No Rehire and No Comment Clauses in Severance Agreements

One commonly included additional clause in severance agreements is the “no-comment” provision, by which the employer promises to respond to a reference check on the former employee by providing only dates of employment and last position held, and not to disparage the former employee. Can an employer be held liable for damages if it discloses information beyond what is permitted by the severance agreement?

A recent decision by the Seventh Circuit Court of Appeals, decided in July 2008, illustrates that courts will hold employers to their promises in severance agreements. The decision, Matthews v. Wisconsin Energy Corp., No. 07-1780 (7th Cir., July 7, 2008), addressed a no-comment clause in a separation agreement.

In Matthews, the employer promised that, if a prospective employer sought reference information about Bernadine Matthews, the former employee, it would respond “in a manner that is consistent with [its] policy in place regarding reference checks” and would not reveal that Matthews was “terminated or fired.”

Although the employer's internal policy provided that it would only confirm dates of employment and last position held, the employer allegedly revealed during a reference check that the employee “had been involved in at least one, if not more legal actions against the company.”

The court found that this evidence created a genuine issue of fact and reversed a ruling by the lower court for the company. It held that disclosing information about Matthews' “litigation history” went “well beyond the objective information concerning Matthews' dates of employment, final salary and final position held.” Accordingly, a jury could find that the disclosure of information about Matthews' litigation against the company constituted a breach of the settlement agreement.

The court also found that Matthews had put forth sufficient evidence that she was damaged by this alleged breach. Matthews' “expected benefit” from the agreement was “to be a more competitive candidate when seeking future employment based on a good reference from her long-time employer.” In light of Matthews' “nearly two-decade” work history, denying her this benefit could be found to have caused her damage.

No Re-hire Clauses

Another commonly included additional clause in severance agreements is the “no-rehire” provision, by which the departing employee promises, in addition to his release, never to seek re-employment with the employer in the future. What happens, however, if an employee breaks this promise and, after signing the severance agreement and obtaining the monetary payment offered by the employer, re-applies for employment with the former employer? May the former employer refuse to consider the application on the basis of the prior employee's promise in the severance agreement not to seek re-employment.

This issue has been considered by at least two federal courts and by the Equal Employment Opportunity Commission (EEOC). Their decisions indicate that while the employer may rely on the no-rehire clause in the severance agreement as a basis for refusing to consider an application for re-employment, the employee may also attempt to claim that the “real” reason for the employer's decision was a prohibited discriminatory or retaliatory animus.

For example, in Jencks v. Modern Woodmen of America, 479 F.3d 1261 (10th Cir. 2007), the employee and employer entered into a separation agreement after the employee had initiated litigation against the employer for unlawful discrimination. Under the agreement, the employee waived entitlement to re-employment or reinstatement with the employer.

Years later, the former employee began receiving letters of solicitation from the employer, urging her to apply for a position with the company, which letters were sent inadvertently. The former employee reapplied, but the company informed her that she would not be offered a position because of the terms of the settlement agreement. She brought suit, alleging that she had not been offered employment in retaliation of her earlier filing of a discrimination complaint.

The court concluded that, even if the former employee set out a prima facie case of discrimination, the company could rely on its interpretation of the settlement agreement as its reason not to hire the employee. In other words, the company's “interpretation and reliance on the terms” of the settlement agreement “can serve as a legitimate, nondiscriminatory reason” for a refusal to consider an application for re-employment. Because the employee could not prove that this reliance was a mere “pretext,” the employee's case was thrown out.

Similarly, in Franklin v. Burlington Northern & Santa Fe Corp., 2005 U.S. Dist. LEXIS 3288 (N.D. Tex. 2005), aff'd, 2006 U.S. App. LEXIS 8267 (5th Cir. 2006), the courts reviewed an agreement whereby the employee resigned from his position and in exchange accepted a settlement check for $150,000 ' the equivalent of three years' pay. The company prepared the settlement documents that stated that the employee could not reapply for employment with the company in the future. The employee refused to sign these documents. Still, based on their verbal agreement and the employee's receipt of three years' salary, the employer believed the settlement to preclude the employee's future employment with the company.

Nevertheless, the former employee then reapplied for a position with the company, which refused to process his application. The employee sued and the company moved for summary judgment. The district court found that, even assuming the employee had established a prima facie case for retaliation, the employer presented a legitimate nondiscriminatory reason for its decision not to rehire the employee. The employer designated the employee as ineligible for rehire and refused to process his application on the basis of the separation agreement, which the company believed to include a “No Rehire” provision. Because the employee was not able to show that the legitimate nondiscriminatory reason was pretextual, the district court granted summary judgment for the company.

In Khou v. Methodist Hospitals of Dallas, 2004 U.S. Dist. LEXIS 4148, (N.D. Tex. 2004), aff'd, 2005 U.S. App. LEXIS 4206 (5th Cir. 2005), the federal court also affirmed a judgment against an employee who applied for a job after promising not to do so. In Khou, an employer, Methodist Hospital, and an employee entered into a separation agreement. Under the agreement, the employee promised to “voluntarily and permanently resign from the MHD Medical Staff.” He later reapplied for a position with the hospital. The hospital denied his application, and the employee alleged that such denial constituted a restraint on trade and race-based discrimination.

The court found the language of the agreement to be unambiguous; the resignation was to be “permanent,” thus implying ineligibility for rehire. With respect to the racial discrimination claim, the court found that the language of the Settlement Agreement provided a legitimate nondiscriminatory reason for the hospital's decision.

EEOC Rulings

The EEOC has considered this issue at least twice. Most recently, in O'Brien v. Potter, 2004 EEOPUB LEXIS 448 (Feb. 3, 2004), the U.S. Postal Service entered into a settlement agreement with an employee. The agreement provided that, in exchange for the employee's voluntary withdrawal of a complaint filed with the EEOC and her agreement not to seek re-employment with the agency in the future, the Postal Service would pay her a lump sum of $2000. A few weeks later, the former employee informed the agency that she considered the settlement agreement null, void, and breached because, during the settlement negotiation, the agency representative told her that the monetary award would be taxable. The former employee stated that according to the IRS, her award should not be taxed because it was an award of compensatory damages for violation of the ADA.

In finding the settlement agreement to be valid, the Commission cited EEOC Regulation 29 C.F.R. ' 1614.504(a). This regulation binds parties to settlement agreements that they have knowingly and voluntarily entered. The Commission also noted that settlement agreements are contracts, and thus, the intent of the parties controls. Because the U.S. Postal Service did not enter negotiations in bad faith and simply followed its policy of submitting information of awards to the IRS, the settlement agreement between the parties, which included a “no rehire” provision, was enforceable.

Similarly, in Jablonskli v. Battista, 2003 EEOC LEXIS 5476 (Sept. 17, 2003), the NLRB entered a settlement agreement with an employee, which provided for the employee's resignation and agreement “not to seek reemployment with the agency in a career position” in exchange for $50,000 in compensatory damages. Notwithstanding the agreement, the former employee submitted an application for a position as an attorney on a career track with the agency. The agency notified the former employee that his application would not be processed because he had agreed not to seek re-employment with the agency in a career position. The former employee alleged that it was against the spirit of the EEO settlement process to bar him in perpetuity from re-applying for a position with the NLRB. The EEOC disagreed and found the agreement enforceable. The Commission reasoned that the parties had knowingly and voluntarily entered the agreement, and the intent of the parties was reflected in the agreement. The agreement was clear and unambiguous on the issue of no re-employment. In light of such clarity, the EEOC found the former employee had no rationale on the basis of which it could impose a time limit on the prohibition.

Conclusion

A tendency does exist to treat severance agreement documents as “mere forms” and to use them repeatedly without giving thought to their clauses. Nevertheless, severance agreements are not mere forms, they are binding contracts. For this reason, careful thought needs to be given to every provision included in a severance agreement.

Paul D. Snitzer, a member of this newsletter's Board of Editors, practices in Duane Morris' Philadelphia office in the area of labor and employment law. He regularly advises clients on all issues relating to the employer-employee relationship.

Proffering a severance agreement to employees being let go in a reduction in force (RIF), or for other reasons not involving willful misconduct, is now a common practice in corporate America. The basic structure of the severance agreement is an offer from the employer to the departing employee of the payment of monies to which the employee is not already entitled, in exchange for a release of claim and promise not to sue by the departing employee. If done properly ' meaning that they are signed “knowingly and voluntarily” by the former employee ' the severance agreement constitutes a binding contract that precludes the former employee from suing over a released claim.

While the basic structure described above is fairly simple, it is also now common for employers to “load-up” the severance agreements with numerous types of other clauses, beyond a simple release and covenant not to sue. Often, these additional clauses are included by rote, without giving thought as to their consequence. Recent decisions indicate that courts are willing to hold both employees and employers to all of the terms of their agreements.

No-Comment Clause

One commonly included additional clause in severance agreements is the “no-comment” provision, by which the employer promises to respond to a reference check on the former employee by providing only dates of employment and last position held, and not to disparage the former employee. Can an employer be held liable for damages if it discloses information beyond what is permitted by the severance agreement?

A recent decision by the Seventh Circuit Court of Appeals, decided in July 2008, illustrates that courts will hold employers to their promises in severance agreements. The decision, Matthews v. Wisconsin Energy Corp., No. 07-1780 (7th Cir., July 7, 2008), addressed a no-comment clause in a separation agreement.

In Matthews, the employer promised that, if a prospective employer sought reference information about Bernadine Matthews, the former employee, it would respond “in a manner that is consistent with [its] policy in place regarding reference checks” and would not reveal that Matthews was “terminated or fired.”

Although the employer's internal policy provided that it would only confirm dates of employment and last position held, the employer allegedly revealed during a reference check that the employee “had been involved in at least one, if not more legal actions against the company.”

The court found that this evidence created a genuine issue of fact and reversed a ruling by the lower court for the company. It held that disclosing information about Matthews' “litigation history” went “well beyond the objective information concerning Matthews' dates of employment, final salary and final position held.” Accordingly, a jury could find that the disclosure of information about Matthews' litigation against the company constituted a breach of the settlement agreement.

The court also found that Matthews had put forth sufficient evidence that she was damaged by this alleged breach. Matthews' “expected benefit” from the agreement was “to be a more competitive candidate when seeking future employment based on a good reference from her long-time employer.” In light of Matthews' “nearly two-decade” work history, denying her this benefit could be found to have caused her damage.

No Re-hire Clauses

Another commonly included additional clause in severance agreements is the “no-rehire” provision, by which the departing employee promises, in addition to his release, never to seek re-employment with the employer in the future. What happens, however, if an employee breaks this promise and, after signing the severance agreement and obtaining the monetary payment offered by the employer, re-applies for employment with the former employer? May the former employer refuse to consider the application on the basis of the prior employee's promise in the severance agreement not to seek re-employment.

This issue has been considered by at least two federal courts and by the Equal Employment Opportunity Commission (EEOC). Their decisions indicate that while the employer may rely on the no-rehire clause in the severance agreement as a basis for refusing to consider an application for re-employment, the employee may also attempt to claim that the “real” reason for the employer's decision was a prohibited discriminatory or retaliatory animus.

For example, in Jencks v. Modern Woodmen of America , 479 F.3d 1261 (10th Cir. 2007), the employee and employer entered into a separation agreement after the employee had initiated litigation against the employer for unlawful discrimination. Under the agreement, the employee waived entitlement to re-employment or reinstatement with the employer.

Years later, the former employee began receiving letters of solicitation from the employer, urging her to apply for a position with the company, which letters were sent inadvertently. The former employee reapplied, but the company informed her that she would not be offered a position because of the terms of the settlement agreement. She brought suit, alleging that she had not been offered employment in retaliation of her earlier filing of a discrimination complaint.

The court concluded that, even if the former employee set out a prima facie case of discrimination, the company could rely on its interpretation of the settlement agreement as its reason not to hire the employee. In other words, the company's “interpretation and reliance on the terms” of the settlement agreement “can serve as a legitimate, nondiscriminatory reason” for a refusal to consider an application for re-employment. Because the employee could not prove that this reliance was a mere “pretext,” the employee's case was thrown out.

Similarly, in Franklin v. Burlington Northern & Santa Fe Corp., 2005 U.S. Dist. LEXIS 3288 (N.D. Tex. 2005), aff'd, 2006 U.S. App. LEXIS 8267 (5th Cir. 2006), the courts reviewed an agreement whereby the employee resigned from his position and in exchange accepted a settlement check for $150,000 ' the equivalent of three years' pay. The company prepared the settlement documents that stated that the employee could not reapply for employment with the company in the future. The employee refused to sign these documents. Still, based on their verbal agreement and the employee's receipt of three years' salary, the employer believed the settlement to preclude the employee's future employment with the company.

Nevertheless, the former employee then reapplied for a position with the company, which refused to process his application. The employee sued and the company moved for summary judgment. The district court found that, even assuming the employee had established a prima facie case for retaliation, the employer presented a legitimate nondiscriminatory reason for its decision not to rehire the employee. The employer designated the employee as ineligible for rehire and refused to process his application on the basis of the separation agreement, which the company believed to include a “No Rehire” provision. Because the employee was not able to show that the legitimate nondiscriminatory reason was pretextual, the district court granted summary judgment for the company.

In Khou v. Methodist Hospitals of Dallas, 2004 U.S. Dist. LEXIS 4148, (N.D. Tex. 2004), aff'd, 2005 U.S. App. LEXIS 4206 (5th Cir. 2005), the federal court also affirmed a judgment against an employee who applied for a job after promising not to do so. In Khou, an employer, Methodist Hospital, and an employee entered into a separation agreement. Under the agreement, the employee promised to “voluntarily and permanently resign from the MHD Medical Staff.” He later reapplied for a position with the hospital. The hospital denied his application, and the employee alleged that such denial constituted a restraint on trade and race-based discrimination.

The court found the language of the agreement to be unambiguous; the resignation was to be “permanent,” thus implying ineligibility for rehire. With respect to the racial discrimination claim, the court found that the language of the Settlement Agreement provided a legitimate nondiscriminatory reason for the hospital's decision.

EEOC Rulings

The EEOC has considered this issue at least twice. Most recently, in O'Brien v. Potter, 2004 EEOPUB LEXIS 448 (Feb. 3, 2004), the U.S. Postal Service entered into a settlement agreement with an employee. The agreement provided that, in exchange for the employee's voluntary withdrawal of a complaint filed with the EEOC and her agreement not to seek re-employment with the agency in the future, the Postal Service would pay her a lump sum of $2000. A few weeks later, the former employee informed the agency that she considered the settlement agreement null, void, and breached because, during the settlement negotiation, the agency representative told her that the monetary award would be taxable. The former employee stated that according to the IRS, her award should not be taxed because it was an award of compensatory damages for violation of the ADA.

In finding the settlement agreement to be valid, the Commission cited EEOC Regulation 29 C.F.R. ' 1614.504(a). This regulation binds parties to settlement agreements that they have knowingly and voluntarily entered. The Commission also noted that settlement agreements are contracts, and thus, the intent of the parties controls. Because the U.S. Postal Service did not enter negotiations in bad faith and simply followed its policy of submitting information of awards to the IRS, the settlement agreement between the parties, which included a “no rehire” provision, was enforceable.

Similarly, in Jablonskli v. Battista, 2003 EEOC LEXIS 5476 (Sept. 17, 2003), the NLRB entered a settlement agreement with an employee, which provided for the employee's resignation and agreement “not to seek reemployment with the agency in a career position” in exchange for $50,000 in compensatory damages. Notwithstanding the agreement, the former employee submitted an application for a position as an attorney on a career track with the agency. The agency notified the former employee that his application would not be processed because he had agreed not to seek re-employment with the agency in a career position. The former employee alleged that it was against the spirit of the EEO settlement process to bar him in perpetuity from re-applying for a position with the NLRB. The EEOC disagreed and found the agreement enforceable. The Commission reasoned that the parties had knowingly and voluntarily entered the agreement, and the intent of the parties was reflected in the agreement. The agreement was clear and unambiguous on the issue of no re-employment. In light of such clarity, the EEOC found the former employee had no rationale on the basis of which it could impose a time limit on the prohibition.

Conclusion

A tendency does exist to treat severance agreement documents as “mere forms” and to use them repeatedly without giving thought to their clauses. Nevertheless, severance agreements are not mere forms, they are binding contracts. For this reason, careful thought needs to be given to every provision included in a severance agreement.

Paul D. Snitzer, a member of this newsletter's Board of Editors, practices in Duane Morris' Philadelphia office in the area of labor and employment law. He regularly advises clients on all issues relating to the employer-employee relationship.