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Severance Agreements

Legal Challenges Question Common Practices

By Richard D. Alaniz

Like many other industries, it is frequently standard operating procedure in the insurance industry to use severance agreements when discharging employees or reducing the workforce. While senior-level executives may have negotiated severance provisions in advance, these agreements are more typically negotiated at the time of termination. These agreements typically benefit both the employer and the soon-to-be ex-employee. The employer gets extra protection, such as the employee’s agreement not to file a lawsuit or a claim with a government agency, and the employee gets a better severance package, perhaps some additional pay or health-care coverage.

However, severance agreements have been the focus of challenges in some recent court cases, especially those agreements that require employees to waive their right to file an administrative charge with the Equal Employment Opportunity Commission or other government agency. Soon-to-be-former employees are often perceived to be at a disadvantage when negotiating severance agreements. As such, some courts have found that such agreements are not binding on employees and, even worse, can be considered retaliatory. The EEOC, in particular, has been actively challenging some of these agreements.

In August 2006, a Maryland federal district court found language in a settlement agreement provision to be illegal and retaliatory. In this case, EEOC v. Lockheed Martin Corp., an employee – who later filed an EEOC charge – was offered severance benefits in exchange for signing the release. This case has drawn particular attention because the language of the agreement is similar, if not identical, to language that the EEOC had previously communicated to be acceptable.

The EEOC took on another common provision in E.E.O.C. v. Ventura Foods, LLC, a Minnesota case. In this case, the employee had been terminated and asked to sign a severance agreement and general release in order to get “enhanced severance benefits.” According to a clause in the contract, the employee verified he had not filed any claims and promised to never file or prosecute a charge based on claims. The employee signed the agreement but ended up filing an age discrimination charge anyway. While the EEOC decided there was no evidence of age discrimination, it did file suit to remove the clause. The case settled after the company removed it while denying that it constituted a violation of the employee’s rights.

In another recent case, EEOC v. SunDance Rehabilitation Corp., an employee lost her job as part of a reduction in force. The company did not have a severance policy, and the employee was asked to sign a broad release. The employee, believing she was a victim of sex discrimination, didn’t sign and filed a charge with the EEOC. The EEOC ruled that even though she had not presented a case of sex discrimination, the language in the release – which required agreeing not to file suit as a condition for benefits – was retaliatory and invalid. The district court ruled for the EEOC, but, on appeal, the Sixth Circuit rejected the EEOC’s position.

While there is still not complete clarity in how far the courts will let the EEOC go, it is clear that the agency is looking for opportunities to limit using severance agreements as a tool to protect employers from future claims, especially where the agreements preclude the filing of an administrative charge with a state or federal agency.

The EEOC handled more discrimination claims against private-sector employers in 2006, the first increase since 2002. “The commission continues to work closely with our stakeholders to implement new strategies to stop discrimination before it starts,” said EEOC chair Naomi C. Earp. “We are striking a vital balance between outreach and education on one hand, and enforcement and litigation on the other.”

In light of the recent cases, employers should take a careful look at their severance agreements. In the current litigation environment, it would be wise to have legal counsel review them to be sure that the following elements are addressed.

Clean up boilerplate contracts

Many of these agreements have been used for years without being updated, and the “boilerplate” language may now be inappropriate or unlawful (or viewed that way by the EEOC). If your standard agreement was written a few years ago, it may already include provisions preventing terminated employees from making claims before the EEOC.

In addition, be careful about adding specific clauses that contradict the unchanging boilerplate language. A new clause that refers to an existing agreement – such as a nondisclosure agreement – may not hold up if the same agreement also includes boilerplate language that “this agreement is the only agreement between the two parties and supersedes all others.” While it probably makes sense to have counsel review the severance agreement for each and every terminated employee, at minimum they should review any standard agreement every year or so.

Make sure agreements are easy to comprehend

The EEOC, as well as the courts, takes a dim view of agreements that are difficult for typical employees to understand. Make sure the language in the severance agreement is clear, straightforward, and not full of legalese. This is especially important if there is a potential for an age discrimination claim, as the Older Workers Benefit Protection Act includes a specific provision that a release must be written so that the average employee can easily understand it.

For example, try not to use confusing legalese such as, “In the event of any breach of this Agreement by the Employee, the Company’s obligation to pay any amounts to the Employee, whether under this Agreement or otherwise, and the Company’s obligation to make the arrangements provided under this Agreement, net of any withholding obligations, shall be subject to set-off by or against, counterclaim or recoupment of, amounts owed by the Employee to the Company or its affiliates.” Instead, try, “Should the Employee breach this agreement, the Company will no longer be obligated by it and may make claims against the Employee to recover benefits already paid.”

Include a disclaimer

While language limiting an employee’s right to file a lawsuit or collect monetary damages is usually acceptable, be much more careful with limits on the right to file claims or charges with regulatory bodies, such as the EEOC. Be sure to be clear that the rights being waived relate to filing a lawsuit in a court of law or collecting monetary damages. Considering the position of the EEOC and recent court opinions, it may be worthwhile to include an explicit disclaimer that the severance agreement is not intended to limit an employee’s right to file a claim or participate in an investigation with the EEOC or other government agency. n

Richard D. Alaniz is senior partner at Alaniz and Schraeder, a national labor and employment firm based in Houston. He has been at the forefront of labor and employment law for more than 30 years, including stints with the U.S. Department of Labor and the National Labor Relations Board. Alaniz can be reached at 281.833.2200 or ralaniz@alaniz-schraeder.com.

Posted: Tuesday, October 16, 2007 12:00:00 AM. Modified: Tuesday, October 16, 2007 4:10:58 PM.

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