September 6, 2017
We recently presented on the topic of settlement and severance agreements as part of Nexsen Pruet’s Employment Law Certificate Series: Building Workplaces That Win.
Here are some highlights from the webinar:
- When an employee’s employment ends, circumstances where an employer may enter into a severance agreement with the employee include where: a) the employer has a severance plan or policy requiring a severance payment; or b) the employer wants to pay a severance in return for a release of all claims by the employee.
- When a severance payment is obligatory because of a plan or policy, employers must fulfill the requirements of the applicable plan or policy. When a severance payment is voluntary and in return for a release, employers must make certain that the severance payment constitutes valid consideration for the release. For a severance payment to be consideration for a release of claims by the employee, it must be a benefit to which the employee is not already entitled. Payment of wages or accrued but unused vacation due to an employee is not sufficient consideration for a release because it is already owed to the employee.
- An employer may also enter into a settlement agreement with an employee, related to litigation or threatened litigation, in which the employee releases claims against the employer in return for a settlement payment. Any portion of the settlement payment that is attributable to wages must be reported by the employer on a Form W-2, and the employer must assess appropriate deductions and withholdings. Only portions of the settlement paid for non-wages can be reported through a 1099 Form. The IRS can hold the employer liable for misapplying wage payments if the employee is unable to satisfy the tax burden related to the settlement proceeds.
- For releases to be effective, agreements must meet a “knowing and voluntary” requirement. Was the release written in a manner that was clear and specific? Did the employee have enough time to read and think about the agreement before signing it? In addition, to release a claim under the Age Discrimination in Employment Act (“ADEA”), for those employees who are 40 years of age or older, the release must meet seven separate requirements in order to be “knowing and voluntary.” Group releases (e.g., exit incentive programs or multiple terminations because of a reduction in force) have additional requirements for valid releases under the ADEA.
- An employee’s release does not bind the Equal Employment Opportunity Commission (“EEOC”) or stop governmental agency investigations from commencing or continuing. Provisions in a release that attempt to prevent employees from filing a charge with the EEOC or participating in an EEOC investigation – or other government investigation – are unenforceable. Only the EEOC, for example, can decide to terminate a charge and close its file.
- Sometimes an employer will enter into a release with an employee for past or ongoing claims, and the employee remains employed (for example, an employee claiming harassment or failure to pay the appropriate wages due). Under these circumstances, a release cannot waive prospective claims, and employers should be wary of a retaliation claim if adverse action is taken against the employee.
- Releasing claims under the Fair Labor Standards Act (i.e., minimum wage or overtime) takes special care. As a general rule, employers may not privately settle wage and hour claims, except through an agreement with the United States Department of Labor or with court approval. Informal or private release agreements may be challenged, although there are some recent cases in which courts have indicated a willingness to enforce a release of FLSA claims through a private agreement.
- In recent years, government agencies, such as the EEOC and the NLRB, have scrutinized what they term to be “overbroad” release terms to make sure that employees do not give up their rights that cannot be waived and that the terms do not violate the law or public policy. Examples of terms deemed overly broad include covenants not to sue, no rehire provisions, confidentiality provisions and non-disparagement terms.
There are plenty of pitfalls for employers to avoid in obtaining an effective release of claims in a severance or settlement agreement. Effective releases require compliance with complex statutes and regulations and are subject to agency oversight, as well as second-guessing. Drafting proper and fair releases, however, can be an appropriate – and often times inexpensive – way to resolve disputes or stave off potentially expensive litigation.
Our Insights are published as a service to clients and friends. They are intended to be informational and do not constitute legal advice regarding any specific situation.