The Employer's Legal Resource: The Legality of Requiring Employees to Waive Legal Claims

03.02.15

In 1999, Allstate Insurance Company announced a massive reorganization. As part of this reorganization, employees to be terminated were given four options: (1) conversion to independent contractor status; (2) $5,000 and an interest in accounts to be sold; (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 associated as independent contractors, employees were required to sign the waiver.

The Equal Employment Opportunity Commission (EEOC) brought a lawsuit against Allstate. As a threshold matter, the EEOC argued the waivers were invalid due to improper consideration (consideration is the value given to induce a party to enter into a contract or agreement). Because the waiver was not in exchange for traditional 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 on alternative means of consideration. Prior to the reorganization, agents were all at-will employees. They had no guaranteed right to become an independent contractor. By signing the waivers of legal claims, the agents benefitted. The conversion option 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 who took the first option received the benefits of a new business arrangement.

This case serves as a reminder that employers must exchange consideration for releases of employment law claims, but 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 (e.g., new business relationship, new position, or bonus). 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 an independent contractor relationship.

Although a waiver may be upheld based upon the receipt of an unconventional benefit, employers 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.

By Sierra Salton, ssalton@dsda.com

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Rebecca D. Bullard

Rebecca D. Bullard

Rebecca represents clients primarily in labor and employment
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