WHAT SHOULD BE INCLUDED IN A SEPARATION AGREEMENT?

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1 WHAT SHOULD BE INCLUDED IN A SEPARATION AGREEMENT? Among the most common calls labor and employment attorneys receive are from clients who ask, Can I terminate this individual? These calls are common because employers are hesitant to terminate anyone for fear that the termination will result in the filing of a (frivolous) lawsuit. There is one tool that is effective in allowing the employer to avoid expensive employment litigation after a termination. In exchange for a severance package, the employer can require the terminated individual to execute a well-drafted release of claims, commonly known as a separation agreement. In separation agreements, the employee promises not to sue the employer in exchange for a sum of money or other promise the employee would not otherwise be entitled to. A separation agreement is a contract. There must be an exchange of promises referred to as consideration. The employer must offer the employee something above and beyond that which the employee is entitled to under the law. For example, the employer cannot offer the employee his or her final paycheck in exchange for the release because the employer is already required to provide the employee with his or her final paycheck. Offering a sum of money above what is already due the employee in exchange for the release is generally sufficient to create a binding agreement. The key with any separation agreement is to ensure it is drafted in a manner that will be upheld in a court of law should a former employee bring a lawsuit against the company. Any separation agreement should seek to have the employee release any and all employment-related claims including but not limited to claims under Title VII of the Civil Rights Act of 1964 (Title -1-

2 SEPARATION AGREEMENT/2 VII), the Age Discrimination in Employment Act (ADEA) and the Employee Retirement Income Security Act (ERISA). ERISA and Title VII claims and claims under other federal employment discrimination laws may be waived by agreement, but the release by the employee must be knowing and voluntary. In determining whether a release is knowing and voluntary, a court will consider the totality of the circumstances, including the following seven factors: (1) the clarity and specificity of the release language; (2) the employee s education and business experience; (3) the amount of time the employee had for deliberation about the release before signing it; (4) whether the employee knew his or her rights when he or she signed the release; (5) whether the employee was encouraged to consult an attorney; (6) whether there was an opportunity for negotiation of the terms of the release; and (7) whether the employee was given benefits above and beyond those to which he or she was entitled by contract or law in exchange for signing the release. Although ADEA claims, other than those that may arise after the waiver is executed, may be waived by written agreement, the law imposes certain specific requirements for releases of ADEA claims. The Older Workers Benefit Protection Act, which amended ADEA, requires that employees 40 years of age or older who are being asked to waive federal age claims be given a period of at least 21 days to consider the terms of the release before signing. Additionally, the release must advise the employee of his or her right to seek an attorney s advice before signing. Finally, even after the employee signs the waiver, the ADEA requires that the employee be given an additional seven days to revoke the agreement. Although the employee can waive the 21-day - 2 -

3 SEPARATION AGREEMENT/3 requirement by signing and returning the agreement before the period has expired, the seven-day revocation period may never be shortened. Additional requirements apply if the waiver is part of an incentive or termination program being offered to a group or class of employees. Importantly, the employee cannot be asked to waive his or her right to file a charge of discrimination or withdraw a pending charge of discrimination with EEOC. This is because filing charges and employee participation in EEOC proceedings are essential to the agency s mission on behalf of the public, and not the individual employee, to investigate violations and enforce the laws it administers. Any attempt to have the employee release the right to file a charge of discrimination with the EEOC will be found unenforceable. However, a properly drafted separation agreement can have the employee waiving his or her right to any recovery the EEOC procures on his or her behalf. Recently, the argument was raised that it is illegal to require employees to waive their right to file an EEOC charge as a condition of receiving benefits. To address this concern, a separation agreement should not prohibit or restrict the employee from communicating, providing relevant information to or otherwise cooperating with EEOC or any other government authority with responsibility for the administration of fair employment practices laws or responding to any inquiry from such authority, including an inquiry about the existence of the separation agreement or its underlying facts. A separation agreement also should not require the employee to notify the employer of his or her communications with the EEOC nor should it preclude the employee from benefiting from classwide injunctive relief awarded in any fair - 3 -

4 SEPARATION AGREEMENT/4 employment practices case brought by any government agency. (Employers can still ask the employee to waive his or her entitlement to any monetary benefit or substantial equivalent thereof.) Language seeking to have an employee release claims under the Family Medical Leave Act (FMLA) presents another set of potential problems. Recent case law out of the Fourth Circuit holds that a waiver of prospective and retrospective FMLA claims requires approval by the U.S. Department of Labor (DOL) or a court of law to be effective and enforceable. Contrary to the court s holding, DOL has taken the position that an employee may waive retrospective FMLA claims but cannot waive prospective claims. The Fourth Circuit s opinion conflicts with the opinion of another appellate court, so it is possible this issue could be heard by the U.S. Supreme Court, or it may be resolved by a legislative or regulatory fix in the future. In addition to release language, a properly drafted separation agreement will set forth the particulars on how the severance payment will be paid and when it will be paid. A separation agreement should make clear that customary payroll withholdings will apply to the severance payments. A clause that has the employee acknowledging that he or she has been paid all wages and other amounts due up to the date of termination will also go a long way to avoiding costly litigation of employment-related claims. The company may also seek to include language in the separation agreement that prohibits the employee from disclosing the terms of the agreement and from making disparaging comments or statements about the company or its employees. Employers may want to consider adding a clause that requires the employee to indemnify the company for costs and attorneys - 4 -

5 SEPARATION AGREEMENT/5 fees the company incurs responding to a claim that the employee releases under the agreement. Lastly, a separation agreement should include a severability provision, which upholds the validity of the agreement despite certain clauses within the agreement that may be unenforceable; an integration provision, which provides the written separation agreement supersedes any earlier versions of the agreement or any oral representations not confirmed in writing within the agreement; and a governing law provision. # # # - 5 -