October 23, 2020

PROPERLY DRAFTED SEVERANCE AGREEMENTS CAN PROTECT EMPLOYERS AGAINST LAWSUITS

At some point, every employer faces the dilemma of needing to terminate an employee but fearing that the employee will respond with a lawsuit.  To complicate matters, California enacted AB 9 as of January 1, 2020, extending the deadline for file a claim of discrimination with the Department of Fair Employment and Housing (“DFEH”) from one year to three years.  A DFEH complaint is a prerequisite to filing a discrimination lawsuit in California.  After a DFEH complaint has been filed, the employee has another year to file a civil lawsuit.  That means an employee may have four years, or even longer, to bring a lawsuit against a former employer. 

So how does an employer protect itself from such lawsuits?  One of the most effective ways is with a severance agreement.  A severance agreement is simply a contract where the employer offers something of value (usually money or continued fringe benefits) in exchange for something of value from the employee (a release of claims). 

It is important, however, to understand what a severance agreement can and can’t do. 

What claims can and can’t be released?

The most common claims released in a severance agreement are those related to workplace discrimination, harassment, and retaliation under various state and federal laws. These include:

• The California Fair Employment and Housing Act
• Provisions of the California Labor Code, including Labor Code section 1102.5
• Title VII of the 1964 Civil Rights Act
• Sections 1981 and 1983 of the Civil Rights Act of 1866 and Executive Order 11
• The Equal Pay Act
• The Age Discrimination in Employment Act and the Older Workers Benefit Protection Act
• The Americans With Disabilities Act
• Section 503 and 504 of the Rehabilitation Act of 1973

The severance agreement should also include a waiver of any benefits under Civil Code section 1542. A 1542 waiver ensures that an employee cannot bring a lawsuit, even if they were unaware of facts supporting a lawsuit at the time the release was signed.  In other words, a 1542 waiver is a catch-all for potential claims that may not have existed when the severance agreement was signed. 

Some claims, however, cannot be waived as part of a severance agreement. For instance, employees cannot waive their right to file a workers’ compensation claim.  Employees cannot waive claims for wages that are due or claims related to payment of minimum wages, or claims for reimbursement of expenses. 

Special rules apply for releases for workers 40 years and older.

If the severance agreement is for an employee who is 40 years or older, special rules apply under the federal Older Workers’ Benefit Protection Act (“OWBPA”).  Requirements under the OWBPA include: (a) a minimum time of at least 21 days (or 45 days for group terminations) to review and accept the agreement; (b) a 7 day period after execution of the agreement during which time the employee may revoke acceptance; (c) language advising that the employee should consult with an attorney; and (d) clear, understandable language throughout the agreement.  Additionally, consideration (the payment to the employee) must be more than that which the employee is otherwise entitled. 

Can the severance agreement include a confidentiality clause? 

California law is continually evolving as to whether or not agreements can include confidentiality clauses.  Currently under California law confidentiality clauses are permitted, but with limitations. For example, an agreement cannot bar an employee from testifying in administrative, judicial, or legislative proceedings regarding alleged criminal conduct.  Agreements also cannot bar an employee from disclosing facts, regardless of the setting, concerning acts of sexual assault, sexual harassment, or discrimination based on sex in the workplace.  

How much should the employee be paid?

Because there is no right to severance pay in California, there is no set amount that must be paid in a severance agreement.  As with any settlement, the amount is negotiable. Some things to consider, however, are the length of employment, the likelihood that the employee will pursue a civil case, and the cost and time of defending against the civil case. 

The structure of the settlement is also something that can be negotiated.  For example, severance can be a lump-sum payment, or an agreement to keep the employee on payroll for a set length of time.  Severance can also include continued payment of fringe benefits or other tangible benefits (gym memberships, car leases, etc.). 

Should the release be mutual?

An employee, or his/her attorney, may request that the release be mutual.  In other words, the employer also agrees not to sue the employee for claims know or unknown. In most contexts, a mutual release is fine.  Employers would generally only be able to sue employees for intentional acts anyway, as the employer has a duty to defend employees for unintentional acts.  As such, unless you suspect that the employee engaged in intentional misconduct, a mutual release is fine. 

An employer, however, may not want to enter into a mutual release with employees who had financial responsibilities within the company.  For example, say you entered into a severance agreement with a CFO that included a mutual release and a section 1542 waiver.  Six months later, you learn that the CFO had embezzled $500,000 from the company.  The mutual release would likely preclude you from seeking restitution for the embezzled funds. 

Do you have questions or need assistance drafting a severance agreement?  Gibbs Giden can help. 

Contact Matthew Wallin, Esq.

 

mwallin@gibbsgiden.com

(310) 552-3400.

Matthew Wallin is a senior associate in the Los Angeles office where he practices labor and employment law.  He has extensive experience defending private business and public entities in litigation involving discrimination, harassment, retaliation, and wage and hour disputes. He has also defendant against assault and workplace violence claims.  

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