However, many employers are surprised to learn that layoffs can result in significant legal claims by affected employees. A reduction in force is a situation that often serves as the basis for discrimination claims—particularly involving age discrimination—even though the cause of the reductions may be a loss of business, a merger or a consolidation of business operations.
When terminating an employee because of a reduction in force, many employers offer severance packages to employees to obtain a waiver of claims. In short, as a part of the layoff, the employer offers an employee some benefit—typically compensation—that the employee otherwise is not entitled to receive. In exchange, the employee is asked to sign a release agreement that waives any claims against the company arising out of his or her employment.
Typically there are no specific requirements for such waivers of federal claims. But there is one major exception: claims for age discrimination under the Age Discrimination in Employment Act. To have a valid release of claims under the act, employers must comply with several technical requirements. Courts consistently have stated that these requirements are "strict and unqualified," and if an employer fails to meet any of the statutory requirements, the waiver is "ineffective as a matter of law." The technical requirements are:
1. A written and understandable agreement: The waiver must be part of a written agreement between the individual and the employer that is written in a manner calculated to be understood by the average individual eligible to participate.
2. Reference to the Age Discrimination in Employment Act: The waiver specifically refers to rights or claims arising under the act.
3. Prohibition against releasing future rights or claims: The agreement reflects that the individual is not waiving rights or claims for actions that occur after the date the waiver is executed.
4. Consideration required: 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. Attorney consultation: The individual is advised in writing to consult with an attorney prior to executing the agreement.
6. Consideration period: In instances of single-employee terminations, the individual must be given a period of at least 21 days within which to consider the agreement. In instances where a waiver is requested in connection with an exit incentive or other employment termination program offered to a group or class of employees, the individual must be given a period of at least 45 days within which to consider the agreement. In this case, "program" is defined to include voluntary and involuntary terminations affecting two or more employees.
7. Revocation period: 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 renovation period has expired.
With respect to the specified time periods, employers should be aware that, if the waiver is sought as a part of a settlement for a claim of age discrimination that has been filed with a court or the Equal Opportunity Employment Commission, the employee is not entitled to either the 21-day consideration or the seven-day revocation period. Also, even when such time limits are applicable, an employee may sign a release prior to the end of the 21-day (or 45-day) time period, although the seven-day revocation period cannot be shortened by the parties.
Finally, there are some special rules that must be followed in order to secure a valid waiver. These come into play if the waiver is requested in connection with an "exit incentive" or "employment termination program." A reduction in force would typically qualify as such a program. First, employees have 45 days to consider whether to sign the agreement. Second, employers must make disclosures concerning eligibility factors and time limits applicable to the program. The statute also requires the disclosure of the job titles and ages of all individuals eligible or selected for the program, as well as the ages of all individuals in the same job classification or organizational unit who are NOT eligible or selected for the program. The use of age bans broader than one year (such as "age 20-30") does not satisfy this requirement.
Unfortunately, there are no clear guidelines on the precise nature and presentation of the informational requirements. The information that must be disclosed and the manner in which it must be disclosed are among the more disputed aspects of this area. Nevertheless, the regulations interpreting the ADEA provide some helpful guidance.
For instance, the scope of terms such as "class," "unit," "group," "job classification" and "organizational unit" are determined by examining the "decisional unit" at issue.
The term "decisional unit" is not mentioned in the Age Discrimination in Employment Act, but is a term discussed by the regulations. The "decisional unit" is defined as that portion of the employer’s organizational structure from which the employer chose the persons who were offered consideration for the signing of a waiver, and those who would not be offered consideration. The term "decisional unit" was developed to reflect the process by which an employer chose certain employees for a program and ruled out others.
The decisional unit is important because it determines to whom the information must be given. The regulations provide examples to assist in determining the scope of a decisional unit, and specifically when a decisional unit is located somewhere other than the facility where the terminations occur. The regulations state that the particular circumstances of each termination program will determine the decisional unit.
Among examples cited in the regulations where the decisional unit is other than the entire facility are the following:
1. A number of small facilities with interrelated functions and employees in a specific geographic area may constitute a single decisional unit.
2. If a company utilizes personnel for a common function at more than one facility, the decisional unit for that unit (e.g., accounting) may be broader than the one facility.
3. A large facility with several distinct functions may constitute a number of decisional units. For example, if a single facility has distinct internal functions with no employee overlap (e.g., manufacturing, accounting, human resources), and the program is confined to a distinct function, a smaller decisional unit may be appropriate.
The regulations also state that if an employer in its disclosure combines information concerning both voluntary and involuntary terminations, the employer must present the information in a manner that distinguishes between voluntary and involuntary terminations. Finally, if the terminated individuals are selected from a subset of a decisional unit, the employer must still disclose information for the entire population of the decisional unit.
For example, if the employer decides that a 10 percent reduction in force of the accounting department will come from accountants whose performance is in the bottom third of the division, the employer must still disclose information for all employees in the accounting department—even for those who are rated the highest.
The reality is that a severance agreement can be an important tool to help employers reduce the risk of future claims by employees. However, to benefit from such an agreement, employers must be very conscious of satisfying the criteria required in each agreement.