Agreements not to Reapply

As part of a separation agreement and release in exchange for severance, many employers include a provision that the separated employee will not reapply or be re-employed.  Such a provision can protect an employer from retaliation or other claims in the event the employer declines to rehire the separated employee if s/he reapplies.  It is important that "employer" in the context of a no-reemployment clause be defined to reflect properly the understanding of the parties - which entities are covered?  The clause should properly protect the employing entity but not be too broad.

The Equal Employment Opportunity Commission recently filed suit against AT&T, Inc. accusing it of retaliation against older workers for refusing to rehire them.  This suit is consistent with the EEOC's position that no-reemployment clauses can be per se retaliatory, even where they are consideration for a release agreement.  

In order to protect themselves in the event of a challenge, employers should make sure that no-reemployment clauses do not have a disparate impact on any protected group (such as older workers) and include a severability clause in any separation agreement to prevent invalidation of the release in the event one clause is stricken.

EEOC Issues Technical Guidance on ADEA Waivers

On July 15, the Equal Employment Opportunity Commission (EEOC) issued technical assistance on waivers of discrimination claims, including age discrimination claims, in a Q&A  format(www.eeoc.gov/policy/docs/qanda_severance-agreements.html).

The guidance, directed at employees faced with waiving claims, explains the following criteria for a release to be enforceable:

- The release must be in exchange for consideration over and above that which an employee is already entitled.

- The release must be knowing and voluntary, which means:

  • it was written in a manner that was clear and specific enough for the employee to understand based on his education and business experience;
  • it was not induced by fraud, duress, undue influence, or other improper conduct by the employer;
  • the employee had enough time to read and think about the advantages and disadvantages of the agreement before signing it;
  • the employee consulted with an attorney or was encouraged or discouraged by the employer from doing so;
  • the employee had any input in negotiating the terms of the agreement; and
  • the employer offered the employee consideration (e.g., severance pay, additional benefits) that exceeded what the employee already was entitled to by law or contract and the employee accepted the offered consideration.

In order to ensure that a release is knowing and voluntary, the release should name the claims to be released, including discrimination claims. 

Also, as explained in the new guidance, even if an employee signs a release, s/he can still bring a claim, either challenging the waiver itself or with the EEOC or other agency (which would not be covered by an employee release).  However, arguably a severance agreement can require an employee to return any severance payment attributable to a claim the employee pursues (under a "tender back" provision), or any recovery on the employee's behalf.  A release cannot require an employee to waive his/her right to bring an EEOC charge or cooperate in an EEOC investigation.  A release also cannot waive prospective claims.

The new guidance also explains the additional requirements that must be met for an effective release of an age claim under the Age Discrimination in Employment Act.  Specifically:

  • A waiver must be written in a manner that can be clearly understood. 
  • A waiver must specifically refer to rights or claims arising under the ADEA. 
  • A waiver must advise the employee in writing to consult an attorney before accepting the agreement.
  • A waiver must provide the employee with at least 21 days to consider the offer. 
  • A waiver must give an employee seven days to revoke his or her signature.   
  • A waiver must not include rights and claims that may arise after the date on which the waiver is executed. 
  • A waiver must be supported by consideration in addition to that to which the employee already is entitled.

In the context of an exit incentive, which is a termination of two or more employees, a release of an age claim also must give the employee 45 (instead of 21) days to consider and identify the decisional unit, eligibilty factors, time limits, job titles and ages of all individuals who are eligible for the program, and the job titles and ages of all individuals in the same job classifications or organizational units who are not eligible for the program.

At the July 15 commission meeting at which the guidance was issued, EEOC Acting Chairman Stuart Ishimaru commented that more older workers are staying on the job as a result of current economic conditions; more workers are age 40 and older; and, EEOC age charges are rising (private sector age discrimination charges in fiscal 2008 increased by 29% compared with the prior year and comprised neary 25% of all EEOC charges).  While the burden on employees to prove age discrimination may be high under current judicial interpretation of the ADEA, employers still must avoid age-related stereotypes and "ageist" comments in the workplace. 

 

 

Protecting Employer Interests

Many employers try to protect confidential information, customer and employee relationships, inventions, and company property as an employee is going out the door.  While these issues can be addressed as part of a separation agreement and release (see posting on Safe Separations, January 27, 2009), if an employee refuses to sign, then the employer is left without important protections.  An employee is much more likely to be willing to agree to certain restrictions at the inception of the relationship rather than at an involuntary end.

As part of an employment agreement or stand-alone confidentiality and/or non-solicitation, invention, and covenant not to compete agreement, an employer can require an employee to maintain confidentiality of confidential and proprietary information; assign invention rights; refrain from soliciting other employees, vendors and customers; and, refrain from competing.  

Initially, an employer must make sure that there is adequate consideration for the agreement. Commencement of employment, a bonus, or increase in compensation is generally sufficient.  Some states recognize continued employment as adequate consideration.

The enforceability of these agreements also differs from state to state, and depends on the breadth of the restrictions.  Generally, courts balance the restriction on an employee's ability to find future employment against the employer's interests in protecting its employee and customer relationships and competitive edge.  Employers will need to prove that the restrictions are reasonable in duration and geographic scope and that they have protected the information or property they seek to protect, such as by implementing safeguards to restrict access to confidential information.

Some states will not enforce agreements against employees who are terminated for poor performance, under the rationale that if the employee is a poor performer his/her employment elsewhere does not pose a threat.  Courts in California will not enforce restrictions on competition, although non-solicitation and confidentiality agreements may be permissible.  Other states will blue line an agreement that is too broad in duration or scope by crossing out unenforceable language, while other states will revise overly broad language.   Employers implementing these agreements in different states must understand the applicable law.  Multi-state agreements should be drafted in such a way that courts can either remove or revise the language as applicable (with the exception of California). 

Based on the foregoing state law issues, employers should carefully consider what law will apply to the agreement.  Agreements also should provide for injunctive relief, meaning that the employer can restrain an employee from violating any of the restrictions.  The employer should reserve its right to assign the agreement, such as in the event of a sale of the business, so the new entity will be protected as well.

Employers also should take steps to provide for the return of company property upon the termination of employment. Employees should agree to do so, and, where permitted by applicable law, agree that the employer may deduct the cost of unreturned property from final pay.  However, some states do not permit such deductions.

Finally, any agreement should clearly state that employment is at-will, which means that the employer and employee can terminate the employment relationship at any time with or without reason. If the parties intend that the relationship last for a certain time, the duration (and reasons to end the agreement earlier) should be defined clearly.

 

Section 409A in 2009 and Beyond...

Posted by Seth I. Corbin, Fox Rothschild LLP

Now that the rush to amend all existing deferred compensation plans to comply with Section 409A has passed, the buzz surrounding Section 409A has quieted significantly. Although the transition period to bring documents into compliance ended on December 31, 2008, the same Section 409A issues employers and employees have struggled with for the past several months extend into 2009 and are likely here for many years to come. Namely, deferred compensation plans must continue to comply with the onerous Section 409A requirements, in both form and operation, in order to avoid the tax and penalties associated with any violation.

 

Section 409A implicates a variety of deferred compensation arrangements, including severance pay agreements and employment agreements that provide for severance, salary continuation, separation pay, and even bonuses. As many businesses are forced to consider workforce reductions in 2009, it is imperative that employers remain mindful of Section 409A. A failure to comply with Section 409A could result in the immediate recognition of income to the employee, a 20% excise tax penalty, and IRS interest. Additionally, employers have enhanced reporting and withholding responsibilities.

 

The final regulations under Section 409A apply to severance plans and refer to such plans as “separation pay plans.” Although the Section 409A regulations exclude certain separation pay plans from coverage under Section 409A, each separation pay plan must be carefully examined on a case-by-case basis to determine whether Section 409A applies and, if so, whether the plan should be revised to comply with its requirements.

 

Section 409A generally prohibits the acceleration of payments, the discretion to alter a payment schedule, and limits offsets against payments under a separation pay plan. These prohibitions can often be avoided with careful drafting of separation pay plans and without disrupting the original business intent of the parties involved. Additionally, reimbursements under a separation pay plan of an employee’s deductible medical expenses are excluded from Section 409A to the extent the right to reimbursement applies during the period when the employee would be entitled (or would, but for such plan, be entitled) to COBRA continuation coverage if the service provider elected the coverage and paid the applicable premiums.

 

In a bit of good news, the IRS recently announced a limited correction program for inadvertent and unintentional Section 409A operational failures. The correction program permits self-correction with reduced penalties for such operational failures as erroneous payments of deferred compensation and impermissible acceleration of payments. While not all failures may be corrected using this program, it remains a valuable option if and when Section 409A errors are discovered.

 

For more detailed on the status of 409A see our recent Alert: www.foxrothschild.com/uploadedFiles/alert_feb
09_empBenefits409ADeadline.pdf

 

 

 

Effective Releases of Age Claims

The Age Discrimination in Employment Act  ("ADEA") prohibits employment discrimination against employees age 40 or older.  In order for a release of a claim for age discrimination under the ADEA to be effective, it must meet the requirements of the Older Workers’ Benefit Protection Act (“OWBPA”).  While simply meeting the minimum statutory requirements does not satisfy the burden of proving that the release is knowing and voluntary, failure to do so can be fatal to the enforceability of the release.            

The OWBPA requires, at a minimum, that the waiver agreement between the individual and the employer:

  • be written in language easily understood by the average employee;
  • specifically refer to rights or claims arising under the ADEA;
  • not waive rights or claims that may arise after the date of the waiver is executed;
  • provide for consideration which is in addition to anything of value to which the individual already is entitled;
  • advise the individual in writing to consult with an attorney prior to executing the agreement;
  • give the individual at least 21 days within which to consider the agreement;
  • provide for a seven-day revocation period.

The OWBPA imposes additional requirements in the context of a group or class termination. The employer must provide the departing employees with at least 45 days (not 21 days) to consider the release and provide the employees with detailed information concerning those eligible and ineligible for the separation program. The latter information must include any class, unit or group of individuals covered by the program, any eligibility factors for the program, and any applicable time limits, as well as 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.  

 

The purpose of the information is to provide older workers with enough information to decide whether a termination may be discriminatory before signing a release. If this information is inaccurate or if the employer does not define the job classification or unit properly, the age release may not be enforceable.  One court recently invalidated age releases because the company represented that it laid-off 152 employees at one facility, when the correct number was 154, and because the company used confusing codes to identify the job classifications at issue.

 

Note that the above requirements do not need to be met where an employee is not releasing a claim under the ADEA, even if the employee is part of a group lay-off or reduction. Thus, where the employee is under age 40, the employer does not need to give the employee 21 (or 45) days in which to consider the agreement (although the employee should have a reasonable period of time in which to do so) and the employer does not have to permit the employee any revocation period. In such agreements, it is advisable for the employee to confirm his or her birth date.

Safe Separations

Employee separations are increasingly more frequent in today’s economic environment. At the same time, ever-expanding employee rights combined with a poor job market may make departing employees more likely than ever to sue. 

Many employers mitigate this risk by offering a severance payment to their departing employees in exchange for a release of claims and other promises by the employee.   However, too often employers take a "one size fits all" approach to separation agreements.  In order to get what they pay for, businesses need to ensure that their separation agreements are tailored to the individual circumstances and protect the company’s interest to the fullest extent permitted by applicable law.

Separation agreements should include the following key provisions:

  • Condition severance payments on a general release.
  • General releases must be state specific.
  • Releases of some claims may not be enforceable – include an acknowledgement that the employee has received everything to which s/he is entitled.
  •  Individual or group releases for employees age 40 or older must meet the Older Workers Benefit Protection Act requirements to be effective.
  • Require the employee to return all company property before receiving any payment.
  • Further protect the company with restrictive covenants and confidentiality and non-disparagement clauses.