The EEOC Offers Guidance on Severance Pay in Exchange for Waiver
May 5, 2023
As we head into a long-anticipated economic downturn, news regarding layoffs at global organizations like Meta, Goldman Sachs, Google, Amazon, IBM, and Salesforce, and other companies that experienced rapid growth during the pandemic is becoming more common. While reductions in the workforce are an unfortunate result of this phase of the business cycle, companies sometimes make these kinds of decisions even in times of prosperity. Organizations of all sizes measure their financial health and long-term sustainability by using financial metrics to evaluate their financial landscape. Because labor costs, defined as the total cost of all labor used in a business, make up a significant portion of any company's operating expenses, employers often focus on this area when making decisions to address profitability. Unfortunately, when employers decide to terminate some workers' jobs while retaining the services of others, this sometimes leads discharged workers to file legal claims based on discrimination due to age, race, sex, national origin, religion, disability, or other protected classes.
What is a Severance Package?
Employees are generally hired on an at-will basis, and employers are not contractually obligated to provide severance packages when their workers are laid off or terminated. There are no Fair Labor Standards Act (FLSA) requirements regarding severance pay because it is a matter based on an agreement between the employer and the employee. If an employer does offer severance compensation, the amount of pay and the benefits may be based on the negotiations between the company and the employee, and the scope of the compensation can vary widely. While some companies offer pay at a flat rate for all discharged workers regardless of the length of their employment, others may implement a scale based on the duration of their worker’s employment with the organization. Accepting a severance package may make employees ineligible to file a wrongful termination lawsuit or collect unemployment insurance, so employers are wise to advise departing employees to consult with an attorney before the employee accepts the terms of a severance package. The company’s employee handbook should include information about the company's severance package and employers are wise to ensure that their policies are updated and reviewed by a labor and employment attorney at least annually.
Severance Packages May Reduce Employers Legal Exposure
To minimize their legal exposure following layoffs, it is becoming more common for employers to offer severance compensation packages and other benefits in exchange for waivers that release the company from potential discrimination claims under state, local, and federal employment laws. These laws include the Title VII of the Civil Rights Act, the Equal Pay Act ("EPA"), the Age Discrimination in Employment Act ("ADEA"), and the Americans with Disabilities Act ("ADA"). To address employer’s strategy of offering a severance package to avoid legal claims, the Equal Employment Opportunity Commission ("EEOC") has recently published a document called "Understanding Waivers of Discrimination Claims in Employee Severance Agreements" to summarize the statutory requirements for these kinds of waivers according to federal employment laws.
The Purpose of the New EEOC Guidelines
While the information contained in the new EEOC publication offers employers helpful insights into the agency's positions when considering waivers of discrimination claims and severance agreements, it does not amend existing regulations. It is likely that the EEOC created the document to provide guidance on discrimination claims rather than to define regulation or enforcement. The publication offers the EEOC's perspective and summarizes the existing legal requirements for severance agreements under the following federal laws:
The Americans with Disabilities Act (ADA
Title VII of the Civil Rights Act
The Equal Pay Act (EPA), and
The Age Discrimination in Employment Act (ADEA).
Summary of Requirements for Severance Agreements
The EEOC publication has addressed the following requirements for severance agreements and the release of discrimination claims:
Employees Must Receive Consideration: The severance agreement must be supported by consideration. In contract law, consideration is defined as an exchange of value that is negotiated between parties. The EEOC states that consideration "must be something of value that is in addition to the employee's existing entitlements."
Employees Have Future Rights: The severance agreement does not require the employee to waive future rights. The EEOC document clearly states that severance agreements cannot waive claims arising in the future.
Employees Have Existing Rights: The severance agreement cannot waive certain existing rights. Although an agreement may waive an employee's right to file a lawsuit against his or her employer for previous acts of discrimination or retaliation, the contract cannot restrict an employee's right to file discrimination charges with the EEOC.
Employees Have Rights Regarding Investigations: The severance agreement cannot limit an employee's right to assist, testify, or participate in an EEOC investigation, hearing, or other proceeding conducted by the agency.
The Employee Must Knowingly and Voluntarily Consent. The EEOC publication states that an employee must knowingly and voluntarily consent to a waiver, but the document also specifies that the rules also depend on the statute under which the suit is filed. According to the agency, most courts will consider the following questions to determine whether the employee knowingly and voluntarily waived his or her rights under the ADA, Title VII, the ADA, or the EPA:
ü Was the agreement written in a manner that was clear enough for the employee to understand?
ü Was the signing of the agreement induced by improper conduct by the employer?
ü Did the employee have enough time to read and consider the agreement before signing it?
ü Did the employee consult with an attorney?
ü Was the employee encouraged or discouraged by the employer to consult with counsel?
ü Did the employee have input in negotiating the terms of the agreement?
ü Did the employer offer the employee consideration?
ü Did the employee accept the consideration?
The ADEA and OWBPA
The document also addresses the following requirements for waivers under the ADEA and Older Workers Benefit Protection Act (OWBPA). According to these federal laws, the publication states that the waiver must:
ü The agreement must be written using plain language that the average individual can easily comprehend.
ü The waiver must specifically reference the ADEA. Any enforceable waiver must spell out the Age Discrimination in Employment Act (ADEA) by name.
ü The severance agreement must advise the employee in writing to consult with a lawyer.
ü Employees must be given a specific number of days from the date of the employer's final offer to consider the waiver. An employer must provide employees with 21 days, and in case of group termination, employers must provide employees with 45 days.
ü Employees must be given seven days after the execution of the agreement to revoke an age discrimination waiver.
ü A severance agreement cannot waive an employee's rights regarding an employer's acts of discrimination that occur after the agreement was signed.
ü In contract law, consideration is defined as an exchange of value that is negotiated between parties. Under the terms of the ADEA, a valid waiver must provide something of value to which the employee is not already entitled.
ü The publication reaffirms the OWBPA requirements for "exit incentives" or "other employment termination programs" offered to a particular group or class of employees.
The publication also states that the requirements listed above are the minimum required for a valid age discrimination release. The waiver can be invalidated if the release contains a material mistake, omission, or misstatement or if an employer uses improper conduct to coerce the employee to sign the waiver.
If you are an employer who has decided to terminate a portion of your workforce due to the economic downturn, you may be considering provide your employees with a severance agreement that requires them to waive their right to file legal claims for wrongful termination based on a discriminatory action. While the EEOC document was published to offer guidelines on the release and waiver of employment discrimination claims, the document does not include an exhaustive list of requirements for severance agreements or releases. Although most signed waivers are legally enforceable if they meet specific contract principles and statutory requirements, an employer cannot lawfully limit their employee's right to assist, testify, or participate in an EEOC investigation, hearing, or proceeding or prevent their terminated workers from filing a charge of discrimination with the agency. Employers are wise to familiarize themselves with the new EEOC publication because the agency will refer to the content when investigating claims of discrimination or participating in lawsuits that involve releases.
To minimize the potential legal exposure associated with layoffs, employers provide exiting employees severance packages in exchange for waivers that release the employer from discrimination claims under state, federal, and local employment laws. These laws include Title VII of the Civil Rights Act, the Age Discrimination in Employment Act ("ADEA"), the Equal Pay Act ("EPA"), the Americans with Disabilities Act ("ADA"). Before offering a severance package, employers are encouraged to review the EEOC policy guidelines and pay attention to the following suggestions:
Employers must carefully draft release agreements to comply with all applicable federal, state, and local laws to ensure the enforceability of waivers of employment discrimination claims.
Employers must ensure that releases specifically comply with the terms of OWBPA.
When conducting group terminations, employers must ensure the age disclosure is accurate.
Employers should consult with an experienced labor and employment attorney to ensure compliance before proceeding with a reduction in the workforce.
Protect Yourself, Your Business, and Your Employees
The takeaway from any investigation involving the EEOC is that it can be risky for an employer to act on employee complaints without consulting an experienced labor and employment attorney. Protect yourself and your organization by scheduling a consultation with Natalie Lynch from the Lynch Law Firm to discuss your concerns. Natalie understands that the facts are rarely straightforward in EEOC investigations, and it can be challenging to determine the reasonableness of any claim. Allegations of this kind can inflame the emotions of involved parties, and Natalie works to enable employers to protect themselves, their employees, and their businesses. Of course, lots of this can be prevented with training.
If You Have Questions About an EEOC Investigation
If you are an employer who has legitimate defenses to a charge of discrimination, the attorneys at the Lynch Law Firm are able to collaborate with you to prepare position statements and assist with the EEOC investigation process, to have the EEOC dismiss the charge. If you have questions about an EEOC investigation, call Natalie Lynch. Natalie is the managing attorney of the Lynch Law Firm, and a credentialed investigator and dispute resolution mediator with many years of experience working with businesses to help minimize employment risk factors.
About Natalie Lynch: Founding Attorney
Natalie R. Lynch, a business and employment law attorney in Austin, Texas, has demonstrated expertise in workplace investigations, employment law, and entity formations. Credentialed through the Association of Workplace Investigators (AWI), Natalie is the only consulting and credentialed expert in Central Texas investigating allegations of harassment, discrimination, and hostile work environment. Having lived abroad in Ghana and Spain, Natalie brings unique perspectives to help organizations achieve business nationally and internationally. As a credentialed dispute resolution mediator, she routinely collaborates with general counsel, internal and external counsel, employment litigators, employment generalists, and senior human resources professionals.
Natalie is the outgoing Chair of the Austin Bar Association's Labor and Employment Section. It serves in leadership roles for the Texas State Bar Association, including the International Bar and Animal Law Sections. In Colorado, Natalie was a two-term president of the Aurora Bar Association, the first recipient of the Colorado Bar Association's Future Leaders award, and a member of the Bar Association's Executive Council. With her extensive business background and solution-focused, purposeful, no-nonsense approach, Natalie excels at:
§ Employment audits
§ Business formation
§ Transactional matters
§ Employment law
§ Workplace discrimination matters.
§ Employment litigation avoidance
§ Customized harassment prevention training modules
As a credentialed AWI investigator, Natalie has extensive training in interviewing techniques and a unique and beneficial skill set in the legal field. Natalie insists that each investigation represents the standards of quality and litigation avoidance on which she built the Lynch Law Firm. Before becoming a business owner, Natalie prepared by obtaining her undergraduate degree in international studies from Texas A&M University and her J.D. from South Texas College of Law. She also studied at the University of Denver. Natalie is licensed to practice law in Texas, Wyoming, and Colorado, and she holds certifications from Women-Owned Business (WBE), Minority-Owned Business (MBE), and Historically Under-Utilized Business (HUB).
Call the Lynch Law Firm Now for a Free Consultation
Call Natalie Lynch at the Lynch Law Firm now to schedule a free consultation. Please contact us by phone at 512 298 2346 or by email
The Continuing Impact of Pay Discrimination in the United States | U.S. Equal Employment Opportunity Commission (eeoc.gov)