Employee Releases
| Jurisdiction | United States,Federal |
| Citation | Vol. 50 No. 2 Pg. 0042 |
| Pages | 0042 |
| Publication year | 2009 |
2009 Fall, Pg. 42. Employee Releases
Volume 50, No. 2
Fall 2009
Layoffs are a certainty in any economic downturn. The current recession is no exception. The most recently reported unemployment rate in the United States is 9.5 percent.(fn 1 ) Since the start of the recession in December 2007, the number of unemployed in the United States has risen by over seven million.(fn 2 ) Employers are downsizing at a fast pace.
Employers letting workers go in this economy know that it will not be easy for their employees to find work. As a result, many employers want to cushion the blow until employees find other work and at the same time avoid legal actions based on the layoffs.
Many employers address these tandem concerns by providing employees with an offer of severance in exchange for the employee executing a release of claims at the time of the layoff.(fn 3 ) By doing so, employers provide employees with additional compensation and/or benefits to assist with the job transition and also secure protection against legal challenges to their layoff decisions. For these reasons, the "severance in exchange for release" has become a fixture in the downsizing process.
However, obtaining an executed release from an employee is not always the cure-all that employers expect. While a properly executed release can provide an employer with the desired legal protection, a release that does not comport with various legal requirements can be deemed invalid, thereby depriving the employer of the benefit of the severance bargain. In addition, in some circumstances, an employer's offer of an invalid release to an employee can even be the basis for an independent claim by an employee, providing a whole new basis for employer liability. There are tax and benefit issues to consider. And finally, there are risks to the employer when an employee rejects a release, such as the employee using the release offer as evidence that the underlying termination was unlawful.
This article will explore the law concerning employment releases, specifically in the context of an offer of severance in exchange for a release at the termination of employment. In particular; we will review:
* Waivable types of claims;
* Standards applied to determine if a release is enforceable;
* Circumstances in which an employer may assume additional liability by providing a flawed release;
* Tax and benefit issues associated with providing severance in exchange for a release; and
* The ability of an employee to use a rejected a release as evidence of an employee's illegal motive in a subsequent lawsuit.
I. PUBLIC POLICY LIMITATIONS ON THE WAIVER OF EMPLOYMENT-RELATED CLAIMS
In employment law, there is no such thing as a "general release" of all claims in which an employee validly releases every claim against the employer because some claims simply cannot be waived. Releases are contracts and accordingly are governed by standard contract prin-ciples,(fn 4 ) including that contracts in contravention of public policy are void.(fn 5 ) Relying on this public policy limitation, courts have invalidated releases of certain employment-related claims.
The first major piece of federal legislation regulating compensation in employment was the Fair Labor Standards Act (FLSA), which set minimum wage and overtime requirements.(fn 6 ) Shortly after the FLSA was passed in 1938, the Supreme Court rejected waivers of claims under the FLSA.(fn 7 ) The Court recognized that "a statutory right conferred on a private party [that] affects the public interest . . . may not be waived or released if such wavier or release contravenes the statutory policy."(fn 8 ) After examining the purpose of the FLSA and its legislative history, the Court concluded that permitting the release of claims for minimum wage or overtime "would nullify the purposes of the Act" to provide a floor of compensation for all workers by essentially allowing employers to pay employees to permit them to violate the Act.(fn 9 ) Accordingly, waivers under the FLSA are unenforceable. (fn 10 ) For similar reasons, waivers of wage and hour claims, unemployment compensation, and workers' compensation claims under New Hampshire law are also unenforceable.(fn 11 )
While FLSA waivers are invalid, the restrictions do not apply to the release of claims under other federal employment laws. In Alexander v. Gardner-Denver, the Supreme Court presumed "that an employee may waive his cause of action under Title VII as part of a voluntary settlement."(fn 12 ) Seizing on this language, courts have enforced releases of claims under Title VII,(fn 13 ) the Equal Pay Act,(fn 14 ) 42 U.S. C. § 1981,(fn 15 ), the Americans with Disabilities Act,(fn 16 ) ERISA,(fn 17 ) the Age Discrimination in Employment Act (ADEA), (fn 18 ) and Worker Adjustment and Retraining Notification Act (WARN)(fn 19 ).
However, there is an important caveat - an employee may only waive claims that arose before the employee executed the release (i.e., retrospective releases). A prospective release of claims violates public policy because it impedes Congress' goal of eradicating workplace discrimination by, in effect, allowing an employer to purchase the right to discriminate in the future.(fn 20 )
In addition to prospective waivers, asking an employee to waive his or her rights to file a charge of discrimination with the Equal Employment Opportunity Commission (EEOC) or to assist the EEOC in the investigation of a charge violates public policy.(fn 21 ) In concluding that employees may not waive the right to file an EEOC charge, courts have distinguished between the employee's right to receive monetary or other benefits as a result of bringing a charge, which the employee may lawfully waive, and the filing of the charge itself, which may not be waived. Prohibiting the filing of a charge violates public policy because
Thus, allowing an employee to waive the right to bring an EEOC charge could frustrate the functioning of the agency charged by Congress with eradicating workplace discrimination[a] flowing the filing of charges to be obstructed by enforcing a waiver of the right to file a charge could impede the EEOC enforcement of the civil rights laws. The EEOC depends on the filing of charges to notify it of possible discrimination. A charge not only informs the EEOC of discrimination against the employee who files the charge or on whose behalf it is filed, but also may identify other unlawful company actions.(fn 22 )
The bar against an employee waiving the right to assist the EEOC in an investigation is justified for similar reasons. Participation in the investigation process is "crucial to the EEOC's ability to investigate charges of discrimination. If victims or witnesses are unable to approach the EEOC or even to answer its questions, the investigatory process that Congress conferred would be sharply curtailed."(fn 23 ) Thus, prohibiting employee cooperation with the EEOC would undermine the public policy in thorough investigations of workplace discrimination.
One other federal statute deserves attention. Enacted in 1993, the Family and Medical Leave Act of 1993 (FMLA), provides certain employees with an entitlement to 12 weeks of unpaid leave for specified qualifying events. (fn 24 ) The statute does not address whether employees may waive FMLA rights; however, the statute does authorize the US Department of Labor (DOL) to promulgate regulations enforcing the FMLA.(fn 25 ) One such regulation provided that "employees cannot waive, nor may employers induce employees to waive, their prospective rights under the FMLA."(fn 26 )
Following this regulation, there were challenges to the enforce-ability of retrospective releases of FMLA claims. The two leading cases reached opposite results.(fn 27 ) The Fifth Circuit, in Faris v. Williams WPC-I, Inc., concluded that the releases were valid. It relied primarily on its understanding that "rights under the FMLA" referred to the substantive rights to take leave and not to suffer retaliation for taking leave under the Act; "rights" did not, however, include the ability to bring a cause of action, which was merely the mechanism for enforcing the rights.(fn 28 )Accordingly, the Fifth Circuit ruled that the DOL regulation did not preclude an employee from waiving the right to bring an FMLA cause of action.(fn 29 )
The Fourth Circuit in Taylor v. Progress Energy, Inc., reached the opposite conclusion.(fn 30 ) It determined that employees maintained three types of rights under the FMLA: substantive rights (the right to take leave); proscriptive rights (the right not to be retaliated against for taking leave); and remedial rights (the right to bring a lawsuit).(fn 31 ) The court concluded that the DOL regulation did not distinguish among these rights but rather flatly prohibited the waivers of any of them.(fn 32 ) In reaching this conclusion, the Fourth Circuit relied heavily on its belief that Congress intended the FMLA to be patterned after the FSLA, insofar as the Act set a non-waivable floor of employee benefits.(fn 33 )
Responding to this split, on November 17, 2007, the DOL promulgated a new regulation effective January 16, 2009, that seeks to clarify the enforceability of FMLA waivers.(fn 34 ) The new regulation provides:
Thus, after this new regulation, it...Employees cannot waive, nor may employers induce employees to waive their prospective rights under FMLA. For example, employee cannot 'trade off' the right to take FMLA leave against some other benefit offered by the employer. This does not prevent the settlement or release of FMLA claims by employees based on past employer conduct without the approval of the Department of Labor of a court.(fn 35 )
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