Many employers offer “severance” or “separation” pay to employees in a variety of circumstances to assist them as they bridge the gap to new employment. This typically includes involuntary terminations under difficult circumstances, involuntary layoffs as part of costsavings reductions, and voluntary exit incentive programs. Employers that offer separation pay to employees who are not otherwise entitled to it under a policy or contract are wise to obtain a release of claims in exchange for the pay.

Like other contracts, release agreements (sometimes called “waivers”) were once animals of state contract law. If the release was supported by valid consideration and was entered into knowingly and voluntarily — i.e., without fraud, duress, or undue influence — it was enforceable and barred legal claims covered by the release. This largely remains true under Michigan law, with the exception of workers’ compensation settlements that require a formal redemption hearing. In a number of other contexts under federal law, however, claims cannot be waived by the employee through a simple release. It is crucial that employers offering separation pay in exchange for a release understand what protections they are and are not buying.

Most of our readers are familiar with the Older Workers’ Benefit Protection Act amendments to the federal Age Discrimination in Employment Act (ADEA), which mandated specific minimum requirements for an enforceable release under that statute. If an employee is over 40 (and hence protected by the ADEA), a release of ADEA claims must contain certain “warnings,” acknowledgments, and disclosures (such as 21 days in which to consider whether to sign the release and a 7-day revocation period) for it to be legally effective. These requirements become more complex if the release is being signed in conjunction with a group termination program involving two or more employees, such as a workforce reduction. In those situations, the law requires a 45-day consideration period and a statistical breakdown of who is, and who is not, being offered the program, or the release will not bar an ADEA claim. Employers may wish to consider whether the likelihood of a federal age discrimination claim is great enough to warrant these extra measures, which sometimes are onerous and cumbersome from a timing and disclosure standpoint.

The federal Fair Labor Standards Act (FLSA) statutorily mandates a minimum level of wages and overtime pay for certain classes of hourly (“non-exempt”) workers. Its provisions are generally not subject to negotiation between employers and employees. Although the statute is silent as to an employee’s ability to waive apossible claim, the U.S. Supreme Court held long ago that the FLSA imposes a bar to private releases of FLSA claims. Thus, even where an employer agrees to pay wages or overtime that are the subject of a dispute, a release signed by an employee in exchange for that pay will not necessarily protect an employer from a subsequent suit for liquidated damages or other relief authorized by the FLSA. To preclude further FLSA liability, the settlement must be approved by the U.S. Department of Labor or a court. Since this is not practical in most instances, an employer should at least include in the release an explicit acknowledgment by the employee that he or she has been fully compensated for all time worked.

Claims under Title VII, which prohibits discrimination on the basis of sex, race, color, national origin and religion, and under the Americans with Disabilities Act (ADA), which prohibits discrimination based on a covered disability, can be knowingly and voluntarily waived and private releases are generally effective. Employers should realize, though, that even where the employee has released a claim, it cannot preclude the EEOC from using that employee’s claim as a vehicle to pursue a Title VII or ADA claim in its own right (though individual remedies may be limited).

The Family and Medical Leave Act (FMLA) gives eligible employees the right to take up to 12 weeks per year of leave for the birth, adoption, or placement into foster care of a child, and for the serious health condition of a child, parent, or the employee. The U.S. Department of Labor’s regulations state that “[e]mployees cannot waive, nor may employers induce employees to waive, their rights under FMLA.” The meaning and validity of this regulation have been addressed by a number of federal appeals courts, which have taken different views on whether it precludes both prospective and retrospective waivers of rights under the FMLA. It would seem that the regulation was intended to prevent employers from overreaching by asking or requiring an employee to waive FMLA rights before they had arisen or before the employee had a claim (i.e., prospectively), and was not intended to prevent employers and employees from “settling” actual or potential FMLA claims after they had ripened, such as when an employee is laid off or terminated (i.e., retrospectively). But the courts have not fully sorted this out. This too may call for special language in a release.

Employers should also understand that vested benefit rights under ERISA-governed benefit plans cannot be waived. Nor is it yet clear to what extent employees can waive whistleblower claims arising under the recently enacted Sarbanes-Oxley Act. At a minimum, a release being presented to an employee should specifically mention this new statute.

Employers hoping to buy peace of mind and avoid potential litigation costs should utilize releases as part of any individual severance agreement or separation pay program. Release documents should be carefully drafted and reviewed to cover the individual circumstances involved and to ensure that everything possible is being done to avoid or minimize potential lawsuits arising under statutes for which waiver is difficult, uncertain, or unavailable.

Eric J. Pelton

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