Strategic Early Retirement Incentive

During this time of recession, many American businesses and public entities are considering reducing their workforce to save costs. Early retirement incentives ("ERI") or "golden handshakes" provide an avenue for the employer to reduce payroll costs over the long run, while providing an attractive and economically feasible way for eligible employees to retire. Employers can either implement their own type of ERI (e.g. lump sum cash incentive) or employers can implement a statutory ERI for employees who are members of California's Public Employees' Retirement System ("CalPERS") or State Teachers Retirement System ("CalSTRS") (i.e. a purchase of two additional years of service credit for eligible members). The CalPERS and CalSTRS statutory incentives have strict parameters that employers must comply with while employer-created incentives are much more flexible.

Whether the incentive is statutory or employer-created, ERIs can result in costly litigious woes. Since ERIs are geared toward older workers, if they are not structured properly, they may expose employers to age discrimination lawsuits under the Age Discrimination in Employment Act ("ADEA"). The ADEA makes it unlawful to take an adverse employment action against persons over the age of 40, including discriminating against the employee with respect to his or her compensation, terms, conditions, or privileges of employment because of the employee's age. (29 U.S.C. §623.)

Two measures can limit exposure to ADEA liability: (1) appropriate structuring of the ERI; and (2) obtaining legally enforceable waivers and releases in exchange for the ERI.

Structuring An Early Retirement Incentive

Voluntary ERIs fall under a "safe harbor" provision to the ADEA. (29 U.S.C. §623(l).) By statute, It is not unlawful for an employer to offer a voluntary ERI plan that is "consistent with the relevant purpose or purposes" of the ADEA. An appropriately structured ERI balances the employer's interest in offering an ERI that is attractive to employees in order to induce early retirement with the purpose of the ADEA, that is, to prevent arbitrary discrimination against employees based on age.

For example, consider a plan that provides an employee retiring between the ages of 50 to 54, with a minimum of 5 years of service, a retirement bonus of 50% of the employee's current annual salary. The plan provides the same benefit for employees aged 55 to 59, but at 30% of the employee's current annual salary; as well as 15% for those between 60-64, but no retirement bonus after the age of 65. This example may induce an employee to retire earlier. However, the drop-off in the value of the retirement bonus is based solely on age. The ERI arbitrarily discriminates against employees simply based on the employee's age. This type of plan would most likely violate the ADEA unless it met one of the limited exceptions under the ADEA, such as an ERI offered by institutions of higher education to tenured faculty as discussed below.

Consider, instead, a plan that offers an ERI to all employees who are at least 50 years of age, with five years of service, at 5% of the employee's last annual salary and 5% more for each additional year of service. The retirement incentive caps at 100% of the employee's last annual salary or 24 years of service. This provides an incentive to employee's to retire at the time when he or she has reached the cap since the employee would not continue to gain a larger retirement bonus after 24 years of service. This type of plan would not likely violate the ADEA because there is no arbitrary decrease in benefits based solely on age.

There are a few exceptions, however. For example, if the employer offers a defined benefit plan that provides an early retirement incentive that subsidizes an employee until the age at which they can receive a normal service pension or social security benefits, then the ERI may cease at the age when the employee is eligible for the service pension or social security benefits without violating the ADEA if it is properly structured. Another exception applies solely to ERI's offered to tenured academic employees of an institution of higher education (e.g. community college districts). Under this exception, the college or university may offer a voluntary ERI to employees who are serving under a contract of unlimited tenure consisting of "supplemental benefits" that are reduced or eliminated on the basis of age, but only if several elements are satisfied.. (29 U.S.C. §623(m).) Given that these elements are mandatory, legal counsel should be utilized to assist the employer in structuring an ERI to take advantage of this exception.

Another important aspect to the structuring of an ERI is that it must be truly "voluntary," otherwise it does not fall under the safe harbor provision of the ADEA. Courts will use a "totality of the circumstances" test, considering factors such as the length of time the employee has to consider the ERI. Many employers offer ERIs as a one-time option or during a "window period." For example, on October 1 an employer may offer an ERI which eligible employees must indicate acceptance on or before December 1. This factor would weigh in favor of finding the incentive as truly voluntary. An ERI which an employee has one day to accept or reject may not meet the ADEA's standard for voluntary.

Other factors considered include whether management employees pressured or coerced employees into accepting the incentive, or whether employees are told if they do not accept the incentive, they will certainly be terminated. It is perfectly acceptable for management to explain the terms and conditions of the incentive or discuss the employer's considerations to reduce costs. When offering an ERI, employers should prepare a memorandum or booklet describing the terms and conditions as well as copies of the agreement and release, which are distributed to eligible employees. The employer should also designate one person within the organization as the person to whom questions should be directed. This is not to say that an employer cannot (and indeed, should) be frank with employees about the potential for future layoffs. It is one thing to say, "accept or be fired" and quite another to inform employees that depending on the number of employees accepting the incentive, the employer's financial picture is such that a reduction-in-force may occur.

If an employer chooses to offer a CalPERS or CalSTRS statutory golden handshake, and the employer complies with the statutory requirements for offering such an incentive, the statutory golden handshake would be consistent with the purpose of the ADEA. That is because the ERIs of these statutory schemes do not decrease benefits based solely on age and are considered to be truly voluntary when properly offered.

The bottom line is that an early retirement incentive must not arbitrarily decrease the amount of the incentive or terminate the incentive based solely on the employee's age unless a statutory exception applies under the ADEA, and the acceptance of that incentive must be truly "voluntary."

Creating Legally Enforceable ADEA Waivers

The second measure to reducing exposure when offering ERIs, is to ensure that employees sign a legally enforceable release or waiver of claims arising under the ADEA, in addition to the usual boiler plate releases. In 1990, Congress adopted the Older Workers Benefit Protection Act ("OWBPA"; 29 U.S.C. §626(f)) as an amendment to the ADEA. Among the provisions of the OWBPA, an employee may not waive any right or claim under the ADEA unless the waiver is "knowing and voluntary." A waiver is not considered such unless at a minimum, the waiver complies with the following: (1) it is written in a manner calculated to be understood by the individual employee or average eligible employee; (2) it specifically refers to the rights and claims arising under the ADEA; (3) it provides consideration in exchange for the waiver in addition to anything of value to which the employee is already entitled; (4) it advises the employee, in writing, to consult with an attorney prior to executing the agreement; (5) it provides the employee with a period of 21 days to consider the agreement if it is an individualized agreement between the employer and a specific employee, or 45 days if the waiver is requested in connection with a program offered to a group or class of employees (e.g. ERIs) (an employee may choose to execute the agreement prior to the lapse of 21 or 45 days, however); (6) it provides the employee with a period of 7 days following execution of the agreement to revoke the agreement and the waiver is not enforceable until the revocation period has expired; (7) if the waiver is a part of an exit incentive program offered to a group or class of employees, the employer must inform the employees in writing of the class, unit, or group of individuals covered by the program, any eligibility factors for such program, and any time limits applicable to the program and the job titles and ages of all individuals eligible or selected for the program, and the ages of all individuals in the same job classification or organizational unit who are not eligible or selected for the program.

Keep in mind that the OWBPA are the minimum requirements necessary to uphold the validity of a waiver under the ADEA. Courts will also apply a "totality of the circumstances" test to consider non-statutory factors in assessing if an ADEA waiver was "knowing and voluntary." These factors include fraud, duress, or mutual mistake.

If an employee signs an ADEA waiver and accepts an ERI or severance package, he or she may bring suit for a violation of the ADEA and allege that the waiver did not comply with the OWBPA. If a waiver does not comply with the OWBPA, the waiver is voidable. The employee is then free to pursue his or her claims under the ADEA. Whether the employee is successful on the merits is an entirely different issue. However, tremendous amounts of time and money can be saved at the outset if the employer has a legally enforceable ADEA waiver and release.

Keep in mind that when offering statutory CalPERS or CalSTRS golden handshakes, neither statutory scheme provides an automatic waiver of the ADEA or OWBPA. In fact, there is no authority that provides that an employer, once it offers a statutory CalPERS or CalSTRS golden handshake, that it may condition acceptance on execution of a waiver. Consequently, once one of the statutory golden handshakes are offered and accepted, the employer remains exposed to ADEA and/or OWBPA claims because there is no waiver. However, if done properly, these statutory golden handshakes should not violate the ADEA or OWBPA.

Some of the common mistakes made by employers in drafting a waiver include the following:

• Failing to specifically use the words "Age Discrimination in Employment Act" or "Older Workers Benefit Protection Act." It is not sufficient to merely state, "the employee agrees to waive all claims for discrimination…" An employer must use the magic words.
• Not providing consideration for the waiver. The employee must receive something of value which he or she is not already entitled to in exchange for signing an ADEA waiver.
• Not providing an employee with the actual agreement and release 21 days or 45 days prior to the last day on which the employee may accept the ERI. Providing a memo or booklet with information about the incentive is not sufficient. The employee must be given 21 days (for individualized incentives) or 45 days (for incentives offered to a group or class) to consider the entire agreement and release. Whether the employee chooses to sign the agreement and release prior to the end of those 21 or 45 days is up to the employee.
• Not presently advising an employee to consult an attorney. It is not sufficient to merely recite in the agreement that the employee "has been given an opportunity to consult an attorney." Instead, the agreement and waiver should state in bold letters, "You are advised to consult a lawyer regarding the terms and conditions of the agreement and release of claims prior to executing this agreement."
• If the ERI is offered to a group or class of employees, failing to provide to the employee, in writing, the job titles and ages of all individuals eligible or selected for the program, and the ages of all individuals in the same job classification or organizational unit who are not eligible or selected for the program. It is not sufficient for an employer to merely say, "I'll provide it to the employee if he or she asks for it." Prepare this information and attach it to the agreement and release as an attachment.
• If the ERI is offered to a group or class of employees, failing to accurately set forth the ages of those in the same job classification or organizational unit eligible, and not eligible, for the program. For example, stating that the ages for all ineligible employees in the classification of "Maintenance Worker I" are 20 to 50 years old is not sufficient. You must list the age of each individual in that classification (e.g. 20, 22, 24, 31(x2), 33, etc.). If the ERI is being offered to only eligible employees in the Finance Departments of the company's 4 branches, the employer should provide the job classifications and ages of all employees in all four branches' Finance Departments to all eligible employees. Do not be over-inclusive either. If the incentive is only being offered to eligible employees in one Department, do not list the job classifications and ages of all employees in the entire organization.

Taking the time and effort to carefully structure the voluntary ERI as well as preparing a legally enforceable ADEA/OWBPA waiver, will go a long way to avoiding costly litigation and thus, realizing the cost-savings the employer seeks.

Steve Berliner is a partner and Frances Rogers is an associate in the employment law firm of Liebert Cassidy Whitmore. The firm represents California community colleges in all aspects of labor and employment law, including retirement issues.

Posted with permission from ACHRO/EEO 2010 Fall Edition Volume IV Issue I.

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