EEOC Challenges Terms of Severance Agreements

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September 19, 2007

It’s a little known fact: employees are terminated every day. Many employers present employees that are about to be terminated with a severance agreement. The severance agreement will usually provide the employee with compensation beyond what the employee would normally be entitled to in return for a release of all claims. By the release of all claims, the employee releases (i.e., waives) any legal claim that the employee might have against the employer. For example, an employer may provide an employee about to be terminated with a cash payment or continued health insurance coverage for a period of time if the employee agrees to sign a severance agreement which, at least on its face, protects the employer from any future claims from the employee. Often times with this “carrot” of additional compensation dangling in front of the employee, the employee will sign the severance agreement because the employee knows that he or she will be terminated in any event. The employer is happy with the arrangement because the employer feels confident that the employer will not be involved in protracted and costly litigation with the employee. The employer could be wrong.
 
The Equal Employment Opportunity Commission (EEOC) has recently commenced several lawsuits across the country challenging the enforceability of severance agreements that state that the employee will not file a discrimination claim against the employer that the EEOC would normally investigate (e.g., age, sex, disability, race, etc.). The EEOC maintains that a severance agreement that requires an employee to waive the right to file a charge of discrimination amounts to retaliation per se.
 
The legal basis for the EEOC’s position is set forth in the Older Workers Benefit Protection Act (OWBPA), which amended the Age Discrimination in Employment Act of 1967 (ADEA). The OWBPA provides in part:
 

No waiver agreement may affect the Commission’s rights and responsibilities to enforce this Chapter. No waiver may be used to justify interfering with the protected right of an employee to file a charge or participate in an investigation or proceeding conducted by the Commission.

 
The EEOC maintains that severance agreements in which an employee waives the right to file a discrimination charge with the EEOC violates the above provision and creates a chilling effect on the employee’s willingness to assist the EEOC in the investigation of a charge. The EEOC does acknowledge, however, that a severance agreement can legally include a provision under which an employee waives any right to recover monetary damages in a lawsuit. In other words, the EEOC’s position is that an employee cannot waive the right to file a claim with the EEOC, but the employee can waive the right to recover any damages.
 
In Maryland, a U.S. District Court agreed with the EEOC. [1] The Court held that the employer’s conditioning of severance benefits on the employee’s waiver of the right to file charges with the EEOC constituted retaliation per se. In another case, the EEOC sued an employer in the U.S. District Court in Minnesota [2] claiming that the employer’s severance agreement, which included a provision that the employee waived his right to file a charge, was retaliation per se. This lawsuit was settled when the employer agreed to: modify the language of its severance agreement; re-offer severance benefits to former employees who refused to sign the original agreement; and notify employees who had signed the severance agreement of their right to file charges with the EEOC.
 
On the other hand, the 6th Circuit Court of Appeals rejected the EEOC’s claim that an employer’s severance agreement constituted retaliation per se. [3] The 6th Circuit found that although the provision in the severance agreement prohibiting an employee from filing a charge was unenforceable, its inclusion in the agreement did not make the employer’s action in offering the agreement in and of itself illegal. In other words, although the provision could be included within the severance agreement, it could not be enforced and the mere fact that the employer included the provision within the severance agreement did not mean that the employer retaliated against the employee. Despite the 6th Circuit’s decision, it is clear that the EEOC will not reverse its position with regard to severance agreements that include a provision under which an employee waives the right to file a charge with the EEOC.
 
What Does This Mean For Wisconsin Employers?
 
Wisconsin employers should review the severance agreement they currently use to ensure the agreement does not require an employee to waive the right to file a charge with the EEOC and instead states that the employee waives any recovery of damages if the employee files such a charge. Taking this action will avoid a challenge by the EEOC that the severance agreement is invalid.
 
Employers should also make sure their severance agreements include a severability provision. Such a provision states that if any portion of the severance agreement is found to be invalid, all of the remaining portions of the agreement remain valid and enforceable. Including such a provision will better ensure that even if a provision within a severance agreement is found to be invalid, the remaining provisions of the severance agreement (waiver of breach of contract claim, wrongful discharge claim, etc.) are enforceable. [4]
 
If you have any questions, please feel free to contact any of the attorneys within the Employment, Labor & Benefits Group of Ruder Ware.
 

 

[1] EEOC v. Lockheed Martin Corp., 444 F. Supp. 2d 414 (D. Md. 8/8/2006).

[2] EEOC v. Ventura Foods, LLC, File No. 05-CV-00663 (D. Minn. 2005, settled Sept. 2006).

[3] Sundance Rehab. Corp., Civ. No. 04-4178 (10/24/06).

[4] Another new development with regard to severance agreements: the Internal Revenue Service has issued new rules in regard to deferred compensation and severance pay arrangements. Commonly used separation pay arrangements will normally fall within the exemptions to the new rules. However, to err on the side of caution and having employees being faced with significant IRS sanctions, you should carefully review your severance pay arrangements in light of the new rules.
 

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