'No-Suit' Agreements: Employers are UsingThem for Severance Protection.

IN ORDER TO PREVENT LAWSUITS BY LAID-OFF EMPLOYEES, many employers are augmenting their severance packages with "no-suit" agreements that offer employees increased severance benefits in exchange for an agreement not to sue their former employer. Such agreements are perfectly legal if they're properly

drafted and presented. For example, in order for a promise not to sue for age discrimination to be enforceable, an employer must give the employee time to consider any offer to prevent "gun to the head" decisions by employees. But if a no-suit agreement isn't properly drafted and presented, former and current workers--not to mention the courts--will view the plans with a skeptical eye.

More on this later.

Though not a new practice, requiring employees to give up certain rights in exchange for better severance benefits has drawn a lot of media attention. No-suit agreements were featured in recent layoffs at:

Amazon.com--It offered 12 weeks of severance pay to laid-off employees who signed no-suit agreements but only two weeks to those who refused.

General Motors--General Motors promised to provide vouchers toward car purchases and other incentives to employees who signed no-suit agreements.

Motorola--Motorola offered to double the severance pay of employees who signed no-suit agreements.

ICG Communications--ICG Communications offered two weeks of additional severance pay for each year with the company in exchange for signing a no-suit agreement.

Lucent Technologies--Lucent offered severance pay only to employees who signed no-suit agreements.

In each instance, employees who signed a no-suit agreement received more severance benefits than those who didn't. And an employer has no legal obligation to provide severance payments unless such benefits were promised to employees as part of their employee benefit plan.

But because there has been an explosion in employment litigation, employers are saying, "If I'm going to offer a severance package, I might as well get some protection for it." And as employment litigation continues to skyrocket--more than doubling over the past 10 years--these agreements have moved from being individually negotiated contracts to standard company policy. At present, many companies with written severance package plans include some provision that says the receipt of benefits indemnifies the employer. Increasingly, noncompete agreements and provisions concerning proprietary information are being rolled into these no-suit contracts.

LEGAL REQUIREMENTS

A no-suit plan must clear the following three legal hurdles:

1. Employees must know what they are giving up.

Be very specific: For example, ask for a simple release that expressly covers Title VII and other fair employment practice laws. An ambiguous release does not work in your favor. Tell your employees to contact a lawyer to ensure that they fully understand the effect of the release and what they are giving up.

2. Workers must sign voluntarily.

To ensure that employees can't claim to have been coerced into signing a no-suit agreement, give them sufficient time to review the contract's provisions. For example, don't expect an employee to review a 10-page contract in one day, and also take into account other circumstances, such as illness or family emergencies. The best bet is to get the employee to agree to the time frame.

3. The incentives being offered must be in addition to what the employee is already entitled to.

A no-suit agreement must make it clear that the employee is giving up a right to sue in exchange for benefits that the company would not otherwise offer.

Age bias

Under the federal Older Workers Benefits Protection Act (OWBPA), passed in 1990 as an amendment to the Age Discrimination in Employment Act (ADEA), employers must follow specific requirements for executing valid releases and severance agreements, which include waivers of employee rights under the ADEA. Congress enacted the waiver provision in order to resolve a debate over whether employers could ask older workers to waive their ADEA rights. Understanding that waivers are typically tied to the receipt of important economic benefits, Congress determined that employers could obtain no-suit agreements, but, in order to protect workers' rights, it also imposed requirements with which no-suit agreements would have to comply.

The Equal Employment Opportunity Commission (EEOC), the federal agency responsible for enforcing the ADEA, promulgated the new regulations, which became effective January 10, 2001. Though the EEOC guidance is limited to age release situations covered by the ADEA, employers should review the language in their no-suit agreements and attempt to conform them to the EEOC regulations if possible.

As a general matter, a waiver under the ADEA is a legal agreement between an employer and employee in which the employee gives up the right to pursue an age discrimination claim against the employer in exchange for something of value, like severance or early-retirement benefits. For example, during a layoff, an employer might ask that an employee agree to give up whatever ADEA claims he or she may have against the employer in order to get severance benefits. Also, it isn't uncommon to lay off senior personnel and retain younger employees. While an employer's motivation may be purely economic--senior employees earn more--the employer could be sued for age discrimination, which is why employers like to make use of no-suit agreements.

Under the traditional contract law principle of "tender back," an individual who believes that a waiver or other legal agreement is invalid must return--i.e., tender back--the payment received for the waiver before challenging it in court. A related principle is "ratification." An individual who fails to return the payment received for a waiver is said to have "ratified' or approved of, the waiver. Ratification prevents an individual from challenging a defective waiver in court. (A defective waiver is one that violates the law; e.g., it's coercive, or it discriminates.)

Main points of the EEOC regulation and how they affect traditional contract law principles

The contract principles of tender back and ratification don't apply to Age Discrimination in Employment Act waivers. The OWBPA governs ADEA waivers, and it takes precedence over traditional principles of contract law not included in the statute. Therefore, an older worker may keep severance or other benefits he/she receives from an employer, even if he/she challenges the validity of a waiver agreement under the ADEA.

Employers can't sidestep the "no tender back" rule by using other means to limit an older worker's right to challenge a waiver agreement or by penalizing an older worker for challenging a waiver agreement. For example, an employer isn't allowed to require older workers to agree to pay damages to the employer or pay the employer's attorneys' fees if the employee files suit. An employer may recover money it paid for a waiver if the older worker successfully challenges the waiver, proves age discrimination, and obtains a monetary award. But the employer's recovery may not exceed the amount it paid for the waiver in the first place or the amount of the award if it is less. An employer may not, on its own, cancel or avoid the obligation it undertook, even if the waiver is challenged. For example, an employer is still obligated to make the retirement or other payments it agreed to provide to the older worker, even though the older worker sues.

In the Older Workers Benefits Protection Act, Congress struck a balance between allowing employers to obtain waivers under specified circumstances and ensuring that older workers have access to the courts to protect their rights. That's why a no-suit agreement can be used by a lawyer as an affirmative defense, but the burden is on the employer to prove in court that the no-suit agreement is valid. If the employer can prove the no-suit agreement's validity, the older worker's lawsuit will be dismissed.

In no-suit agreements, the older worker's receipt of early-retirement, severance pay, or other benefits depends on the worker agreeing to two things: (1) that he or she will not bring a lawsuit, and (2) that if a lawsuit is brought, the older worker will pay damages and attorneys' fees to the employer. An earlier "proposed" version of the EEOC regulation would have categorically prohibited no-suit agreements under the ADEA.

The final regulation takes a somewhat different approach, based on public comments to the proposal. It recognizes that no-suit agreements and similar agreements are, functionally, the same as waivers in that older workers give up the Age Discrimination in Employment Act right to sue for age discrimination. As a result, ADEA no-suit and similar agreements are subject to the requirements and restrictions of the OWBPA just like any other ADEA waiver provision.

The monetary remedies traditionally associated with no-suit agreements under common law damages and attorneys' fees are not allowed under the final EEOC regulation because they are inconsistent with the Older Workers Benefits Protection Act statutory design. These remedies would stop older workers from challenging ADEA waivers in the same way that "tender back" does. They simply couldn't afford to.

The OWBPA does not permit any arrangement that has the practical effect of protecting ADEA no-suit agreements that don't comply with the law. If an older worker successfully challenges such an agreement, proves age discrimination, and obtains a monetary award, a court, in its discretion, may reduce the older worker's monetary award. But the reduction may not exceed the amount the employer paid for the no-suit agreement in the first place or the amount of the older worker's monetary award if it is less. For example, if an older worker received benefits valued at $15,000 in exchange for a no-suit agreement and obtained $10,000 in monetary benefits after proving that there was age discrimination, the court could reduce the award by up to $10,000. If the older worker obtained $30,000 in monetary benefits from the lawsuit, the court could not reduce the award by more than $15,000, the amount the worker received in exchange for the no-suit agreement. This rule recognizes that permitting an employer to recover more money from the older worker would deter older workers from bringing age discrimination lawsuits.

For the reasons discussed above, this would be inconsistent with the purposes of the law. The regulation says an employer cannot "abrogate," or avoid, its duties under an ADEA no-suit agreement, even as to the older worker who has challenged it. An older worker has an OWBPA right to have a court determine his or her no-suit agreement's validity. Permitting an employer to stop making payments due under the agreement would make it very difficult for older workers to exercise this right.

THE BOTTOM LINE

No-suit agreements work in many instances because most potential signers can't afford to look a gift horse in the mouth--even if they have what appears to be a valid discrimination or other claim. Nonetheless, employers should show discretion and sensitivity when employing this tactic. Employment law experts counsel employers to make sure that the enhanced severance package is seen as an added bonus, not as a payoff. If employees feel that they are being rewarded for prior service rather than being bribed to keep quiet, then no-suit agreements will serve their intended purpose.

Milton Zall is a freelance writer who specializes in taxes, investments, and HR/business issues. He is a Certified Internal Auditor and a Registered Investment Advisor.