Severance Agreements May Not Waive All Claims (12/17/07)

SEVERANCE AGREEMENTS MAY NOT WAIVE ALL CLAIMS

By Michael C. Saqui and Anthony P. Raimondo

On December 6, 2007, a Court of Appeal issued a decision that could severely limit the effectiveness of severance agreements as releases of potential wage claims.

Employers will often use severance agreements to close the door on claims by departing employees. Usually, such an agreement offers the employee some kind of payment and/or benefit in exchange for a release of any and all claims that the employee may have against the employer. These types of agreements have been in use for many years.

In Perez v. Uline, Inc., the plaintiff brought a wrongful termination case under the Uniformed Services Employment and Reemployment Rights Act (USERRA) (which addresses reinstatement rights after military service, as well as various contract and wage claims, one of which was a claim for overtime pay.

The employer claimed that the claims were barred a short Severance Agreement and Release that provided that it would pay the plaintiff six weeks’ salary in exchange for a release from all claims, which were set out in a comprehensive but nonexclusive list of named federal and state laws, and “any other federal or state law, statute, decision, order, policy or regulation establishing or relating to claims or rights of employees . . ., and any and all claims in tort or contract, based upon public policy, and any and all claims alleging . . . defamation, . . . or wrongful discharge.” The trial court ruled in favor of the employer, and dismissed all of the claims based on the release.

The appellate court reversed the decision regarding the wrongful termination claim because USERRA states that its terms cannot be eliminated by a contract. Accordingly, the release of rights in the severance agreement was unenforceable with respect to the claims of termination based on plaintiff’s military service.

As to plaintiff’s other claims for defamation and overtime payments, the court found no basis to invalidate the release and upheld the dismissal. Of interest, the opinion makes no mention of Labor Code §206.5, presumably because the parties did not raise it. Labor Code §206.5 prohibits releases of unpaid wages.

While the decision on the overtime claim is encouraging, the fact that Labor Code §206.5 was not mentioned leaves open the possibility that future cases will prohibit the release of wage claims through severance agreements. The language of Labor Code §206.5 is similar to the language in USERRA, and the same reasoning could be used to prohibit releases of wage claims in future cases. On the other hand, comprehensive releases have a long history in the law, and there are a number of cases supporting their use. Employers should monitor this area of law for developments.

COUNSEL TO MANAGEMENT:

Severance agreements remain a good method for employers to move forward without fear of legal claims from former employees, and should continue to be used. While the future of such agreements remains unclear regarding wage disputes, there is no reason not to use them. The severance agreement can be used to bar discrimination, harassment, and similar claims, and may be successful with regard to wage claims. Employers should be aware that there is a risk that a release covering wage claims may not be enforced, but should still attempt to obtain as much security as possible from departing employees.

The goal of this article is to provide employers with current labor and employment law information. The contents should neither be interpreted as, nor construed as legal advice or opinion. The reader should consult with Saqui & Raimondo at (831) 443-7100 in Salinas, or (916) 782-8555 in Sacramento for individual responses to questions or concerns regarding any given situation.