Legal Trends: Severance Strategies

At the start of an employment relationship, employers often rely on their forms -- more specifically, the application form -- with little thought of alteration. In the employment relationship’s infancy, one size may fit all.

When it comes to ending an employment relationship, some employers follow the same approach. They take their “form” severance agreement, which includes a general release, and tweak termination dates and number of weeks’ severance with the idea that one size fits all, more or less.

This approach initially may seem like a time saver, but it can result in protracted litigation, a risk that will only grow in light of the current barrage of legal challenges on general releases, sometimes referred to as waivers. As courts scrap what was common to agreements only a few years ago, employers should make sure they aren’t using the same old severance agreements that courts no longer approve.

Moreover, employers must consider a number of decision points in drafting severance agreements, even when their “forms” do not include problematic language. For example, for a waiver to be effective, different requirements may apply depending on:

• The employee’s age.

• Whether the termination is isolated or part of a group.

• The state where the employee worked.

Finally, employers need to balance competing legal and business risks in drafting severance agreements. What may be appropriate in one reduction in force (RIF) may not be appropriate in another RIF, based on the employer’s business objectives and risk assessment. As demonstrated below, there is no such thing as a no-risk termination or a no-risk severance agreement.

Time To Consider Signing

To make a strategic choice about legal requirements, employers first must reacquaint themselves with familiar requirements now interpreted in surprising ways.

Employers should pay attention to the requirement that employees be given time to consider whether to sign a severance agreement, a period that varies depending on the employees’ ages. This specific statutory requirement must be met for a release of claims arising under the Age Discrimination in Employment Act (ADEA), as amended by the Older Workers Benefit Protection Act (OWBPA), to be enforceable.

Employees age 40 or older must be given 21 days to consider the employer’s offer, unless it is part of a group termination. In a group termination, employees must be given 45 days.

If the employee is younger than 40, there is no specified period of time which the employee must be given to sign the severance agreement. However, the amount of time given to an employee becomes a factor that a court considers in determining whether a waiver of Title VII, the Americans with Disabilities Act (ADA) or other non-ADEA claims is “knowing and voluntary.” Generally, the more time an employer offers, the stronger the employer’s position.

Employers often use the time frames set forth in the ADEA as benchmarks to maximize the likelihood that a release will be knowing and voluntary for non-ADEA claims. Accordingly, employees younger than 40 often are given the same 21 or 45 days as older counterparts.

A Week To Revoke

Even if an employer provides ADEA time frames to employees younger than 40, it does not automatically follow that the employer must or should extend ADEA revocation rights to those employees.

Under the OWBPA, employees must be given seven days to revoke their waivers of age claims after they sign severance agreements. This right to revoke applies in the context of individual and group terminations.

Beyond the ADEA, employers are not required to provide employees with the option to revoke under federal employment law. The question becomes whether an employer should offer this right to employees younger than 40 as a matter of practice.

Of course, if you offer employees younger than 40 the right to revoke and they don’t exercise this right, this is helpful in establishing that the waiver was knowing and voluntary -- the standard for waivers under Title VII and the ADA. But there is a countervailing business consideration: The employee could exercise the right, in which case the company ends up with a claim it otherwise would not have.

Accordingly, employers need to balance the benefits and risks of extending revocation rights to employees younger than 40. Different factors may inform that decision.

If you have an employee younger than 40 who threatens to sue and has a history of changing his or her mind, you might not want to offer that employee revocation rights. Conversely, in a group termination, for administrative ease, you may want to treat all employees the same regardless of age and consequently include revocation rights in all severance agreements.

Employers must consider federal and state laws. For example, for a waiver or release of claims under the Minnesota Human Rights Act to be binding, the employer must notify the employee in writing that he or she has 15 days to rescind the waiver or release. The statute prescribes the manner in which the right to rescind must be communicated and how it must be executed.

Decisional-Unit Attachments

For a waiver of age claims to be effective in a group termination, employees must be given information about the “decisional unit.”

Generally, the decisional unit consists of the positions considered by the employer in deciding whom to let go. Depending on circumstances, the decisional unit could be, for example, the entire company, a division, a department, employees reporting to a particular manager or workers who fall under a particular job classification.

After defining the decisional unit, an employer must identify:

• The job titles and ages of employees in the decisional unit eligible for or selected for the “program,” as well as the job titles and ages of employees not eligible for or selected for the program.

• The eligibility factors determined for the program and any time limits applicable to it.

The initial question is whether the program referenced in the statutory language cited above relates to the underlying termination decisions or to the severance offered subsequent to the termination decisions.

Historically, the conventional wisdom has been that the program is the severance program, not the underlying termination decisions. Under this analysis, employers define in their decisional-unit attachments the criteria to be satisfied to receive severance, not the criteria used to determine who would be terminated.

However, in Kruchowski v. Weyerhaeuser Co. (423 F.3d 1139 (10th Cir. 2005) (Kruchowski I)), the 10th Circuit held that the eligibility requirements that must be specified relate to the underlying termination decision and not to who is eligible for severance pay after the termination. In that case, factors the employer considered in determining who would be terminated were “leadership, abilities, technical skills and behavior of each employee.” Because these criteria were not included in the decisional-unit attachment, the court held that the releases were ineffective against age discrimination claims.

After providing employers with a scare, the 10th Circuit vacated the Kruchowski decision and reissued its opinion without addressing this requirement (see Kruchowski v. Weyerhauser Co., 446 F.3d 1090 (10th Cir. 2006) (Kruchowski II)). While this was good news for the employer, it is too early to break out the champagne.

At least two district courts have followed the analysis in Kruchowski I, holding that employers must include in their decisional-unit attachments the reasons why employees have been selected for termination. One case was before the Kruchowski reversal; the second case, after it (see Merrit v. First Energy Corp., C.A. No. 00585 (N.D. Ohio March 31, 2006) and Pagliolo v. Guidant Corp., 483 F.Supp.2d 847 (D. Minn. 2007)).

In light of the legal uncertainty, employers may want to address the eligibility requirements in their decisional-unit attachments for the underlying termination decisions as well as the severance program. This is not a risk-free course of action, however.

How the employer defines the criteria in the decisional-unit attachment is admissible in litigation. To the extent that the decisional-unit attachment is inconsistent with subsequent testimony, the decisional-unit attachment may be used to impeach that testimony.

Further, to the extent that performance was a consideration, the employer will need to include performance in the decisional-unit attachment. This flies in the face of conventional wisdom that an employer should not tell one employee why another employee was terminated.

This concern relates to another issue: How much detail is enough? In the Pagliolo decision, the court provided some guidance, stating that the employer did not need to list the eligibility factors for each employee separately but rather only the eligibility factors generally applied -- for example, job criticality and performance.

Of course, what was enough for the Pagliolo court might not be enough for another court. The bottom line: There is no clear answer; again, an employer must balance competing risks.

Risk Assessment

If an employer does not comply with all of the requirements of the OWBPA, this does not mean that the release is unenforceable against all claims. It means only that the release is unenforceable against age claims.

There may be times when an employer may wish to make a considered decision not to comply with the OWBPA because the employer’s primary concern is risk under Title VII or the ADA and not under the ADEA. Assume, for example, the following scenario:

A reduction in force results in five sales employees in a division being laid off. Only one of the five employees let go is age 40 or older, and just barely; 60 percent of the sales employees in the division are age 40 or older. Four of the five employees let go are women, even though women account for only 30 percent of the division’s sales employees.

In this fact pattern, the Title VII risk appears to be considerably greater than the ADEA risk. When you look at the employees who have been laid off, women are overrepresented and older employees are underrepresented.

The employer may not want to give the employees 45 days to decide, seven days to revoke or a decisional-unit attachment to study. Instead, the employer may wish to assume the ADEA risk to capture the Title VII risk by trying to meet the general knowing and voluntary standard only and getting the document signed sooner rather than later without a right to revoke.

In balancing risks, employers also need to consider what claims to list in the general release. This requires understanding recent cases and regulations under federal law, as well as requirements and restrictions that may exist under state law. Next month’s Legal Trends column addresses these issues.

Editor's Note: This article is not intended as legal advice. For specific situations, consult qualified employment law counsel.

The author is vice chair of WolfBlock’s Employment Services Group and managing principal of the WolfInstitute. His practice in Philadelphia concentrates on preventive planning, counseling and training.