What Constitutes a Severance Agreement?
A severance agreement is a document that an employee enters into with an employer after the employee’s employment has ended. The agreement is used to separate the employee from the company, and includes various forms of compensation and consideration to the employee, often in return for legal releases or other promises or obligations from the employee. A severance agreement may, but does not have to, be accompanied by a signed Separation Agreement, Mutual Release, Waiver and Covenant Not to Sue, but the two documents typically contain many of the same provisions or elements.
Severance agreements come in many forms. Some employers offer severance agreements to all departing employees, usually at the end of the employee’s employment with the company. Other employers do not. Severance can also be offered during the course of employment , such as as part of an offer to settle potential or actual wage and hour or other claims. Regardless of when made, severance agreements traditionally provide departing employees with compensation and/or benefits in exchange for a release of all potential and/or actual claims (federal, state, local, and statutory).
In some circumstances, however, there may be relatively few, if any, claims that the employee can bring. As a result, the severance package offered to the employee is limited-or even non-existent. Guidance from courts, as well as the Department of Labor and the Equal Employment Opportunity Commission provide that waivers and releases required by severance agreements need not pertain to statutory claims or rights that do not exist or are otherwise not yet known to the employee and therefore not waivable.
The Significance of the Revocation Period
In recognition of the fact that requiring or even pressuring an employee to sign a release on the last day of work, after a long period of employment, is not only probably not good practice, but might also be deemed coercive and therefore unenforceable under federal law, some employers providing severance agreements now include in their agreements a "revocation period." This is a period of time (generally seven days, although sometimes longer) provided at the end of the process (that is, after the agreement has been signed, generally at least 21 days after the employee has been informed of the separation), during which the employee may revoke his or her consent to execution of the agreement. Such a provision, in addition to giving the employee an opportunity to review the agreement (and we always encourage our clients to suggest that the employee take advantage of that time) with an attorney (presumably for free; if a union employee, certainly the union will have legal representation), is also a back-up for the case where the employer might have any question about having met the "informed consent" requirements of the OWBPA, or of having rushed the employee into signing an unclear or unfairly drafted or executed agreement, especially with respect to calculating the 7 day revocation window or the 21 day execution window. If an employer is following an existing plan, such as a severance plan providing for the same basic consideration for all employees at termination, an exception to age discrimination requirements may be available, although it is important to avoid creating precedents that may not be followed with respect to younger employees, lest claims be made that the policy is discriminatory.
Legal Basis for the Use of a Revocation Period
Understanding the Revocation Period in Severance Agreements
The legal framework governing the revocation period in severance agreements is set forth in various federal laws. A federal law that has particular impact in this area is the Older Workers Benefit Protection act ("OWBPA").
The OWBPA generally provides that for releases of "rights or claims arising under the ADEA" (the Age Discrimination in Employment Act), entitlement to severance benefits is conditioned on execution of a release of claims and failure to revoke a general release within 7 days, or entitlement to severance benefits will be deemed timely waived. The OWBPA also extends this protection to protected spouses, i.e. the spouse of a participant in or beneficiary of any plan subject to the provisions of the Employee Retirement Income Security Act of 1974 ("ERISA") if such spouse’s rights or benefits are forfeited under such plan because of the election not to participate in the plan unless such spouse has received written notice of the terms and effects of such election.
Length of the Revocation Period
In most cases, the statutory revocation period will be known to the employer from the outset of the drafting process. As noted above, the statutory revocation period for an individual (non-group) severance agreement is typically 7 days, but sometimes may be subject to a longer statutory standard of up to 15, 21 or 45 days depending on the age of the employee in question. Without any additional layers of protection, practitioners usually consider a revocation period of seven days sufficient to ensure compliance with the statutory requirements.
Parties must be careful if the intended severance agreement is also a release of claims pursuant to states’ so-called "baby" Worker Adjustment and Retraining Notification Acts (or WRNAs). Under certain states’ laws, employers must provide at least 21 days to employees aged 40 and over to consider such a release. In these cases, if an employee has in fact received a 21-day revocation period at an earlier point in the litigation process, then such period must be repeated for the same release in the severance agreement.
The duration of the revocation period also may be altered under certain circumstances if the parties elected to contract around the general rule provided such contract is not prohibited by law. For example, pursuant to the Older Workers Benefit Protection Act (also known as OWBPA), employers may, in a non-group context, choose to follow the relevant statutory requirements of employees ages 40 and over or those as low as 29 years old. The most frequently observed selection of this option has been for employers to use 45 years of age when they are settling with former employees. Furthermore, as illustrated in the Williams case above, courts are willing to give relief to agreements that have created an unforeseeable hardship for the releasing party where the 45-day OWBPA requirement was not followed.
However, in general, courts are interested less in the particulars of the agreement actually signed than they are in whether a party is surprised by the terms or result of the agreement as a whole. Thus, although a revocation period of less than seven days cannot be guaranteed to be upheld, even seven days may not be sufficient if an employee is clearly deprived of a reasonable opportunity to evaluate the proposed agreement. This is especially true when the requesting party is the one responsible for drafting or dispersing the proposal.
Employee Entitlements During Revocation Period
Employees have the right to revoke their consent to signing the Release and Separation Agreement up to seven (7) days after signing it, and during this time period, a number of important rules apply. This revocation may be in any form, as long as it has a clear statement that the employee no longer wishes to be bound by the agreement. If the employee executes the agreement on Wednesday and the employer causes it to be delivered to the employee’s home on Thursday, then the revocation can be sent to the employer at any time on Wednesday, Thursday, Friday, Saturday, Sunday or Monday. Having received the signed release package on Thursday, the employer must provide the employee with a form of the waiver to be signed and returned by the employee no later than the close of business on the seventh day after the employee executed the release. No payment will be made to the employee until a properly signed waiver is filed by the employer. The employee then has until the close of business on the eighth day after the employee executed the release to execute the waiver. A notice that simply states the employee is revoking the prior signature is sufficient – the employee does not need to advise the employer why the employee has changed his/her mind . After the close of business on that eighth day, unless the employee has revoked his/her agreement to voluntarily resign, there will be no further opportunity of the employee to reconsider the execution of the release. The employer has no obligation to remind the employee of these rights; it is up to the employee to know that there is a seven (7) day period to reconsider the signing of the agreement, and an eighth day to sign the waiver of that right. This knowledge can and should come from the Separation Agreement itself, and there should be an acknowledgment of that in the agreement signed by the employee with those same seven (7) or eight (8) days to change his/her mind. It is also important that the employee go over the Separation Agreement with an attorney, with sufficient time to secure the attorney’s opinion of the agreement before executing it. Enumerable problems can occur if the employee does not consult an attorney but, where that is the case, the employee may not have enough time to consult a competent employment attorney. Again, the Separation Agreement should so state, with a specific provision concerning the recommendation of an attorney and the time limits.
Employer Obligations During Revocation Period
An aggrieved employee will likely attempt to rescind a severance agreement even after the requisite 7 day revocation period. And, the employer’s failure to honor that revocation can create liabilities, even years later. To comply with the provisions of the OWBPA, an employer must: To properly terminate the agreement, the employer must comply with the OWBPA requirements by providing express instructions to the employee regarding how and when the agreement may be revoked, and by properly accepting any timely revocation. Employer’s should provide clear written instructions in the offer letter regarding revocation of the agreement that clearly set forth: If either of these instructions is violated, a waiver is void and not enforceable.
Implications of Failing to Adhere to the Revocation Period
Consider the consequences of ignoring the revocation period. If an employee were to accept an agreement and then change his mind about some portion of the acceptance, he might suffer little in terms of legal or financial consequences. The acceptance may present risks to the employee (e.g. tax consequences, new work schedules, new commute) that could result in no more than a significant inconvenience should he reconsider the acceptance. However, if an employer reaches an agreement with an employee but fails to respect the employee’s right to revoke the agreement within the seven day waiting period, the employer risks exposure to legal and financial consequences.
First, if the employee does not consider the agreement final, he might be less likely to perform under the agreement. In this case, the employer might not have adequate consideration for the agreement, thereby voiding it.
Second, even if the agreement is valid, the employer risks exposure to statutory claims. For example, by agreeing to waive an employee’s rights under the Michigan Illness and Disability Act ("The MIDA"), the employer could be forced to pay 3 mislaid work days for each omitted day on which the employer did not intentionally pay wages to the employee or contribute to fringe benefits in lieu of the employee’s absence. M.C.L. 408.969(1)(a). This can be significant, as the calculation is performed per omitted day, not per week or pay period. At a minimum, the three day backpay could easily exceed any compensation that would have been owed under most employment agreements.
Finally, and most problematically, the employer risks exposure to statutory claims that require written agreements to be reasonable. For example, the Employee Retirement Income Security Act ("ERISA") generally requires that an employee be provided with a document summarizing the provisions of any benefit plan. Any waiver signed before the provisions of the plan have been made known to the employee would be deemed involuntary because they would not be sufficiently informed. The employer could be required to provide all benefits to the former employee until he receives the corrected summary. The employer would be responsible not only for the benefits themselves, but all administrative costs as well.
Practical Scenarios Regarding the Application of the Revocation Period
69-year-old Gerald Burkhardt worked at something called the MagiQuest entertainment facility in Erie, Pennsylvania. The company that owned MagiQuest had a release of claims that it used when terminating employees; and indeed Gerald was separated from employment in December 2014. This included a Mass layoff; after which all employees were required to sign a separation agreement to receive severance pay. As one would expect, the separation agreement contained a release of claims, including an express waiver of the Age Discrimination in Employment Act (the ADEA). True to the age of consumerism, the agreement provided the employee seven days after signature during which time he could always revoke his consent to be bound by the terms. The agreement itself said, "Employee understands that he or she is entitled to the right to revoke this Separation Agreement for up to seven calendar days after the Employee has signed this Separation Agreement and that such a revocation must be in writing (Deliberation Period)." Mr. Burkhardt read the agreement and signed it. Subsequently, he changed his mind and sent a letter to the company within the specified seven-day window advising it he would not honor the agreement and that he wished to rescind his execution of the agreement. The company continued to honor the terms of the agreement , and paid him what it owed. Mr. Burkhardt took the issue to court claiming the agreement was invalid because the letter he had written was sufficient to void the agreement. Magistrate Judge Baxter found that Burkhardt’s letter did not quote the language used in the agreement that he wanted to revoke its terms, and therefore he failed to invalidate the agreement. But wait, there is more. When the matter went to trial on the company’s motion for judgment on the pleadings, the judge decided the agreement was unenforceable for another reason. The agreement calling for 7 days to consider was itself inconsistent with the ADEA which requires 21 days to consider a release in conjunction with an age-discriminatory termination. So 49 days, by that standard, the agreement fell well short of that requirement. Subsequently the third circuit held that 45 days was an appropriate extension of the 21-day requirement given the number of persons involved in this terminations in the same facility. There are two lessons to be learned. First that unless the dollar value of the release is consistent with the likely exposure for the release, the agreement is not enforceable; and second that the standard for showing that a waiver is knowing and voluntary is very high. A mere signature on an agreement combined with an explanation that the employee can change his mind as to the terms is simply not sufficient to show that the agreement is deal binding. So when drafting these agreements one must assume that the courts will be looking for the highest standards for showing that the basis of the agreement was knowing and voluntary.