Severance Agreements Drawing Increasing Legal Scrutiny

Bill O’Reilly’s $25 million “departure package” from Fox News recently put severance agreements back in the public limelight. However, well before the O’Reilly saga began, severance agreements have been the focus of increasing judicial and agency scrutiny. That scrutiny has included new challenges to many traditional severance clauses and the enforceability of many “standard” severance agreements. Given these developments, HR professionals should exercise extreme caution when drafting severance agreements, even if the agreement does not involve the type of dollars offered to Mr. O’Reilly. The last thing an employer wants to learn, after paying out severance to an outgoing employee, is that the legal waiver, or any other critical portion of the severance agreement, is invalid.

The following is a summary of recent developments affecting key severance agreement clauses.

• Challenges to Legal Waivers. A fundamental aspect of severance agreements is the employee’s agreement to waive any legal claims or damages against the employer in exchange for the money or other benefits received. Historically, there have been three general limitations on the provisions of legal waivers contained in severance agreements. First, the waivers cannot release future claims or actions arising after the employee signs the agreement. Second, the waivers cannot release certain types of claims without third-party approval (such as a worker’s compensation claim). Third, the waivers cannot prevent an employee from filing a claim with certain agencies (such as the Equal Employment Opportunity Commission), although the waivers can preclude the employee from recovering damages from any claim they might file with those agencies.

These historic limitations are now being expanded, which in turn has narrowed the scope of protections available to employers who offer severance agreements. For example, some laws provide financial rewards to whistle blowers and others who come forward to report unlawful actions on the part of their employer or former employer. The Securities and Exchange Commission has declared that severance agreements which require the employee to waive receipt of such financial rewards are unlawful and subject to civil penalties. In August, 2016, the SEC issued significant penalties against two employers whose severance agreements contained overbroad legal waivers. See: In the Matter of Health Net, Inc. (8/16/16) ($340,000.00 penalty) and In the Matter of BlueLinx Holdings, Inc. (8/10/16) ($265,000.00 penalty).

The Occupational Safety and Health Administration has taken a similar stance on severance agreements containing such “overbroad” legal waivers.

Not to be left out, the National Labor Relations Board has also expanded its scrutiny of legal waivers in severance agreements. The NLRB has declared that it is not necessarily bound by legal waivers in severance agreements, and that employees may still have the right to participate in Board charges filed on their behalf and receive the benefit of any remedies provided through those charges.

In addition to the increasing restrictions being imposed by federal agencies, HR professionals must also take into consideration growing lists of state laws governing legal waivers. For example, California Civil Code Section 1542 requires specific language be included to be effective to waive unknown claims.

• Challenges to Non-Disparagement Clauses. Non-disparagement clauses are probably the second most common provision of a severance agreement. Employers believe that the departing employee, after accepting severance pay they were not otherwise owed, should not be entitled to bad-mouth their former employer, managers and coworkers on social medial sites or other public forums. Most employers have, therefore, been extremely surprised and disturbed by recent challenges being mounted against non-disparagement agreements. These challenges have arisen under a variety of settings.

First, some non-disparagement clauses are being challenged under general contract law. The common law of most states provides that contracts or contract clauses containing significant ambiguities can be void due to “vagueness.” Non-disparagement clauses are particularly susceptible to such challenges as most do not specifically define “disparagement.” Thus, questions can arise as to what constitutes disparagement. For example, can the employee make any statements about his termination? If the employee goes to work for a competitor, can the employee contend that the products or services he is now selling are superior to those of his ex-employer? If someone asks him what he feels about his former employer or about his experience at his former employer, does he have to lie? If, during an interview, the employee is asked about any discipline he received from his ex-employer, can he claim that the discipline was improper, if that is what he truly believes? If the clause is found to be ambiguous, it is susceptible to being declared void due to vagueness.

Employers often confuse “disparagement” with “defamation,” and assume the terms are synonymous. This is not the case. Defamation is specifically defined under a host of state, federal, and common laws, and is more specific and narrow than the common meaning of “disparagement.” Non-defamation clauses may be easier to enforce under general contract law than non-disparagement clauses. However, those clauses may not be sufficient to prevent the employee from his derogatory social media rants.

Like legal waivers, non-disparagement clauses are also being targeted by federal agencies. For example, in separate lawsuits against CVS Pharmacy and several other employers, the EEOC has taken the position that non-disparagement clauses within severance agreements violate an employee’s right to provide truthful information to the EEOC about their employer. The EEOC further argues that such clauses effectively preclude the employee from filing a claim with the EEOC (since filing a claim contending that the employer violates federal employment law is, by definition, disparaging to the employer). This, in turn, violates the EEOC’s historical stance on legal waivers (employer can restrict employee from receiving remedies from the EEOC after signing a severance agreement but cannot preclude employee from filing a claim with the EEOC).

The NLRB has also challenged non-disparagement provisions, on grounds that such clauses can improperly interfere with an employee’s right to engage in “concerted activity” and can improperly prevent an ex-employee from joining a union campaign to organize the former employer. See: Pratt (Corrugated Logistics) LLC and Teamsters Local 773 (NLRB 2/21/14).

The SEC and OSHA have also criticized non-disparagement clauses to the extent that they discourage or deter whistleblowing activities.

• Challenges to Confidentiality Clauses. Another common expectation of employers is that former employees who receive severance payments should be precluded from disclosing confidential information of the employer. However, like non-disparagement clauses, confidentiality provisions are being challenged as unlawful impediments to whistleblower and other enforcement laws.

OSHA included confidentiality provisions within the list of improper restrictions on protected employee actions described in its whistleblower guidance (cited above).

In another curb on confidentiality provisions, the SEC enacted Rule 21-F-17 as an enforcement mechanism for Dodd-Frank and similar whistleblower laws. Rule 21-F-17 provides that: “No person may take any action to impede an individual from communicating directly with the Commission staff about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement.”

In September of 2015, the SEC issued its penalty under the Rule 21-F-17 against an employer whose confidentiality clause required employees to obtain authorization from its legal department before disclosing certain confidential information. See: In the Matter of KBR, Inc. (4/1/15) ($130,000.00 civil penalty).

The EEOC considers confidentiality clauses to be as offensive as non-disparagement clauses by improperly restricting employees from filing or providing testimony in EEOC actions.

Likewise, the NLRB contends that confidentiality clauses improperly impede on employees’ concerted activities rights, particularly clauses which do not allow employees to share compensation information or other information concerning working terms or conditions. See: Quicken Loans, Inc. (NLRB 3/17/16) (NLRB ordered employers to remove broad confidentiality clauses from severance agreements).

• Challenges to Overall Enforceability. Finally, courts and agencies have been increasingly aggressive in declaring that the entire severance agreement is unenforceable. Many of these challenges focus on the overall formatting of the agreement.

For example, in its Legal Guidance on the Enforceability of Severance Waivers, the EEOC stresses that an employee’s acceptance of a severance agreement must be “knowing and voluntary.” The EEOC reviews multiple factors to determine whether the “knowing and voluntary” requirements are met. These include, but are not limited to, the length of the agreement, the complexity of the language, the formatting and font of the agreement, and whether the agreement can reasonably be understood by someone with the departing employee’s education and experience.

Employers often attempt to use a “one size fits all” severance agreement, using the same, detailed “boilerplate” provisions for a departing CEO with a master’s degree in business administration as is used for a departing janitor who never graduated from high school. This practice is dangerous, and could cause the agreement to be void. (Moreover, in some cases, the janitor may have a stronger potential legal claim against the employer than the CEO, so the validity of the legal waiver could be more crucial for the janitor.)

Additional “knowing and voluntary” factors include whether the employee has been provided sufficient time to review the agreement, whether the employer has been willing to discuss or negotiate any of the clauses of the agreement, and whether the employee has been advised to have the agreement reviewed by legal counsel.

Some employers, seeking to obtain a quick waiver, impose extremely short deadlines for acceptance, and/or declare that the offer is a “take it or leave it” offer, and/or routinely decline to advise the employee to seek legal counsel to review the agreement. Employers who use such shortcuts to secure a waiver may find that those efforts have backfired when the waiver is held to be unenforceable.

[Note: The Older Workers Benefit Protection Act requires that severance agreements for employees over 40 years old must recommend, in writing, that the employee review the agreement with legal counsel. The law also imposes various minimum periods for review of the agreement and other requirements.]

Bottom Line: Severance agreements are becoming extremely challenging to draft and enforce, due to various challenges to critical provisions of such agreements. No HR professional wants to be in the position of informing their employer that, despite paying significant money to a departing employee, the fundamental protections that the employer expected to receive from the agreement are unenforceable.

Due to the complex nuances of the new rules affecting severance agreements, HR professionals would be prudent to seek legal guidance from a qualified employment attorney before attempting to draft a severance agreement. More information on the new rules governing severance agreements, or assistance in reviewing or drafting severance agreements, may be obtained from the COJ Employment Team.

Written By:
Attorney Gregory A. Grobe