Final regulations recently adopted by the Equal Employment Opportunity Commission (the "EEOC") affect employers requiring signed release agreements in exchange for benefits under a severance plan. The final regulations interpreting the Age Discrimination in Employment Act of 1967 ("ADEA") slightly modify proposed regulations issued by the EEOC on April 23, 1999.
Many employers' severance plans condition the receipt of severance benefits on participants' signing of a release or waiver of legal claims against the employer. If the participant is over age 40, the signed release often includes a release of claims under ADEA. In general, the United States Supreme Court has found that a release of ADEA claims is enforceable so long as the release complies with the requirements of the Older Workers Benefit Protection Act ("OWBPA"). OWBPA generally requires that the release be signed knowingly and voluntarily and requires employers to give employees certain periods of time to consider and revoke the release.
The New Regulations
"Tender Back" of Severance Benefits
The primary issue addressed in the new regulations is whether an employer may require a terminated employee to return, or "tender back," the severance benefits received in exchange for a signed release prior to suing the employer to challenge the validity of such release. Prior to the Supreme Court's ruling in the 1998 decision, Oubre v. Entergy Operations, Inc., if a terminated employee wanted to sue his/her employer for age discrimination but had signed a release, many courts would allow an employer to require the participant to return the severance benefits to the employer prior to challenging the validity of the release. Under the new regulations, an individual may not be required to return the benefits he/she received from the severance plan in exchange for the signed release prior to challenging the validity of the release, even if the release appears to be valid on its face. In essence, the regulations ensure that the participant's retention of the severance benefits does not constitute an admission that the release was valid.
Covenant Not to Sue
The new regulations also address the enforceability of covenants not to sue that may be contained in a release agreement or in a related document signed by a terminated employee. In this regard, the commentary to the regulations makes a distinction between covenants not to challenge the validity of the release agreement and covenants not to bring other legal claims against the employer. The regulations provide that covenants not to challenge the validity of the release agreement are not valid under ADEA while other covenants not to sue may be valid if they meet the requirements of OWBPA. In other words, terminated employees may never be required to release their right to challenge the voluntary nature of a release agreement.
The EEOC cautions employers whose release of ADEA claims contains a covenant not to sue in the same document to ensure that such covenant not to sue clearly does not release a terminated employee's right to challenge the validity of the release agreement itself.
Recoupment of Severance Benefits
Finally, under the new regulations, if a Plan participant wins an ADEA challenge of a release against his/her company, a court has the discretion to give the company back the severance benefits paid to the participant prior to the lawsuit. The provision reflects the policy that, if the release was invalid, the severance benefits provided in exchange for such release should not remain with the participant.
Employers requiring signed releases in exchange for severance benefits should be advised of the "tender back" restriction of the new regulations. In addition, employers that include a covenant not to sue in their severance release agreements should be made aware of the EEOC's heightened scrutiny of such provisions.