While a bad economy may be one of the biggest reasons companies downsize, there are other reasons, including mergers and acquisitions, changes in management, and outsourcing.

Problems can arise, however, if laid-off employees believe they are victims of discrimination. Employees who have been with the company for a long time may feel they are victims under the Age Discrimination in Employment Act (ADEA) and the Older Workers Benefit Protection Act (OWBPA). Others may believe they have legal claims under Title VII, the Americans with Disabilities Act (ADA) or the Equal Pay Act (EPA). 

To minimize the risks of potential litigation, many employers offer severance packages that include money, benefits, or both, in exchange for a signed release, or waiver, from all future claims. But without careful consideration, a severance deal can backfire.

Waivers are generally valid only when employees knowingly and voluntarily consent to them, according to the Equal Employment Opportunity Commission (EEOC). Whether a waiver is knowing and voluntary is often determined by case law, but when it comes to age issues, the rules are strictly defined by the OWBPA.

To meet the requirements, the OWBPA lists seven minimum factors. The waivers must:

    • Be written clearly and be specific enough for employees to understand based on their education and business experience. The EEOC's guidance on waivers cites a situation where an employee asked his supervisor if certain language in the agreement meant that he could still sue the company if he made claims only under the ADEA. The employer declined to provide legal advice. When the employee sued, the court found that even though he had accepted the severance pay, the age discrimination suit was valid because the waiver wasn't written in a manner that could be understood
    • Refer to rights or claims arising under the ADEA. In fact, the EEOC maintains that waivers must spell out the Age Discrimination in Employment Act by name
    • Actively advise employees in writing to consult an attorney. In one instance noted by the EEOC, a waiver was rejected because the language did not proactively advise an employee to consult with an attorney. It merely asked the employee to agree that he had time to do so
    • Provide employees at least 21 days to consider the waiver. If significant changes are made to the final offer, the 21-day clock restarts. This applies to employees aged 40 or older. That time period extends to 45 days if the employees are part of a group termination. For younger employees there is no specified time limit, but the number of days your business allows may be a factor in determining whether an employee knowingly and voluntarily agreed to a waiver under other laws. To be on the safe side, your company may choose to match the time requirements for older workers
    • Give employees seven days to revoke their signatures. Employees cannot waive this right
    • Not require giving up the right to sue for discriminatory acts that may occur after a waiver is signed
    • Offer employees some form of consideration, such as severance pay, to which employees weren't already entitled to by law or contract.

Waivers that don't meet these requirements cannot be enforced. Moreover, an employer cannot try to fix an invalid waiver by issuing a letter with the omitted, but required, information after the waiver has been signed.

Bottom Line: If your company is contemplating a workforce reduction, consult with your legal advisers to develop a severance package that can pass muster under all applicable federal and state laws. This ounce of prevention is often worth a pound of cure.