the determination of the appropriate class, unit or group, and job classification or organizational unit for purposes of [the statute] also must be made on a case-by-case basis."
Letters of Reference
Often a letter of reference will be requested by the employee during the course of negotiating the terms of the waiver agreement. While in-depth discussion of the issues related to providing such reference letters is beyond the scope of this article, suffice it to say that if the employer makes a decision to provide a reference letter, a provision should be placed in the agreement which sets forth the obligations of the employee with respect to procuring a reference for prospective employers, i.e., that the employee must request the letter by writing to a designated individual in the employer's organization, providing the name and address of the recipient of the letter.
If that condition is met, the employer will then agree to send a letter, the terms of which were agreed upon in advance by the parties and the form of which is attached to the employee's waiver agreement as an exhibit.
Recently, the United States Supreme Court issued a decision that may militate against a decision to provide references at all. In Robinson v. Shell Oil Co., 1997 WL 63007 (1997), the Court held that former employees are "employees" within the meaning of employment discrimination laws, and thus can maintain an action against a former employer for "retaliation," with respect to acts that have occurred subsequent to the termination of employment.
Thus, if an employer provides a negative reference to a former employee's prospective employer, it risks a separate retaliation claim averring that the employer retaliated against the employee by providing a negative reference solely because the employee had exercised his or her statutory right to file a charge or suit.
The Court held that the employer can no longer defend against such a claim by asserting that the former employee is not an "employee" to which the protection of the statute attaches.
Tax Issues in the Settlement of Claims
Prior to the passage of the federal Small Business Job Protection Act of 1996, (SBJPA) the state of the law as to the taxability of employment discrimination awards and settlements was extremely complicated.
While the new law creates some fairly simple rules with respect to the tax treatment of awards and settlements, it complicates the parties' ability to settle on economically advantageous terms, since virtually all damages are now subject to income tax.
Section 1605 of the SBJPA modified Section 104(a)(2) of the Internal Revenue Code regarding damages received on account of personal injury or sickness. The law overruled past interpretations of the Section that provided for the exclusion of various types of employment discrimination and injury-to-reputation damages.
The measure amended the Section to provide that only nonpunitive damages received on account of an actual personal physical injury or sickness are excludable from income. Further, the legislation provides that "emotional distress" is not to be treated as a physical injury or sickness, and hence, such awards now are taxable.
The legislative history states that such conditions as insomnia, headaches, and stomach disorders resulting from emotional distress are within the definition of emotional distress.