Release of Claims in Separation Agreements

by Kate W. Beckman

Employee reductions in force and “downsizing” are an unfortunate part of the employment relationship.  An employer’s decision to retain certain employees, while terminating or laying off others, may lead the discharged worker(s) to feel that they were discriminated against.  To minimize the risk of potential litigation, many employers offer departing employees money or benefits in exchange for a waiver of liability for all claims connected with the employment relationship, including discrimination claims under the Age Discrimination in Employment Act (“ADEA”), Title VII, the Americans with Disabilities Act (“ADA”) and the Equal Pay Act (“EPA”).

This waiver or release usually comes in the form of a severance agreement.  A severance agreement is a contract, or legal agreement, between an employer and an employee specifying the terms of an employment separation.  The Colorado Courts provide required elements which must be present to make the release of the right to sue valid and enforceable.

A valid agreement must: 1) offer some sort of consideration; 2) not require the employee to waive rights to sue on claims that may arise after the employment separation; and, 3) comply with applicable state and federal laws.  In addition, a waiver in a severance agreement generally is valid when an employee knowingly and voluntarily consents to the waiver.

The first requirement is that the agreement must be supported by consideration.  The legal term consideration means something of value, to which a person is not already entitled, which is given in exchange for an agreement to do, or refrain from doing something.  In the context of a severance agreement, paying a pension benefit or paying out earned vacation leave is not enough.  The consideration must be something in addition to the employee’s existing entitlements.  An example of valid consideration would be a lump sum payment of a percentage of the employee’s annual salary.  The second requirement states that the employee can only waive their right to sue on issues which occurred to up and including the date of termination.  The employee is not required to waive the right to sue on any issues which may occur in the future.

The rules regarding whether a waiver is knowing and voluntary depend on the statute under which the suit has been made, or may be brought with specific rules under the ADEA which are discussed in detail below.  Under Title VII, the ADA, and the EPA, the analysis is the same.  Some courts rely on traditional contract principles and focus primarily on whether the language in the waiver is clear.  Most courts, however, look beyond the contract language and consider all relevant factors to determine whether the employee knowingly and voluntarily waived the right to sue.  The courts will consider: 1) if the agreement is written in a manner that was clear and specific enough for the employee to understand based on his education and business experience; 2) whether it was induced by fraud, duress, undue influence or other improper conduct by the employer; 3) if the employee had time to read and think about the advantages and disadvantages before signing it; 4) whether or not the employee consulted with an attorney; 5) whether or not the employee had any input in negotiating the terms of the agreement; and, 6) whether the employer offered the employee consideration which exceeded what the employee was already entitled to by law or contract.

Under the ADEA, the rules are more concrete.  In 1990, Congress amended the ADEA by adding the Older Workers Benefit Protection Act (OWBPA) which established specific requirements for a “knowing and voluntary release of ADEA claims.  At a minimum, the agreement must 1) be written in a manner that can be clearly understood, 2) the waiver must specifically refer to rights or claims arising under the ADEA, 3) A waiver must advise the employee to consult an attorney, 4) A waiver must provide twenty-one (21) days to consider the offer, 5) The agreement must provide seven (7) days to revoke the signature after signing, 6) the waiver must not include rights or claims which arise after the date of the waiver, 7) the waiver must be supported by consideration.

It is important to note that under all of the above statutes, a discharged employee still has the right to file a charge of discrimination with the Equal Employment Opportunity Commission or the Colorado Civil Rights Division.  Any provision in a waiver that attempts to waive that right is invalid and unenforceable.

Kate BeckmanKate W. Beckman is an associate at Bryan E. Kuhn, Counselor at Law, P.C. Her practice focuses on employment law, business law, and civil litigation. Kate is an active member of the Colorado Bar Association and Denver Bar Association. She is admitted to practice in Colorado, the United States District Court for the District of Colorado and the Tenth Circuit Court of Appeals. Kate received her J.D. from the University of Denver Sturm College of Law in 2010. She can be reached by email, her firm’s website, Facebook, and invites you to reach out to her on LinkedIn.

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