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Whenever you terminate or lay off a worker, there is always the possibility that the employee will take legal action against you. Many employers use severance agreements to limit exposure to employee lawsuits alleging discrimination and other claims. As part of the severance agreement, the worker will sign a release stating that he or she gives up some or all rights to sue you.
Although severance agreements have many uses, they are used most often when you lack the preferred back-up documentation to terminate, but you want to end an employment relationship and avoid the possibility of a lawsuit. Severance agreements can also be used to offer early retirement to a worker, or when you are seeking to end an employment contract early by providing severance pay to the worker. The Older Workers Benefit Protection Act requires these types of severance agreements to be clearly “written in a manner to be understood” by the employee who is agreeing to release the employer from any liability.
In a recent Eighth Circuit Court of Appeals decision, Thomforde v. IBM, the Court found that IBM’s severance agreements were unacceptable because they were not understandable to the employees signing them. The agreements used legal language such as “covenant not to sue” and “waiver” without explaining what the terms meant. Further, although IBM meant for the two terms to have different meanings, it mixed up the terms in the agreement making it seem that they meant the same thing. The Court held that all of the agreements IBM had used in its Reduction in Force were unclear, and therefore, invalid.
Employers can and should guard against potential liability. Because of recent interpretations of the Age Discrimination in Employment Act, (as amended by the Older Workers Benefit Protection Act) plaintiffs find it easier to prove age discrimation. Not only can employees claim discrimination by showing the employer took some negative action toward the employee because of age, but the U.S. Supreme Court has recently said that an employment policy which appears to be neutral can be considered discriminatory under the ADEA if it has a negative impact on workers because of their age.
In order to protect against claims that can cost companies thousands of dollars in attorneys’ fees to defend, every employer should have a severance agreement available to use for its high risk employees. An attorney experienced in drafting severance agreements can help employers avoid issues like those in Thomforde, which put employers at risk for unnecessary liability and expenses. IBM’s agreement could easily have been clarified by not using the legal terms at all or at least by using them separately and consistently and explaining the meaning of each term. The Older Workers Benefit Protection Act requires that all severance agreements must be based on a knowing and voluntary waiver of rights. This knowing and voluntary standard requires all agreements to meet eight specific and strictly construed requirements. Because this is a developing area of the law, an employer's standard severance agreement should be routinely reviewed for changes in the law that could make the agreement invalid.
For more information about severance agreements, see program information below or contact educational services at (414)423-1330.
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