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Teresa M. Thompson

Teresa M. Thompson Employment & Labor

tthompson@fredlaw.com
612.492.7347
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Release of Claims in Separation and Severance Agreements

By: TERESA M. THOMPSON

December 2006

Employers have long offered severance benefits or “enhanced” severance payments in exchange for a release of all claims. This practice has always been considered a sound way to limit litigation, resolve possible disputes, and finalize the employment relationship.

Yet, in landmark litigation, the EEOC has been challenging employers’ use of these releases. In each case, the EEOC presumed that requiring an employee to release and/or waive any right to file a charge with the EEOC in order to receive severance payments is illegal, facially retaliatory, and therefore, unenforceable. Most of the cases came to the attention of the EEOC when one employee filed a charge. The EEOC then initiated litigation to eradicate the releases, seeking relief for all current and former employees affected by the agreements and releases. The requests for relief included: prohibiting the employer from using “unlawful” releases; requiring the employer to re-offer severance to any employee who had not signed the agreement; requiring the employer to notify all former employees who signed the releases to advise them of their right to file a charge; and, finally, removing any statute of limitations defense to any former employee who files a charge following notification.

These lawsuits are premised on the EEOC’s belief that agreements containing broad release language “chill” an employee’s right to file a charge with the EEOC or to assist in its investigations of discrimination. However, the EEOC’s apparent muscle-flexing  introduces new uncertainty about the validity of releases, which may very well “chill” employer incentive to offer severance in exchange for a release.

Where the Dispute Began

The challenges largely arise over different interpretations of a provision in the Older Workers Benefits Protection Act (OWBPA), which amended the Age Discrimination in Employment Act. The language reads:

No waiver agreement may affect the Commission’s rights and responsibilities to enforce this chapter. No waiver may be used to justify interfering with the protected right of an employee to file a charge or participate in an investigation or proceeding conducted by the Commission.

The EEOC has long maintained that any attempted waiver of the right to file an EEOC charge or participate in an EEOC investigation was illegal and could amount to a retaliation. In an April 10, 1997, enforcement guidance, the EEOC instructed its investigators to make a probable-cause determination in any case where an employee was required to sign an agreement that contained a waiver of a right to file a charge. It concluded that such agreements “by their very existence” have a “chilling effect on the willingness and ability of individuals to come forward with information that may be of critical import to the Commission as it seeks to advance the public interest in the elimination of unlawful employment discrimination.”  

The EEOC maintained that its position was “consistent with the public interest in the voluntary settlement of employment discrimination disputes.” It appeared to concede that a private agreement could eliminate an employee’s right to “personal recovery,” but not the EEOC’s right to seek relief that would benefit the public. That is, the employer could not prevent an employee from filing a charge. Employers altered language in their release agreements to take this new “guidance” into consideration.

These new cases appear to take the Enforcement Guidance one step further and seek far-reaching remedies that affect not only the employee filing the charge, but all employees affected by a similar release. Additionally, all of the releases contained language that appeared to comply with the OWBPA and the Enforcement Guidance.

The recent cases (two of which were brought by the EEOC in the Minnesota federal district court) provide some interesting insight. The Sixth Circuit’s rejection of the EEOC’s position may turn the tide.

The Recent Litigation

EEOC v. Lockheed Martin Corp., 2006 WL 2294540 (D. Md. Aug. 8, 2006)

A provision in the EEOC v. Lockheed Martin Corp. decision included a broad general release of all claims or charges for “personal remedies or damages.” The settlement agreement also stated:

The parties agree that this Release prohibits my ability to pursue any Claims or charges against the Released Parties seeking monetary relief or other remedies for myself and/or as a representative on behalf of others. This agreement does not affect my ability to cooperate with any future ethics, legal or other investigations, whether conducted by the Corporation or any governmental agencies.

The EEOC brought suit, claiming the release was facially retaliatory. Lockheed Martin argued that, while the release precluded an employee from recovering monetary damages, it did not prohibit filing a charge with the EEOC and therefore was not retaliatory. The Maryland federal district court agreed with the EEOC, concluding that the broad release language as illegal and retaliatory. It is unknown at this time whether the decision has been appealed to the Fourth Circuit. This case is disturbing because the language appeared to comport with the EEOC’s earlier Guidance.

E.E.O.C. v. Ventura Foods, LLC, File No. 05-CV-00663 (D. Minn. 2005) (settled Sept. 2006)

In Ventura, the EEOC addressed another provision commonly found in severance agreements:

I have not filed or caused to be filed any …charge with respect to any claim this Agreement purports to waive, and I promise never to file or prosecute a …charge based on such Claims. I promise never to seek any damages, remedies or other relief for myself personally (any right to which I hereby waive) by filing or prosecuting a charge with any administrative agency with respect to any such claim. I promise to request any administrative agency or other body assuming jurisdiction of any …charge to withdraw from the matter or dismiss with prejudice.

This litigation arose when a former employee filed a Charge of Discrimination with the EEOC, alleging age discrimination. This employee had been terminated and asked to sign a severance agreement and general release to receive “enhanced severance benefits.” He sought the advice of counsel, who negotiated for additional benefits (amounting to three months’ severance and benefits), and he signed the severance agreement and release. The EEOC determined that there was no evidence of age discrimination. Regardless, it concluded that the language of the agreement, which included a provision that the employee release his right to file a charge, was per se retaliatory. The EEOC commenced suit against Ventura – not on behalf of the employee who filed a charge, but rather to eradicate the release.  

The parties ultimately settled. As part of a September 1, 2006 consent decree, Ventura Foods denied that it violated any civil rights laws but agreed to:

  • Remove language from its standard severance agreement that required separated employees to agree not to file a charge of discrimination in exchange for severance;
  • Re-offer severance benefits to former employees who had refused to sign the agreement; and
  • Notify employees who received benefits of their right to file a charge without losing benefits or violating the terms of their prior severance agreement.

EEOC v. Land O’ Lakes, Inc., Civ. No. 06 CV 3828 (D. Minn. Sept. 25, 2006)

This action was filed by the EEOC on September 25, 2006. The Complaint does not state with any particularity the “offending” language from the separation agreement, which has not been made public. It apparently required terminated employees to agree that they had not filed a claim of discrimination with the EEOC and had no intent to do so (a common provision in many such agreements).

EEOC v. SunDance Rehabilitation Corp., Civ. No. 04-4178 (6th Cir., Oct. 24, 2006)

In SunDance, an employee was terminated as part of a reduction in workforce. SunDance did not have a severance policy, and the employee was asked to sign a broad general release in order to receive 80 hours of severance pay. The provision at issue read in part:

Releasor … agrees that she will not institute, commence, prosecute or otherwise pursue any proceeding, action, complaint, claim, charge or grievance against Company or any other released parties in any administrative, judicial or other forum whatsoever with respect to any acts or events occurring prior to the date hereof in the course of Releasor’s dealings with Releasee.

The employee believed she had been discriminated against because of her sex and did not sign the agreement. She then filed a charge with the EEOC. The EEOC issued a no-probable-cause determination relating to her sex discrimination claim, but concluded that the language in the release was retaliatory and invalid. The EEOC then commenced suit against SunDance. The federal district court ruled in favor of the EEOC and concluded that the agreements were facially invalid.

On appeal, the Sixth Circuit rejected the EEOC’s position that offering a separation agreement that conditions severance benefits on signing a release (even one that includes an agreement not to file a charge with the EEOC or to withdraw such charges) is invalid and facially retaliatory under the various federal civil rights laws. The Sixth Circuit noted, however, that any waiver of the right to file an EEOC charge is void; a release containing such a provision would not be enforceable, though the release itself would not be retaliatory or void. The Sixth Circuit concluded:

In sum, the employees of SunDance have not been deprived of anything by the offering of the Separation Agreement. Those who choose to accept it are better off, by receiving a benefit that was not “part and parcel of the employment relationship” … Those employees who reject the agreement obviously do not give up any rights. And, as we have noted above, employees may, if they wish, accept the agreement and argue later that parts of it may be unenforceable under existing or expanded precedent. Under these circumstances, simply offering the Agreement is not facially discriminatory.

The Sixth Circuit noted that its holding was a “narrow one” limited solely to the issue of whether such releases are facially retaliatory and invalid.

The Current State of Affairs

The EEOC has inserted significant uncertainty into the use of release of claims in severance and separation agreements. Employers involved in the disputes have argued that the EEOC’s position will discourage parties from voluntarily resolving disputes. Yet, the EEOC maintains that “employers remain free to settle disputes with their workers. Their agreements just have to comply with the anti-discrimination statutes.”     

The problem lies with determining how employers can do so without offending the EEOC. The EEOC has disclaimed that the OWBPA requires employers to include a provision in severance agreements that “specifically reserves” an employee’s right to file a charge. Instead, the EEOC stated:

The EEOC’s position is that employers cannot include provisions in waivers or releases depriving employees of the right to file charges, such as Ventura Foods has done here. Further, if the agreement is ambiguous, and the employee might reasonably interpret it to prohibit charge filing, the employers must clarify that the right to file a charge and participate in an EEOC proceeding is reserved to the employee.

So, what does this all mean? The law is unclear. The Sixth Circuit has apparently taken the position that employers may include broad releases in their severance agreements and that employees can be precluded from recovering additional monetary relief. However, the release would not affect an employee’s right to file a charge or participate in an EEOC investigation. This interpretation is consistent with the statutes and their legislative history, but provides no certainty for employers as the EEOC continues to pursue “invalid” releases. If you are still using a severance or separation agreement that contains language the EEOC may find “offensive,” please consult an employment attorney.