Legal Bulletins

Many employers routinely use separation agreements in order to minimize their exposure to claims arising out of an employment termination. These agreements generally contain a general release of all claims and a covenant not to sue in exchange for the payment of additional consideration to the individual whose employment is terminated. The agreements often impose financial penalties, such as forfeiture of the consideration received, payment of liquidated damages and attorney’s fees, in the event that the individual files a claim in violation of the agreement. On December 11, 2000, the Equal Employment Opportunity Commission (“EEOC”) issued a final rule, which severely restricts an employer’s ability to enforce the covenants not to sue and the penalties in such agreements with respect to individuals who file age discrimination claims.

In 1990, Congress amended the Age Discrimination In Employment Act ("ADEA") by passing the Older Workers Benefit Protection Act ("OWBPA"), which established specific requirements for releases of ADEA claims. In Oubre v. Entergy Operations, Inc., (1998), the U.S. Supreme Court held that a release that does not comply with the OWBPA’s stringent requirements is invalid with respect to age discrimination claims, and that an employer may not rely on contract theories of ratification or tender back to defend against such claims. The Court, however, expressly stated that it was not deciding, "whether the employer has claims for restitution, recoupment, or setoff against the employee" for return of the consideration paid in exchange for the invalid release. The EEOC regulations address this issue.

The EEOC regulations provide that no release agreement, covenant not to sue, or similar agreement may impose any penalty or any other limitation adversely affecting an individual’s right to challenge the validity of the release agreement with respect to claims under the ADEA, and expressly prohibit all provisions which require employees to tender back consideration received or which allow the employer to recover attorney’s fees, and/or damages because of the filing of an ADEA suit. Moreover, where an employee successfully challenges a release agreement and prevails on the merits of an ADEA claim, the courts have discretion to determine whether the employer is entitled to a set off against the employee’s monetary award, provided that the reduction can never exceed the amount recovered by the employee or the consideration which the employee received for signing the release agreement, whichever is less. Finally, the regulations state that no employer may abrogate its duties under an agreement containing an ADEA release, such as an agreement to provide a reference or purge of personnel records, even if the individual challenges the validity of the ADEA release.

Thus, if an individual files an ADEA lawsuit after signing a valid ADEA release, the employer’s only recourse is to incur the time and expense of persuading a court to enforce the release. Because the EEOC’s regulations significantly reduce an employer’s ability to deter such claims through the imposition of financial penalties, it is important for employers to be aware of these new limitations in assessing the value of ADEA releases.

Finally, the EEOC’s regulations are not applicable to non-ADEA provisions, such as non-disparagement and confidentiality clauses, which are often contained in separation agreements. However, the EEOC has taken the position that a reasonable employee must be able to determine that any financial penalties for breach of non-ADEA clauses have no effect on the employee’s ability to bring an ADEA charge or lawsuit challenging the ADEA release.

We expect these EEOC regulations will be challenged. However, until there is a definitive decision on this issue, the effect of the EEOC regulations is unclear. Employers may want to consider revising agreements containing liquidated damages or other financial penalties for filing an ADEA charge or lawsuit.