The Price of Poorly Written Separation Agreements

Robert G. Chadwick, Jr., Labor-Employment Lawyer for Management.

Under appropriate circumstances, a separation agreement between an employer and a terminated employee can be an effective means of avoiding costly litigation. The May 3, 2005 decision of the Eighth Circuit in Thomforde v. IBM, however, shows that the peace bought by an employer in a separation agreement can be fleeting if the agreement is not carefully drafted.

OWBPA: Thomforde presented the issue of whether a General Release and Covenant Not to Sue executed by a former employee and honored by the employer satisfied the requirements of the Older Workers Benefit Protection Act ("OWBPA"). Enacted in 1990, the OWBPA provides that a person may not waive a claim under the Age Discrimination in Employment Act ("ADEA") unless the waiver is "knowing and voluntary." The Act prescribes minimum standards which must be satisfied for a waiver to be considered "knowing and voluntary."

THE PROBLEM: The General Release and Covenant Not to Sue in Thormforde contained an internal inconsistency which had not been explained to the former employee prior to its execution. Some terms released IBM from all ADEA claims while others purported to preserve the right of the employee to sue under the Act. IBM argued, to no avail, that the latter language was intended only to allow a challenge to the validity of the waiver itself. The Eighth Circuit found that the document was not "written in a manner calculated to be understood", as required by the OWBPA. The Court thus allowed the employee to pursue his ADEA claims against IBM.

THE LESSON: A separation agreement which is internally inconsistent or drafted in such a way that only a lawyer can understand its terms will not pass muster under the OWBPA. Even though the OWBPA requires that an employee be advised in writing to consult an attorney before executing an agreement, not all employees heed such sage advice. It is thus imperative that employers use agreements which make sense and are easy to read. As demonstrated by the Thormforde opinion, the price of a poorly written separation agreement can be costly litigation under the ADEA.

DISCLAIMER

This paper is not intended to provide legal advice in general or with respect to any particular factual scenario. Any such advice should be obtained directly from retained legal counsel.