The Changing State Of The Law Regarding Releases

Recent cases from different circuits illustrate the uncertain state of the law regarding employers’ use of releases in exchange for severance pay. These cases serve both as hope that courts may begin to look more favorably upon releases by employees in exchange for severance payments and as a constant reminder of the perils that can befall even the most vigilant employers in preparing and tendering releases.

Sundance Rehabilitation

In EEOC v. Sundance Rehabilitation Corp., the Sixth Circuit Court of Appeals recently held that offering a release that prohibits an employee from filing a charge with the Equal Employment Opportunity Commission (EEOC) is not, by itself, retaliatory. This case marks a victory for employers in that a prominent, seemingly less employer-friendly, district court opinion regarding employers’ uses of releases was reversed by this ruling, possibly signaling a change of the tide in this unsettled area of the law.

For two years, the touchstone of caution in drafting releases was the 2004 decision in EEOC v. Sundance Rehabilitation Corp. In that case, the U.S. District Court for the Northern District of Ohio held that an employer’s offer of severance benefits in exchange for a release of the right to file a charge of discrimination was per se illegal retaliation under the Age Discrimination in Employment Act (ADEA), the Americans with Disabilities Act (ADA), the Equal Pay Act (EPA), and Title VII of the Civil Rights Act.

In so holding, the district court relied upon the Seventh Circuit Court of Appeals’ reasoning in the 1992 case of EEOC v. Board of Governors of State Colleges and Universities. In Board of Governors, the employer terminated a grievance proceeding, as permitted under the collective bargaining agreement, when the employee who brought the grievance later filed an EEOC charge. The Board of Governors court found the collective bargaining agreement provision allowing the employer to terminate the grievance proceeding upon the filing of an EEOC charge to be discriminatory on its face under the ADEA.

Relying upon the Board of Governors decision, the district court in Sundance found that “although Sundance did not have to offer its terminated employees severance packages, once it decided to do so, it could not do so in a retaliatory manner.” The court stated that “when an employer requires an employee as part of a separation agreement to give up her right to file a charge with the EEOC in exchange for severance benefits, the employer violates the anti-retaliation provisions of the laws enforced by the EEOC.”

The employee in Sundance was offered a separation agreement by the company as part of a planned reduction in force (RIF). The separation agreement provided for severance pay to the employee if she promised not to file a lawsuit or an administrative charge and released all claims against Sundance. The employee believed that she could not sign the agreement because it provided that if she filed a charge with the EEOC, which she intended to do because she believed she had been unlawfully denied a promotion, Sundance could have sued her for the return of the severance payment, attorneys’ fees and other costs.

The employee called the Sundance human resources (HR) toll-free number and asked if she could strike through the provision which prohibited her from filing an EEOC charge. The HR representative told her that if she struck through that provision the agreement would be null and void. The employee later filed an EEOC charge alleging that she was discriminated against when she was denied a promotion and that she did not sign the separation agreement because she believed that it violated her rights.

In rejecting the EEOC’s argument that such a provision is facially retaliatory, the Sixth Circuit found that the language of the separation agreement would only become retaliatory when an employer sought to enforce it through some action, such as discontinuing severance payments. Because Sundance had taken no action to enforce the release, the court held, it had not engaged in any retaliatory conduct.

Other courts have looked to the Sundance district court opinion in holding that severance pay contingent upon a release of all claims was facially retaliatory. The Sixth Circuit’s decision overturning Sundance may call into question the persuasiveness of decisions based upon the reasoning of the U.S. District Court for the Northern District of Ohio.

IBM

On August 31, 2006, a unanimous panel of the Ninth Circuit Court of Appeals held that a release with minor internal inconsistencies used by IBM was not “knowing[ly] and voluntar-[ily]” agreed to and as such did not comply with the Older Workers Benefit Protection Act (OWBPA). The case is Syverson v. IBM.

As part of a RIF in 2001, IBM offered workers scheduled for termination severance pay in exchange for executing a “Release and Covenant Not To Sue.” The release agreement clearly stated that the employees were releasing “all claims, demands, actions or liabilities you may have against IBM of whatever kind including, but not limited to, those that are related to your employment with IBM, the termination of that employment, or other severance payments or your eligibility for participation in the Retirement Bridge Leave of Absence, or claims for attorneys’ fees.”

The release agreement also contained a “covenant not to sue” provision which stated that the employees agreed not to “institute a claim of any kind against IBM.” Any individual who violated this provision would be liable to IBM for its attorneys’ fees and costs. However, the agreement further stated that the “covenant not to sue does not apply to actions based solely under the [ADEA]”; thus, “if [an employee] were to sue IBM . . . only under the [ADEA], [the employee] would not be liable under the terms of this Release for their attorneys’ fees and other costs and expenses of defending against the suit.”

Ten employees who had signed the release later filed EEOC charges against IBM alleging that the RIF violated the ADEA. The charges were dismissed by the EEOC because the releases were found to be “knowing and voluntary.” The employees later filed suit in the U.S. District Court for the Northern District of California, where IBM was granted summary judgment when the releases were once again upheld. The employees appealed to the Ninth Circuit.

The Ninth Circuit noted that while the release addressed “all claims,” the covenant not to sue (contained in the release) precluded all claims with the exception of those brought under the ADEA. The court deemed these two provisions to be in conflict and confusing; therefore, it held that the waivers were unenforceable because they could not be entered into “knowing and voluntary.” The Ninth Circuit reversed the grant of summary judgment on the employees’ ADEA claims and sent the case to the district court for trial.

Practical Advice In Light Of These Decisions

While it is clear from Sundance and IBM that releases cannot prohibit the filing of charges of discrimination, these cases provide cause for concern that an employer’s ability to offer releases in exchange for severance pay may vary from circuit to circuit. As a primary consideration, employers should carefully review their releases to ensure that they do not violate the current state of the law in their circuit, and that they clearly do not purport to prevent employees from filing charges or claims. The releases should make clear that it is only the workers’ right to remedies which are waived, and not the right to assert the protected rights by filing charges or lawsuits.

In light of the IBM decision, employers should review their releases to ensure that there are no internal inconsistencies which could give courts cause for concern. In IBM, even an internal inconsistency between two separate and distinct sections of the agreement – the terms of the release and the terms of the covenant not to sue – was considered sufficient to make the waiver confusing and thus not entered into “knowingly” under the OWBPA.

Note: This article was published in the Dec/Jan 2007 issue of The Employment Law Authority.