As artificial intelligence (AI) continues to reshape business operations, many employers are reassessing workforce needs and organizational structure. For many organizations, workforce reductions or redeployments may be unavoidable as roles evolve, processes are automated, and business models change. While some organizations may ultimately pursue involuntary reductions in force (RIFs), others are exploring whether voluntary separation programs (VSPs) can achieve workforce‑reduction goals while mitigating legal, operational, reputational, and employee‑relations risks.
When thoughtfully designed, a VSP can provide flexibility and predictability during periods of transformation where organizational change is necessary, but business continuity and employee relations remain critical. Poorly designed programs, however, can invite potential age discrimination claims, ERISA litigation, and regulatory scrutiny.
The following outline provides a strategic roadmap and identifies core design considerations for employers considering a VSP. The outline also highlights the most common legal risks that tend to give rise to claims and disputes.
Strategic Roadmap: How to Design a VSP
A well‑designed VSP typically includes a formal plan document (often ERISA‑governed), compliant release agreements and OWBPA disclosures, standardized application and acceptance forms, coordinated communications, and consistent administration.
Before launching a VSP, employers should take several key steps, including:
- Documenting legitimate business objectives for the program;
- Designing eligibility criteria that align with operational needs while minimizing age‑based risk;
- Structuring the program as an ERISA welfare plan where appropriate;
- Preparing compliant release agreements and OWBPA disclosures;
- Training HR and managers to reinforce voluntariness and ensure consistent messaging;
- Modeling costs and participation scenarios in advance; and
- Coordinating closely among legal, HR, finance, and benefits teams throughout the design and rollout process.
a. Eligibility and Ineligibility
Employers have substantial flexibility in determining who is eligible to participate, but eligibility cannot be based solely on age. Common approaches include:
- Minimum age plus years of service (e.g., age 55 with at least 10 years of service as of a specified date);
- A “points” formula combining age and service;
- Limiting eligibility to certain job categories, departments, or levels; and
- Excluding mission‑critical roles or employees with specialized skill sets the business needs to retain.
Employers may reserve discretion to reject applications based on business necessity, provided that discretion is exercised using objective, non-discriminatory criteria. If oversubscription is anticipated, employers should establish selection criteria in advance and consider whether additional anti-discrimination analysis is warranted.
b. Voluntary Participation
Voluntariness is critical. Participation should be entirely voluntary, with no pressure from management. Supervisors should be trained not to encourage or discourage participation, and communications should emphasize that:
- Employees are not required to apply;
- Continued employment remains at‑will; and
- Declining to participate does not, by itself, result in adverse action
c. Procedure and Timeline
Most VSPs follow a defined sequence, such as the following:
- Program announcement;
- Notification of eligible employees;
- Employee application window;
- Review and exit‑planning period;
- Acceptance notifications;
- Separation dates;
- Release consideration period (up to 45 days);
- Seven‑day revocation period; and
- Payment of benefits.
d. VSP Incentive Payments and Benefits
To induce voluntary participation, VSP benefits should be more generous than those offered in an involuntary RIF. Employers should assess:
- Whether incentives are sufficient to drive participation;
- Whether projected cost savings outweigh benefit costs; and
- Which benefits will be most valued by the target population.
Common incentives include enhanced severance pay, employer‑paid health benefits or COBRA subsidies, Medicare bridge benefits, and/or retiree HRAs.
e. Release Agreements and OWBPA Disclosure Notice
Employers typically condition VSP benefits on execution of a general release of claims, including age discrimination claims under the ADEA. Employees who are accepted into the VSP but decline to sign the release generally separate without receiving VSP benefits.
For employees age 40 and older, employers must provide a 45‑day consideration period, a seven‑day revocation period, and a compliant OWBPA disclosure notice—even if participation is entirely voluntary.
f. When a Supplemental Release Is Warranted
VSPs often involve delayed separations. Employers may accept an employee into the program but require continued employment or transitional services for weeks or months (to complete projects or facilitate knowledge transfer, for example).
If an employee continues working after signing a release, new claims may arise during the transition period that cannot be waived in advance, including claims under the FMLA, ADEA, and Title VII. To address this gap, employers should consider a two‑step release approach:
- An initial release upon acceptance into the VSP, covering claims through the execution date; and
- A supplemental release executed on or after the employee’s final separation date, covering claims arising between execution of the initial release and the last day the employee provided services.
The original release should condition severance and other benefits on the employee’s execution (and non‑revocation) of the supplemental release, incorporate the supplemental release by reference, attach it as an exhibit, and delay payment of VSP benefits until the supplemental release becomes effective.
Alternatively, some employers require VSP participants to wait until their last day of employment to execute a single release.
Important Legal Considerations
In practice, legal challenges to VSPs tend to cluster around four recurring themes: (a) whether the program was genuinely voluntary in design and execution (not merely labeled as such); (b) whether age‑based eligibility criteria, waivers, and disclosures strictly complied with the ADEA and OWBPA; (c) whether the program constituted an ERISA‑governed plan; and (d) whether the timing or structure of severance benefits triggered unintended tax consequences under Internal Revenue Code Section 409A.
a. Truly Voluntary
Despite written materials and communications that characterize the program as voluntary, some employees may feel pressured to participate and may not consider it truly voluntary. For this reason, it is important to carefully design a VSP to support its intended purposes. Potential risk factors to avoid include short decision windows, “first‑come, first‑served” caps, or informal pressure from managers.
While employers may communicate that a future involuntary RIF could involve less favorable severance terms if the VSP is undersubscribed, managers should not suggest that any particular employee will be targeted for an involuntary RIF if the VSP offer is declined. Communications should be carefully scripted, centrally coordinated, and consistently applied.
b. ADEA and OWBPA Compliance
The Age Discrimination in Employment Act (ADEA) and Older Workers Benefit Protection Act (OWBPA) impose strict requirements when employees age 40 and older are asked to waive age discrimination claims. For group termination programs, employers must provide:
- A minimum 45‑day consideration period;
- A seven‑day revocation period; and
- Required disclosures identifying the eligibility criteria and the ages and job titles of employees within the relevant decisional unit who are eligible and ineligible (or selected and not selected) for the VSP.
The OWBPA demands strict (not substantial) compliance with each of these technical requirements. A failure to comply with any individual requirement may render a release of ADEA claims invalid.
c. ERISA Considerations
A VSP may be subject to the Employee Retirement Income Security Act (ERISA) if it provides for a series of payments and requires an ongoing administrative scheme. If subject to ERISA, the plan will typically be classified as a welfare benefit plan (as opposed to an ERISA pension plan) but must nonetheless comply with ERISA’s core requirements, including the requirement to maintain a formal claims and appeals process.
VSPs subject to ERISA may provide meaningful dispute resolution and litigation advantages, including mandatory administrative exhaustion, deferential “abuse of discretion” review, limited discovery, federal court jurisdiction, avoidance of jury trials, and limited damages.
VSP plan documents should also unambiguously reserve the employer’s right to amend or terminate the plan. Where a reservation of rights is clear, courts generally enforce it; where it is ambiguous or absent, courts may scrutinize the circumstances more closely.
d. Section 409A Issues
If VSP benefits are paid in installments or contingent on future events, the employer must also be mindful of Internal Revenue Code Section 409A and its potential impact on the timing and form of payment of benefits. Failure to comply with Section 409A or one of its many exemptions can result in significant tax complications for both the employer and the employee.
Conclusion
As an alternative to involuntary RIFs, properly designed and implemented VSPs offer the following key advantages:
- Lower litigation risk. Employees who elect to leave voluntarily—particularly in exchange for enhanced benefits and execution of a compliant release and waiver of claims—are less likely to challenge their separations.
- Improved employee relations. Because participation is voluntary, VSPs are generally less disruptive to morale than involuntary layoffs.
- Greater predictability. Employers can define eligibility, application windows, and severance benefits in advance, allowing for more controlled workforce planning.
A voluntary separation program is not a cure‑all, but as technological innovation accelerates and workforce restructuring becomes increasingly unavoidable, the VSP can be a powerful workforce‑management and risk‑mitigation tool when carefully designed and implemented.