Poorly Drafted Severance Agreements

If an employee files or participates in such a charge, the agreement gives Nucletron the right to recover the severance payment, liquidated damages and attorneys' fees. In exchange for the release, Nucletron provides the employee a severance payment and a period of continued employment at a reduced work schedule.

In December 2005, Nucletron informed Peter Dove, one of its employees, that it intended to terminate his employment. In March 2006, Nucletron offered Dove its standard severance agreement. Dove retained counsel, who wrote the company claiming that Dove's termination constituted discrimination under ADEA. Dove indicated, however, that he was willing to sign the severance agreement if Nucletron increased the severance payment. Nucletron refused, Dove was terminated, and no severance benefits were provided.

Thereafter, Dove filed a charge with the EEOC claiming that Nucletron had terminated him because of his age in violation of ADEA. Finding reasonable cause, the EEOC then filed the lawsuit against Nucletron on Dove's behalf.

According to the EEOC, Nucletron offered the severance agreement to 11 employees in addition to Dove. Each of those employees signed the agreement and received severance benefits. However, according to the EEOC, Nucletron retaliated against Dove based on its requirement that Dove sign Nucletron's standard severance agreement to obtain severance benefits.

The EEOC maintained that such action is retaliatory on two theories: 1) Nucletron's policy of conditioning the award of severance benefits upon the terminated employee's agreement not to file a discrimination charge or to participate in proceedings before the EEOC constitutes “facial retaliation”; and 2) Nucletron retaliated against Dove for engaging in a protected activity by denying him severance benefits.

Nucletron moved to dismiss the EEOC's retaliation claim, arguing that it is insufficient as a matter of law. The EEOC, in turn, moved for partial summary judgment on that claim.

The Court's Decision

According to the court, an employer can offer its employee additional severance benefits not already promised or owed in exchange for the employee's promise not to file a discrimination lawsuit or for a waiver or release of his discrimination claims. An employee may not, however, waive his right to file a charge with the EEOC or participate in an EEOC discrimination proceeding. Even if the employer offers a severance agreement with an invalid waiver, the employer only commits retaliation if it either attempts to enforce the agreement against the employee who signed the agreement, but, nevertheless, files or participates in an EEOC charge, or withholds benefits already promised or owed from an employee who refuses to sign the agreement.

Thus, according to the court, if Nucletron revoked benefits that were part of the severance package promised to all terminated employees because Dove refused to waive his rights, the EEOC's retaliation claim would succeed. If, however, Nucletron offered Dove an additional payment not otherwise promised or owed, then the EEOC's claim would fail.

With regard to the EEOC's first claim, that Nucletron's policy of conditioning the award of severance benefits on the terminated employee's agreement not to file a discrimination charge or participate in proceedings before the EEOC, constitutes “facial retaliation,” the court disagreed. While that portion of the severance agreement that requires an employee to waive his right to file or participate in an EEOC discrimination charge is unenforceable and cannot be waived, the mere offer of any unenforceable severance agreement, according to the court, does not constitute a separate basis for retaliation under Title VII, ADEA or the EPA.

In reaching this conclusion, the trial court relied on a decision from the Sixth Circuit Court of Appeals that found that a mere offer of an unenforceable severance agreement does not constitute retaliation. According to the court, to have committed actionable retaliation, the employer must have taken a sufficiently adverse employment action toward the employee, such as a denial of severance benefits or instituting a suit to enforce the severance agreement.

As to the EEOC's second theory that Nucletron retaliated against Dove by denying him severance benefits that were promised or owed to all terminated employees because he refused to relinquish his claims under the employment statutes, the court found that such actions, if proven, could constitute retaliation. As the court noted, in the context of retaliation claim, an adverse employment action is any action that well might have persuaded a reasonable worker from making or supporting a charge of discrimination.

While it is clear that an employer may offer an additional severance payment in exchange for release of any claims under the retaliation statutes and the promise not to file suit against the employer, it is equally clear that an employer may not withhold standard employee benefits because an employee has refused to waive his rights under the anti-discrimination statutes.

As the court observed, if the EEOC can prove that Nucletron provided the payment offered in the severance agreement as a matter of course to all terminated employees, then it can establish the second element of its claim. If, however, the severance payment is a benefit over and above what is promised to employees generally, then the EEOC's retaliation claim would probably fail.

In addition to seeking individual relief, the EEOC also requested that the court grant injunctive relief against Nucletron, prohibiting it from attempting to enforce the invalid portions of the standard severance agreement against the 11 employees who signed it. According to the court, the invalid provisions violated the Older Workers Benefits Protection Act (OWBPA) because they prohibited employees from filing or participating in an EEOC charge.

Moreover, if Nucletron were to bring a breach of contract suit against an employee who signed the severance agreement, but nevertheless filed a charge with the EEOC, such an action would also constitute retaliation. Thus, to prevent the possible enforcement of the invalid provision in Nucletron's standard severance agreement, the court found that an injunction was appropriate.

Bottom Line

Every Maryland employer that uses severance agreements as a way of amicably resolving potential employment claims should make sure that the severance agreement it uses fully complies with applicable law. As noted in this decision, a severance agreement that purports to prevent an employee from filing a claim with the EEOC or otherwise participating in an EEOC investigation is invalid and should be removed from the standard severance agreement. Moreover, as the court discussed, if an employer has a standard practice of offering certain severance benefits to all employees who are terminated, then in those situations in which the employee is being requested to sign a waiver and release of claims, additional severance benefits should be offered to obtain the full release.

To do otherwise could be construed as retaliatory, as in this case, or could be attacked on the grounds that the severance agreement is unenforceable because there was inadequate legal consideration. In either event, the employer could lose the protection of the release ' the very benefit that the severance agreement is designed to provide.

Kevin McCormick, a member of this newsletter's Board of Editors, is a Partner in the Baltimore office of Whiteford Taylor Preston, LLP.

When faced with potential employment claims, many employers often elect to resolve them amicably by providing additional severance in exchange for a release of those claims. However, as recognized in a recent decision from the Maryland Federal Court, a poorly drafted severance agreement can prove to be a very expensive mistake. This article takes a closer look at this decision: Equal Employment Opportunity Commission v. Nucletron Corporation, D.C. Md., Civil Action No. L-07-2644, July 2, 2008.)

Background Facts

Nucletron, the employer, provides severance pay to eligible employees whose employment is terminated for reasons that are not prejudicial to the company. Nucletron requires its employees to sign a severance agreement upon their termination in order to receive severance benefits. The agreement requires that the employee waive his rights under several employment statutes, including the Age Discrimination In Employment Act (ADEA), Title VII of the Civil Rights Act (Title VII) and the Equal Pay Act of 1963 (EPA). The agreement also requires the employee to promise neither to file a charge with any federal agency, nor to participate in any such action.

If an employee files or participates in such a charge, the agreement gives Nucletron the right to recover the severance payment, liquidated damages and attorneys' fees. In exchange for the release, Nucletron provides the employee a severance payment and a period of continued employment at a reduced work schedule.

In December 2005, Nucletron informed Peter Dove, one of its employees, that it intended to terminate his employment. In March 2006, Nucletron offered Dove its standard severance agreement. Dove retained counsel, who wrote the company claiming that Dove's termination constituted discrimination under ADEA. Dove indicated, however, that he was willing to sign the severance agreement if Nucletron increased the severance payment. Nucletron refused, Dove was terminated, and no severance benefits were provided.

Thereafter, Dove filed a charge with the EEOC claiming that Nucletron had terminated him because of his age in violation of ADEA. Finding reasonable cause, the EEOC then filed the lawsuit against Nucletron on Dove's behalf.

According to the EEOC, Nucletron offered the severance agreement to 11 employees in addition to Dove. Each of those employees signed the agreement and received severance benefits. However, according to the EEOC, Nucletron retaliated against Dove based on its requirement that Dove sign Nucletron's standard severance agreement to obtain severance benefits.

The EEOC maintained that such action is retaliatory on two theories: 1) Nucletron's policy of conditioning the award of severance benefits upon the terminated employee's agreement not to file a discrimination charge or to participate in proceedings before the EEOC constitutes “facial retaliation”; and 2) Nucletron retaliated against Dove for engaging in a protected activity by denying him severance benefits.

Nucletron moved to dismiss the EEOC's retaliation claim, arguing that it is insufficient as a matter of law. The EEOC, in turn, moved for partial summary judgment on that claim.

The Court's Decision

According to the court, an employer can offer its employee additional severance benefits not already promised or owed in exchange for the employee's promise not to file a discrimination lawsuit or for a waiver or release of his discrimination claims. An employee may not, however, waive his right to file a charge with the EEOC or participate in an EEOC discrimination proceeding. Even if the employer offers a severance agreement with an invalid waiver, the employer only commits retaliation if it either attempts to enforce the agreement against the employee who signed the agreement, but, nevertheless, files or participates in an EEOC charge, or withholds benefits already promised or owed from an employee who refuses to sign the agreement.

Thus, according to the court, if Nucletron revoked benefits that were part of the severance package promised to all terminated employees because Dove refused to waive his rights, the EEOC's retaliation claim would succeed. If, however, Nucletron offered Dove an additional payment not otherwise promised or owed, then the EEOC's claim would fail.

With regard to the EEOC's first claim, that Nucletron's policy of conditioning the award of severance benefits on the terminated employee's agreement not to file a discrimination charge or participate in proceedings before the EEOC, constitutes “facial retaliation,” the court disagreed. While that portion of the severance agreement that requires an employee to waive his right to file or participate in an EEOC discrimination charge is unenforceable and cannot be waived, the mere offer of any unenforceable severance agreement, according to the court, does not constitute a separate basis for retaliation under Title VII, ADEA or the EPA.

In reaching this conclusion, the trial court relied on a decision from the Sixth Circuit Court of Appeals that found that a mere offer of an unenforceable severance agreement does not constitute retaliation. According to the court, to have committed actionable retaliation, the employer must have taken a sufficiently adverse employment action toward the employee, such as a denial of severance benefits or instituting a suit to enforce the severance agreement.

As to the EEOC's second theory that Nucletron retaliated against Dove by denying him severance benefits that were promised or owed to all terminated employees because he refused to relinquish his claims under the employment statutes, the court found that such actions, if proven, could constitute retaliation. As the court noted, in the context of retaliation claim, an adverse employment action is any action that well might have persuaded a reasonable worker from making or supporting a charge of discrimination.

While it is clear that an employer may offer an additional severance payment in exchange for release of any claims under the retaliation statutes and the promise not to file suit against the employer, it is equally clear that an employer may not withhold standard employee benefits because an employee has refused to waive his rights under the anti-discrimination statutes.

As the court observed, if the EEOC can prove that Nucletron provided the payment offered in the severance agreement as a matter of course to all terminated employees, then it can establish the second element of its claim. If, however, the severance payment is a benefit over and above what is promised to employees generally, then the EEOC's retaliation claim would probably fail.

In addition to seeking individual relief, the EEOC also requested that the court grant injunctive relief against Nucletron, prohibiting it from attempting to enforce the invalid portions of the standard severance agreement against the 11 employees who signed it. According to the court, the invalid provisions violated the Older Workers Benefits Protection Act (OWBPA) because they prohibited employees from filing or participating in an EEOC charge.

Moreover, if Nucletron were to bring a breach of contract suit against an employee who signed the severance agreement, but nevertheless filed a charge with the EEOC, such an action would also constitute retaliation. Thus, to prevent the possible enforcement of the invalid provision in Nucletron's standard severance agreement, the court found that an injunction was appropriate.

Bottom Line

Every Maryland employer that uses severance agreements as a way of amicably resolving potential employment claims should make sure that the severance agreement it uses fully complies with applicable law. As noted in this decision, a severance agreement that purports to prevent an employee from filing a claim with the EEOC or otherwise participating in an EEOC investigation is invalid and should be removed from the standard severance agreement. Moreover, as the court discussed, if an employer has a standard practice of offering certain severance benefits to all employees who are terminated, then in those situations in which the employee is being requested to sign a waiver and release of claims, additional severance benefits should be offered to obtain the full release.

To do otherwise could be construed as retaliatory, as in this case, or could be attacked on the grounds that the severance agreement is unenforceable because there was inadequate legal consideration. In either event, the employer could lose the protection of the release ' the very benefit that the severance agreement is designed to provide.

Kevin McCormick, a member of this newsletter's Board of Editors, is a Partner in the Baltimore office of Whiteford Taylor Preston, LLP.