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Saturday, February 28, 2015

Don't Sue: The Legality of Requiring Employees to Waive Legal Claims

           Your company is reorganizing, and in order to keep your job, you have to waive any legal claims you might have against your employer. You've kept your job, but lost the ability to remedy discrimination. Something about this doesn't seem fair.  Nevertheless, in a recent case, the Third Circuit Court of Appeals upheld a waiver requirement and found that, because the employees received the benefit of continued employment, waiver was valid.          

          In 1999, Allstate Insurance Company announced its plan to convert to a sales program based on independent contracting. As part of this reorganization, employees were given four options: (1) conversion to independent contractor status; (2) $5,000 and interest in accounts; (3) one year’s severance pay; or (4) 13 week severance. Employees who chose one of the first three options were required to sign a release of all legal claims against Allstate related to their employment or termination, including discrimination claims under Title VII, the ADA, and the ADEA. In order to remain employed as independent contractors, employees were required to sign a waiver, waiving their ability to sue Allstate for discrimination under Title VII, the ADA or the ADEA. Importantly, the employees were not required to waive any future claims against Allstate.

            The Equal Employment Opportunity Commission brought a lawsuit alleging that Allstate’s waiver requirement constituted retaliation against its employees because continued employment was contingent upon waiving legal claims. As a threshold matter, the EEOC argued the waivers were invalid due to lack of consideration. Because the waiver was not in exchange for severance benefits, the Commission argued that employees received nothing of value.
            In determining the validity of the waivers, the Third Circuit Court of Appeals focused on whether the employees benefited from waiving legal claims. In doing so, the Court focused on alternative means of consideration.  Prior to the reorganization, agents were not entitled to continued employment; instead, they were all at-will employees.  By signing the waivers of legal claims, the agents benefitted.  Not only did the agents receive continued employment, but the conversion option also provided the following benefits: (1) guaranteed conversion to independent contractor status (previously discretionary); (2) monetary bonus;  \(3) excused repayment of outstanding expense advancements, and (4) transferable interest in his business after 2 years (previously 5 year requirement). In essence, employees received the benefit of a new business arrangement.

            After finding adequate consideration, the Court then considered whether the waiver requirement constituted illegal retaliation. Because continued employment was contingent upon the release of claims, the EEOC argued impermissible retaliation. By failing to provide alternative means of continued employment, the EEOC argued that Allstate committed an adverse action against employees by forcing a waiver of rights in order to maintain employment. Once again, the Court rejected EEOC’s argument, finding that employees do not have a protected right to refuse a waiver, and denial of conversion to independent contractor status does not qualify as an adverse employment action.

            This case serves as a reminder that employers can exchange consideration for releases of employment law claims, and this exchange is not limited to the offer of severance pay.  For example, an employer can offer the employee other things of value in exchange for releases of claims (ie new business relationship/new position; bonus, other perks). The key is that the consideration must offer the employee something that they were not otherwise entitled to receive.  In this case, because the Allstate employees were previously employed “at-will”, the conversion program offered a benefit with its guarantee of continued employment.

            Although a waiver may be upheld based upon the receipt of an unconventional benefit, employers and employees alike must remember that releases may be declared invalid for other reasons. Even if there is adequate consideration for the waiver, if the employee was required to waive future claims or if the employee signed the agreement involuntarily or without adequate knowledge, it may be deemed invalid. When crafting a waiver agreement, remember to consult with an attorney to ensure its validity and maximize its effectiveness.

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