How (Not) To Obtain an Enforceable Employee Release

October 30, 2013Articles New Jersey Law Journal

Imagine your client pays a terminated worker two weeks' severance in exchange for a release of claims. The release identifies the applicable state and federal employment statutes, has the employee's initials on each page and contains an all-capped acknowledgment, above the employee's signature, stating that the employee has not been coerced and understands the release to be a final and binding agreement. The employee subsequently files a lawsuit alleging employment discrimination. The case is dismissed, right?

Not necessarily, according to the Appellate Division's recent decision in Carey v. NMC Global Corp. The case serves as a cautionary reminder to employers as to the need to use best practices in procuring releases from terminated employees.

The Circumstances

In the case, Carey, a high-school graduate, worked for NMC asa dispatcher. He went on an authorized two-month leave of absence for pneumonia. The day Carey returned to work, he met with NMC's office manager and vice president, who advised that he was being terminated. They provided Carey with a separation and release agreement. According to the plaintiff, the vice president explained to him that he could either sign the agreement and receive two weeks' severance, or choose not to sign it and receive nothing. Carey testified that he was given five minutes to consider the agreement, was not encouraged to discuss the agreement with an attorney and did not do so. Nevertheless, he initialed each page and executed the agreement. Four days later, after discussion with an attorney, the plaintiff wrote to NMC, indicating that he did not accept the terms of the severance package and requested that NMC not deposit the two weeks' pay into his account. NMC ignored Carey's request and deposited the funds into his account.

After returning the severance, Carey filed a lawsuit under New Jersey's Law Against Discrimination (NJLAD), alleging disability discrimination and retaliation for taking medical leave. The Law Division granted NMC summary judgment, based upon the agreement. The Appellate Division reversed.

The Knowing and Voluntary/Totality-of-the Circumstances Test

Under the NJLAD (and Title VII, ADA, FMLA and ERISA), a release will be deemed valid if it is knowingly and voluntarily entered into. That determination is based upon a totality-of-the-circumstances test, consisting of the following criteria:

  1. The plaintiff's education and business experience;
  2. The amount of time the plaintiff had possession of or access to the agreement before signing it;
  3. The role of the plaintiff in deciding the terms of the agreement;
  4. The clarity of the agreement;
  5. Whether the plaintiff was represented by or consulted with an attorney;
  6. Whether the consideration given in exchange for the waiver exceeds employee benefits to which the employee was already entitled to by contract or law;
  7. Whether an employer encourages or discourages an employee to consult an attorney; and
  8. Whether the employee had a fair opportunity to do so. Swarts v. Sherwin-Willams Co., 244 N.J. Super. 170, 176­177 (App. Div. 1990).

While it is the employer's burden to meet this test, no one factor is determinative. And the employer is not required to satisfy each factor.

The Carey court drew the following conclusions as to these factors:

  1. While the plaintiff's high school education was meager compared to others who have been deemed to execute valid releases, his 15-plus years of work experience could compensate for the lack of a college education.
  2. The plaintiff's testimony that he signed the agreement five minutes after it was given to him, and that he felt pressured to sign because the vice president was glaring at him, created a genuine issue of material fact in favor of the employee as to this factor.
  3. Because NMC presented the agreement to the plaintiff without providing him an opportunity to negotiate, this factor was resolved in favor of the employee.
  4. While the release language specifically referenced the NJLAD (and other employment statutes), the plaintiff's testimony that he did not understand the release, including its title ("Separation and Release Agreement") created a material dispute in favor of the employee.
  5. The plaintiff did not consult with an attorney prior to executing the release, and, thus, this factor also worked in favor of the employee.
  6. The court questioned whether two weeks' severance was sufficient consideration for entering into the release, citing with approval cases where employees were paid four weeks and $45,624.96.
  7. The court explained that "the onus is on the employer to encourage the employee to consult with an attorney," thus, the court found a genuine issue of material fact in that the agreement did not recommend that the plaintiff consult with an attorney, and the plaintiff's supervisors did not encourage the plaintiff to do so.
  8. As to the final factor, the plaintiff's testimony that the vice president was glaring at him during the termination weighed against the employer.

Best Practices for Procuring Knowing and Voluntary Employee Releases

In the wake of Carey, the following should be considered in drafting and offering separation agreements to employees.

  • It is critical that separation agreements be short (2-4 pages) and written in plain English, with limited legalese, especially where the employee is not sophisticated, i.e., lacks a college education. The employer may want to consider having different forms of separation agreements, depending upon the sophistication of the individual signing.
  • The separation agreement should reference the specific employment statutes, both by name and legal citation.
  • The separation agreement should indicate that the employee was given a reasonable period of time to consider the agreement. Even in releases for employees under the age of 40, employers should consider offering the 21 days mandated by the Age Discrimination in Employment Act (ADEA), and advising employees that they are not permitted to execute the agreement for "x" number of days. In that regard, the Carey court cited a 1998 District of New Jersey decision referencing a holding that 10 days was insufficient to consider executing a release.
  • New Jersey employers should consider offering more than two weeks of severance.
  • The separation agreement should indicate that the employee was encouraged to consult with an attorney prior to executing the agreement.
  • Employers should consider providing cover letters or emails to employees along with separation agreements, which letters or e-mails would identify the review period, and advise employees of their right to ask questions and consult with counsel.
  • To the extent the employer negotiates or offers to negotiate the terms of the agreement, it should do so in writing and preserve the communications.
  • If the separation agreement is being provided to employees at the termination meeting (at which two employer representatives should be present), the employer should encourage the employee to take the agreement home to review before executing, and advise the employee that he/she has the right to consult with an attorney before signing the agreement. The employer should take contemporaneous notes of the meeting.

Also, remember that releases cannot restrict an employee's right to file a charge with the Equal Employment Opportunity Commission (EEOC) or take part in EEOC proceedings. Any provision that attempts to waive these rights is unenforceable and could be a factor in invalidating the entire release. See EEOC, Understanding Waivers of Discrimination Claims in Employee Severance Agreements.

Finally, waiver requirements are more stringent concerning the release of federal age discrimination (ADEA) claims (the ADEA applies to workers aged 40 and over), which requires that the following criteria be met, in the context of individual terminations.

  1. The waiver is part of an agreement between the individual and the employer that is written in a manner calculated to be understood by such individual, or by the average individual eligible to participate;
  2. The waiver specifically refers to the ADEA;
  3. The individual does not waive rights or claims that may arise after the date the waiver is executed;
  4. The individual waives rights or claims only in exchange for consideration in addition to anything of value to which the individual already is entitled;
  5. The individual is advised in writing to consult with an attorney prior to executing the agreement;
  6. The individual is given a period of at least 21 days within which to consider the agreement; and
  7. The agreement provides that for a period of at least seven days following the execution of such agreement, the individual may revoke the agreement, and the agreement shall not become effective or enforceable until the revocation period has expired.

Note the similarities between the Older Worker Benefit Protection Act and totality-of-the-circumstances tests, a fact that catches many employment law practitioners by surprise.

It is critical that employment counsel and their clients take heed of the "careful considerations" that govern the knowing and voluntary waiver of employment law claims. After all, the last thing an employer (or its counsel) wants is to find itself in a war after bargaining—and paying—for peace.

Reprinted with permission from the October 30 issue of the New Jersey Law Journal. (c) 2013 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.