After nearly a decade of litigation, the Third Circuit Court of Appeals held in EEOC v. Allstate Ins. Co. that employers may require employees to sign releases of claims against employers without running afoul of federal discrimination and retaliation laws. The holding in Allstate is especially significant for insurers, financial institutions and other employers that have transitioned, or are considering transitioning, to an independent contractor model of business for individuals who work in a sales capacity.

The facts of Allstate stem from a 1999 decision by Allstate executives to transition Allstate from classifying its insurance sales agents as at-will employees to hiring the agents as independent contractors. Pursuant to Allstate’s new plan, it offered employee-agents the option to: (1) become independent contractors; (2) receive a payout upon the sale of their interests in customer accounts; (3) receive a year’s severance pay; or (4) receive thirteen weeks’ severance pay. If the employee-agent picked any of the first three options, the employee-agent would have to sign a release of all potential claims he or she might have a right to pursue at the time of the signing. If the employee-agent picked the thirteen weeks’ severance pay option, he or she would not have to sign the release.

Shortly after Allstate had implemented its transition program, the United States Equal Employment Opportunity Commission (EEOC) filed suit in federal court, alleging that Allstate retaliated against its employee-agents by allowing them to continue working for Allstate only if they released Allstate from any discrimination claims. The EEOC argued that Allstate  essentially forced employees to waive their rights in exchange for the ability to continue working with Allstate, and that Allstate retaliated against employee-agents who declined to sign the releases by terminating their business relationship with Allstate. The EEOC opined that the employee-agents’ refusal to sign constituted “protected activity,” and that Allstate’s refusal to further its relationship with those employee-agents imposed an “adverse action on the employee-agents.”

Employees’ valid releases of employers from claims for liability generally possess four key elements: (1) the employer and employee knowingly and voluntarily enter into the release; (2) the employer provides some tangible benefit to the employee in return for his or her release (consideration); (3) the release does not force the employee to waive future discrimination claims against the employer; and (4) the release otherwise complies with applicable law. In its decision against the EEOC, the Third Circuit Court of Appeals reiterated the principle “that employers can require terminated employees to release claims in exchange for benefits to which they would not otherwise be entitled.” In particular, the Court ruled that Allstate could require its transitioned employees to sign releases in exchange for a continued business relationship with Allstate because at-will employees generally are not entitled to continued employment with their employer. In addition, the Court found that since Allstate’s releases renounced all claims against Allstate, as opposed to only discrimination claims, Allstate did not unlawfully retaliate against the objecting employee-agents when it ended their relationship with Allstate because it did not intend to target those employee-agents’ discrimination claims.

The Allstate decision provides employers with three significant takeaways. First, the decision reaffirms the principle that employers can lawfully require employees to release existing legal claims against an employer without being found liable for retaliation or another violation of the law. Second, if an employer wishes to reclassify its employees as independent contractors, it may lawfully require those employees to sign releases as a condition for beginning a new business relationship with the employer that provides employees severance pay or other post-termination benefits to which the employees would not otherwise be entitled. The employer must, of course, ensure that the individuals actually are acting as independent contractors rather than employees under the applicable law. Third, broader releases of claims typically will be more effective in preventing unlawful retaliation and myriad other lawsuits than narrower releases that waive only discrimination-related claims. 

While these three takeaways provide guidance to employers, the Allstate case highlights the importance of strategic, well-drafted releases. Thus, before presenting employees with releases designed to insulate employers from liability, employers should consult with counsel to help maximize the effectiveness of such releases.