Checklist for Improvements to Consider re Claims Releases
There is nothing worse for an employer than paying money to settle claims, and then finding that its claims release is invalid - or the subject of further litigation. Listed below are provisions by which employers may avoid having their claims releases backfire.
1. To Avoid Challenges to the Validity of the Release:
(a) __ Be sure the release references consideration that is valid under state law to support not only any claims or other rights that the former employee is releasing, but also any new or beefed-up restrictive covenants (such as non-competes and non-solicits).
(b) __ Consider eliminating covenants not to sue, because that will enhance satisfaction of ADEA's "understandability" requirement.
- See Thomforde v. IBM, 406 F.3d 500 (8th Cir. 2005) and Syerson v. IBM, 461 F.3d 1147 (9th Cir. 2006), which each invalidated a release due to confusion from its covenant not to sue, with the latter decision explaining that:
- "The employees' core complaint is that the MERA Agreement misleads participating employees to believe that, above and beyond their unaffected right to file an ADEA claim with the EEOC, they retain the right to pursue independently an ADEA claim in court. They contend that the phrasing of the release and covenant not to sue engenders confusion over whether ADEA claims are in fact covered by the release or are excepted from it. We agree, and hold that the MERA Agreement does not satisfy the "manner calculated" requirement of the OWBPA."
- "Given this substantive overlap between releases and covenants not to sue, that fact that the MERA Agreement's covenant not to sue contains an exception for ADEA claims necessarily creates potential confusion, as it appears to lift any barrier from proceeding to court with an ADEA claim. The confusion ensues, in part, from including in a single document two concepts that, technically speaking, cannot coexist."
(c) __ Include a sentence along the following line, in order to avoid retaliation claims:
- "This General Release does not prohibit me from filing a charge with any government administrative agency such as the EEOC) as long as I do not personally seek reinstatement, damages, remedies, or other relief as to any claim that I have released, any right to which I hereby waive."
- The foregoing reflects EEOC advice published by the EEOC in “UNDERSTANDING WAIVERS OF DISCRIMINATION CLAIMS IN EMPLOYEE SEVERANCE AGREEMENTS.”
(d) __ Out of an abundance of caution, state that the individual is not releasing claims that cannot be lawfully released, in order to defuse arguments that the release is overly broad and therefore invalid. But see Edwards v. Arthur Andersen LLP, 44 Cal.4th 937 (2008), upholding the validity of a release of "any and all" claims, with the court explaining that:
- Edwards suggests contract drafters could easily fix the overbroad release problem by including the clause "except as otherwise prohibited by law" after "any and all." We fail to see what difference this would make. The phrase "except as otherwise prohibited by law" is vague and essentially informs the employee of nothing. In addition, it appears most practitioners already operate with the understanding that the release does not encompass items "otherwise prohibited by law." If they do, they are null and void under the Labor Code. Therefore, we believe that voiding all existing releases which include the language "any and all" is inappropriate.
2. To Protect Employer's Business Interests:
(a) __ Structure the severance to fall within the scope of ERISA, for the reasons described in the article "Say Hello to Smart Good-byes."
(b) __ Use the release agreement as leverage to establish (or to tighten the enforceability of) non-competition, non-solicitation, and other loyalty covenants.
(c) __ Require cooperation with post-employment transitional requests from the employer, as a condition for receipt or retention of severance.
3. To mitigate litigation risks:
(a) ___ For payouts that cash out bonuses, stock awards, or other formula-based compensation, refer to specific dollar amounts to the maximum extent possible.
- If a release instead commits an employer to pay an amount to be later determined, that opens the door for disagreements over the amount that is ultimately payable. Because courts often resolve ambiguities against employers, uncertainties over calculations will usually be resolved in favor of the former employee.
(b) __ See Litigation Precautions Checklist, in order to assure consideration of provisions that a release agreement could include in order to provide for efficient claims resolution (coupled with deference to employer decisions).
4. To Avoid Tax Problems: Assure compliance with Code Section 409A