An employee who signs a separation agreement can still sue—and keep the severance money—if the agreement is invalid.

The U.S. Supreme Court ruled that separation agreements must conform to the Older Workers’ Benefit Protection Act. The decision in the Oubre vs. Entergy Operations Inc. case is a major blow to the informal use of severance payments.

The case arose when the company gave an employee 14 days, rather that the required 45 days, to consider its proposed separation agreement.

The separation agreement also failed to mention the Age Discrimination in Employment Act and did not allow for a seven-day period of revocation.

All three of the above elements are required to be in separation agreements under the OWBPA.

The employee contended that the agreement was defective, and therefore invalid, which absolved her of any obligation to return the severance payments made to her by the company.

The employer countered that the employee’s refusal to honor the separation agreement should result in the employee’s returning the severance payments.

The court disagreed. The court said that Congress amended the ADEA by passing the OWBPA, which assures that an employee cannot waive the right to sue for age discrimination unless the waiver is made on a “knowing and voluntary” basis.

Waiver agreements must meet eight conditions under the OWBPA to establish, in part, that the separation agreement has been made on a knowing and voluntary basis:

  1. The waiver agreement must be written in plain language so as to be understood by the employee.
  2. The waiver must specifically refer to rights or claims arising under the ADEA.
  3. The waiver may not apply to rights or claims that may arise after the agreement has taken effect.
  4. In return for signing, the employee must be given something of value above what he or she is already entitled to.
  5. The employee must be given 21 days to think about the agreement. If the agreement is part of an early retirement plan or other employment termination program that is made to a group or class of employees, the employee must be given 45 days to consider the agreement.

If the offer is part of an early retirement plan or other employee termination program offered to a group of employees, the employer must give each employee information in writing that identifies the following:

  • the group or classes involved
  • the eligibility factors for the program
  • the program time limits
  • the job titles and ages of all those eligible for the program
  • the ages of those employees in the same job classes or organizational units not eligible for the program
  1. The employee must be advised in writing to consult with an attorney before signing the agreement.
  2. After signing the agreement, the employee has seven days to revoke it. The agreement is not effective until the end of the seven days.

According to the court, the separation agreement in this case did not conform to the requirements of the OWBPA, and thus was unenforceable with respect to age-discrimination claims and the return of severance pay.

“A discharged employee often will have spent the monies received and will lack the means to tender their return. These realities might tempt employers to risk noncompliance with the OWBPA waiver provisions knowing that it will be difficult to repay the monies and relying on ratification,” stated the court.

Employers might be concerned that conforming to the OWBPA waiver requirements might create an impression in the mind of the employee that the employer is operating from a position of weakness.

However, the case clearly establishes that an employer can lose the protection of the waiver and the money that went along with it if the instrument used is not in conformance with the law.

What should employers do? Have your separation agreements prepared by or reviewed by your legal counsel. An improperly developed agreement can be worse than none at all. If an employer is going to enter into an agreement, it must be done right.