Recent Court Decisions Identify Concerns In Drafting Releases

Releases of liability are valuable risk-management tools for employers. The basic concept of a release is that the employer provides a sum of money or other consideration in exchange for a waiver of claims that the employee may have against the employer. Releases frequently are used to avoid litigation related to reductions-in-force (RIF), as a required element of severance programs, or to resolve potential claims with individual employees. Releases also are used to settle asserted claims against employers in administrative proceedings or in lawsuits. Courts, Congress, and state legislatures have increasingly restricted circumstances in which releases can be effective or placed specific obligations on employers related to releases. This Insight article addresses several recent legal developments that employers must consider when preparing releases for departing or former employees.

Claims that May Not Be Released

There are a number of claims that cannot be released because of specific statutory provisions. For example, claims for unpaid overtime and violations of minimum wage obligations under the Fair Labor Standards Act require court or Department of Labor (DOL) supervision to be released. Similarly, most states prohibit the release by private agreement of workers' compensation and unemployment compensation claims. Thus, in the absence of litigation, an employer cannot simply agree with an employee to release claims for unpaid overtime, workplace injuries or unemployment compensation.

Several federal courts recently have addressed whether employers may require employees to release claims under the Family and Medical Leave Act (FMLA) without court or DOL supervision. The DOL issued regulations in 1995 implementing the FMLA. One of the provisions in these regulations states: "[e]mployees cannot waive, nor may employers induce employees to waive, their rights under the FMLA."1 The first federal appellate court that considered the waiver of FMLA claims held that this restriction did not apply to all claims. Specifically, the Fifth Circuit Court of Appeals held in Faris v. Williams WPC-I, Inc.2 that the regulation prohibited the prospective waiver of the substantive rights under the FMLA (i.e., the right to take FMLA leave) and not waiver of proscriptive rights (i.e., claims of past violations or retaliation).3

In a recent decision by the Fourth Circuit Court of Appeals, Taylor v. Progress Energy, Inc.,4 the Fourth Circuit panel reinstituted its prior opinion5 in which the court held that this DOL regulation barred waivers of all FMLA claims without court or DOL supervision. The employer filed a petition for rehearing after the first decision, and the DOL filed a brief supporting the employer's position. The court granted the motion for rehearing and the DOL argued to the court that it interpreted its own regulation to mean that an employer could require a waiver of proscriptive rights but not prospective rights, as the Fifth Circuit had decided in Faris. Surprisingly, the Fourth Circuit rejected the DOL's interpretation of its own regulation, determining that the DOL's interpretation was plainly inconsistent with its own regulation. The court relied on a number of factors in deciding not to adopt the DOL's opinion of its own regulation, including the language of the regulation and the statute, inconsistent positions taken by the DOL in other litigation, and indications of the agency's intent at the time of promulgation of the regulation in 1995 (during the Clinton administration).

Recommendation. This split in authority in the federal courts requires caution by employers. Employers should not include the FMLA (as well as the FLSA and state unemployment and workers' compensation statutes) in the list of statutes specifically released by the employee in a pre-litigation release. In addition to possibly invalidating the release because the employer includes claims that cannot be released, employers may expose themselves to additional liability by including unreleasable claims. For instance, there have been examples where a party has asserted that the employer committed fraud by offering the employee a release that included a claim the...