By: Chad A. Staul, Esq.
Plaintiff lawyers and some government agencies have long sought to scrutinize waiver and release agreements prepared by employers for terminated and otherwise adversely affected employees. Congress got in on the act in 1990 when it enacted the Older Workers Benefits Protection Act (OWBPA). This law amended the Age Discrimination in Employment Act (ADEA) by requiring the presence of a number of very particular provisions in order to effectively release age discrimination claims under the ADEA, not the least of which is that employees must be advised in writing of their right to consult with legal counsel of their own choosing and be given at least 21 days to consider the agreement before signing. Today, courts are seeing more and more challenges to the enforceability of waiver and release agreements due, at least in part, to their increased use by companies experiencing mass layoffs and plant closings due to the poor economy. Of greater interest to employers is the growing number of court decisions holding such agreements invalid and allowing the employees who signed them to sue.
Earlier this year, a Minnesota court threw out a severance agreement drafted by a large law firm and signed by dozens of employees in connection with a mass layoff. Imagine the employer's shock when, after it paid severance (and legal fees for the agreement), a court found the agreement did not prevent the employees from suing! More recently, the federal court in Minnesota refused to enforce a severance/release agreement signed by a terminated employee who took the money and then turned around and sued, pursuing claims under the ADA and Minnesota Human Rights Act. The court in this case, noting the lack of legal precedent on the enforceability of release agreements under federal law, set forth the following minimum factors to consider for such an agreement to be valid: (1) whether the release is supported by adequate consideration; (2) whether the employee had access to legal counsel; (3) whether the employee could negotiate changes to the agreement; and (4) whether fraud, duress or other inequitable conduct was present. Chappell v. Butterfield-Odin School Dist. 836, No. 08-CV-0851, (D. Minn., Nov. 17, 2009)
What makes this case unique is that the court articulated many requirements that were similar to those found in the OWBPA pertaining solely to age claims under the ADEA. In this particular case, the court found that the employer, a public school district, had fired the plaintiff from her job as a teacher while threatening to report her to the Minnesota Board of Teaching if she did not immediately sign its release. This constituted duress that invalidated the agreement. The fact that the agreement gave the employee time to rescind her agreement after signing (as required to release claims under the MHRA) was insufficient for the court to excuse the employer's heavy handed tactics.
Although this decision is from a trial court and not an appellate decision that is binding on other judges it is illustrative of issues that prudent employers will want to consider when asking employees to sign waiver agreements. For example, although the OWBPA applies only to age claims under the ADEA it is advisable for employers to provide at least some reasonable time for an employee to consider signing a waiver agreement (something the employer in the noted case did not do, resulting in the court finding that the agreement was signed under duress and, thus, unenforceable). Additionally, not allowing the employee reasonable time to consider the agreement effectively prevented her from seeking sufficient advice from legal counsel. Further, the court found that the release was not clear regarding which statutory claims the employee could retain by rescinding the release within the appropriate time after signing. Thus clarity in the language used is becoming more and more crucial to enforcement of waiver/release agreements.
Finally, the court also said "When there is a large gap between the value of the consideration received and the value of the claims released - when, for example, the releaser receives a peppercorn in return for giving up a can't-miss claim worth over $1 million - then it is more likely that the releaser did not act knowingly and voluntarily in signing the release." This statement represents a deviation from what has been the general rule not to question the sufficiency of consideration given by employers in exchange for an employee's agreement to waive/release claims. This court's decision to weigh the value of the employer's severance against the assumed value of the employee's potential disability claims is disturbing because unasserted claims are speculative at best. Under this court's rationale, if an employee believes they gave up the proverbial $1 million claim for something far less in return they could ask a court later on to invalidate the entire agreement on the basis it was not fair and thus was not entered into "knowingly and voluntarily;" in other words, "buyer's remorse." Obviously no one is recommending that employers offer anything close to what an employee might arguably recover in litigation as consideration for signing a waiver of claims, but it may not be enough to offer a mere "peppercorn" to get a valid waiver.
In light of this decision, employers are well advised to consider all of the following in any waiver/release agreement: (1) use clear, understandable language, not complicated legalese; (2) advise the individual to have legal counsel of their own choosing review the document; (3) Allow adequate time for their review and consideration of the agreement; (4) do not be overly concerned if the employee or his/her lawyer has questions or proposes modest changes as this can add to the conclusion that the agreement was voluntary and thus more likely to be enforced if challenged; and (5) give at least some thought to how much is being offered to secure the employee's waiver since a court might have trouble enforcing a waiver clause in a severance agreement for a 20-year employee that is supported, for example, by one week's or even one month's pay. The advice of experienced legal counsel is always recommended as the laws - and judicial opinions - impacting the enforcement of these agreements are constantly changing.
Questions? Please contact WS Attorney Chad A. Staul in our Minneapolis, MN office at (952) 746-1700, or chstaul@wesselssherman.com.
