United States: Two Courts of Appeals Raise Significant Cautions for Releases of Employment Claims

Employers offer enhanced severance benefits in exchange for a release of claims by departing employees in order to avoid litigation. In two recent cases, however, an employer that thought it had "bought peace" with a departing employee instead found out that the employee’s release of claims was invalid and the employee could still sue. In Kruchowski v. The Weyerhaeuser Co., 2005 U.S. App. LEXIS 19722, *11 (10^th Cir. Sept. 13, 2005), the United States Court of Appeals for the Tenth Circuit held that to comply with the Older Worker’s Benefit Protection Act (OWBPA), a release of age discrimination claims in connection with a group reduction in force must tell terminated employees the criteria on which the employer relied in deciding who to terminate. It invalidated a release that failed to do so. In Taylor v. Progress Energy, Inc., No. 04-1525 (4th Cir. 2005), the United States Court of Appeals for the Fourth Circuit ruled that a release of claims under the Family and Medical Leave Act is invalid unless it is approved by either the Department of Labor (DOL) or a court.

The OWBPA requires employers to give employees particular information and follow specific procedures when seeking a waiver of age discrimination claims under the Age Discrimination in Employment Act (ADEA). Even more information is required when seeking waivers from employees who are terminated or leave as a result of an "exit incentive or other employment termination program offered to a group or class of employees," or, in common parlance, a reduction-in-force (RIF) or voluntary early retirement plan. When an employer seeks an age discrimination waiver from employees who leave under a group RIF or early retirement plan, it must tell them all of the following:

(i) any class, unit, or group of individuals covered by [the group termination] program, any eligibility factors for such program, and any time limits applicable to such program

(ii) the job titles and ages of all individuals eligible or selected for the program, and the ages of all individuals in the same job classification or organizational unit who are not eligible or selected for the program (emphasis added)

However, neither the OWBPA nor its implementing regulations further defines an employer’s obligation to inform individuals asked to sign ADEA waivers about "any eligibility factors for such program."

In the Kruchowski decision, the employer gave terminated employees a severance agreement stating that all salaried employees who reported to a particular manager were eligible for the termination program. The agreement did not, however, list the specific criteria the employer examined to determine who, from that defined pool, would be terminated. The plaintiff challenged his release of ADEA claims for failure to comply with OWBPA’s requirement that the agreement disclose the "eligibility factors" for the termination program.

Weyerhaeuser argued that it had complied with this requirement by disclosing the eligibility requirements for obtaining severance. The 10th Circuit disagreed, stating:

The intent of the statute’s information requirement is to alert affected employees to potential age discrimination claims. ... [T]he term "eligibility factors" must refer to the factors used to determine who is subject to a termination program, not the factors used to determine who is eligible for severance pay after termination.

Id. at *11. The Court then noted that "[i]n answering interrogatories, defendant stated that the eligibility factors it used in analyzing each salaried employee reporting to the Mill manager were the leadership, abilities, technical skills and behavior of each employee and whether each employee’s skills matched defendant’s business needs," and that "[d]efendant admitted that it did not provide this eligibility information to plaintiffs." Id. The Court concluded that "[d]efendant’s failure to provide information about eligibility factors resulted in a failure to comply with OWBPA’s information requirement. These undisclosed eligibility factors were the program-wide parameters for selecting employees for the RIF. Defendant’s failure to disclose this information rendered the Release ineffective as a matter of law." Id.

It appears that in the 15 years that the OWBPA has been on the books, the Kruchowski decision is the only appellate decision to interpret the obligation to disclose the "eligibility factors." Now that the OWBPA’s requirement that the employer identify the "eligibility factors" for selecting terminated employees has been recognized by the 10th Circuit, however, more plaintiffs will likely begin to challenge age discrimination releases for failure to disclose this information.

Barbara Taylor began working for Carolina Power & Light Company (CP&L) in 1993. In April 2000, she began experiencing extreme pain and swelling in her right leg. She consulted her doctor, who ordered her to take a week of bed rest, causing her to miss five days of work in late April 2000. Throughout the rest of the year, Taylor was absent for full workweeks on several occasions for further tests and treatment. Each time, the employer told her she was not eligible for FMLA leave because she had not been absent for more than five consecutive days (the FMLA contains no such requirement).

In late 2000, Taylor’s doctors determined her problems were caused by an abdominal mass. Taylor had surgery to remove the abdominal mass in December 2000 and was out of work for about six weeks. She was advised that her six-week leave qualified as FMLA leave. She later discovered, however, that CP&L had credited her with only four weeks of FMLA leave during her six-week absence.

In February 2001, Taylor received her performance evaluation for 2000. She was given a "poor" productivity rating because of her health-related absences and received only a 1 percent pay raise while other employees’ raises averaged about 6 percent. Shortly thereafter, CP&L terminated Taylor’s employment in a reduction in force, based in part on her poor performance evaluation.

Taylor was told that she was eligible for benefits under the company’s transition plan, which included seven weeks of paid administrative leave. She also was told that she would receive additional benefits (including monetary compensation) if she signed and returned a general release and severance agreement within 45 days. She signed and returned the release agreement. Although the release did not specifically apply to FMLA claims, it did apply to "all claims and all rights employee may have or claim to have relating to employee’s employment with CP&L … or employee’s separation therefrom," and "all other claims under state or federal law." CP&L sent Taylor a check for approximately $12,000 under the terms of the release.

After Taylor’s separation, she contacted the DOL about the company’s failure to designate her health-related absences as FMLA leave, the resulting negative performance evaluation and the company’s use of the evaluation in its decision to fire her. She was told to try and resolve her concerns directly with the company, which she did. When the company refused to make the changes Taylor requested, she sued the company in federal court for violations of the FMLA.

In response, CP&L argued that Taylor’s release was valid and barred her FMLA suit. Taylor responded that under the DOL’s regulations, "employees cannot waive, nor may employers induce employees to waive, their rights under the FMLA."

On appeal, the Fourth Circuit ruled that the plain language of the DOL regulations prohibits all releases of an employee’s FMLA rights. According to the court of appeals, such a release is valid only if the DOL or a court approves it. Since neither the DOL nor a court approved Taylor’s release of FMLA claims, the company’s general release was unenforceable with respect to her FMLA rights.

In reaching that conclusion, the Fourth Circuit distinguished an earlier decision from another circuit court of appeals that construed the DOL regulations to prohibit only the prospective waiver of substantive FMLA right during employment, not the post dispute settlement of FMLA claims. The Fourth Circuit concluded that the regulation’s plain language could not be limited only to future claims.

In light of these decisions, employers should review their severance agreements with counsel. Employers in states covered by the Tenth Circuit (Oklahoma, Kansas, New Mexico, Colorado, Wyoming and Utah) are almost certain to face challenges to age discrimination waivers obtained in group programs that fail to disclose the specific criteria on which the employer relied in deciding who to terminate. Employees elsewhere are likely to rely on the Kruchowski decision to challenge releases as well. Thus, before paying severance and seeking releases in connection with a group reduction in force, determine with legal counsel what information you need to provide terminated employees about the criteria you used to identify who would stay and who would go.

As noted above, the Courts of Appeals are split as to whether private settlements of FMLA claims (without court or DOL approval) are valid. In the states covered by the Fourth Circuit (Maryland, Virginia, West Virginia, North Carolina, and South Carolina), it is clear that, under Taylor, a release of FMLA claims will not be enforceable.

Given the split, employers outside of those states do not need to remove references to FMLA claims from their general releases. However, they should not rely on such a general release in connection with an employee who appears to have a serious FMLA claim, but should instead consult counsel before entering into any settlement.

The content of this article does not constitute legal advice and should not be relied on in that way. Specific advice should be sought about your specific circumstances.