Unequal Severance Benefits

After more than 25 years of employment by the County, including 12 as Department Director, Gerner was informed by County officials on Dec. 15, 2009, that her position was being eliminated due to reorganization. The officials asked Gerner to sign an agreement that offered her three months' pay and health benefits in exchange for her voluntary resignation and a waiver of any claims against the County.

Gerner considered the offer for a few days and ultimately declined it. The County then terminated her employment effective Dec. 15, 2009, without any severance pay or benefits.

The Litigation

Unhappy with that turn of events, Gerner filed a claim with the EEOC, alleging sex discrimination in violation of Title VII of the Civil Rights Act of 1964, as amended. In short, Gerner alleged that the County did not offer her the same “sweetheart” severance package it offered to other similarly situated male counterparts when it sought to terminate their employment.

Gerner alleged that prior male department directors, including employees who were not meeting performance expectations, were transferred to positions with less responsibility while being allowed to continue their salary and benefits, and were kept on the payroll with benefits for up to six months or more to enhance their retirement benefits. Gerner identified four specific male comparators whom she claimed were treated more favorably than was she.

The County moved to dismiss Gerner's complaint with two primary arguments. The first was that the severance offer did not constitute an actionable adverse employment action that would trigger a violation under Title VII. The second was that Gerner's complaint failed to describe adequately the male comparators whom she claimed were treated more favorably. The trial court agreed with the County and summarily dismissed Gerner's
complaint.

The Appeal

In considering this novel issue, the Fourth Circuit first reviewed the specific language of Title VII, which prohibits an employer from discriminating against “any individual” with respect to compensation, terms, conditions or privileges of employment because of such individual's sex. To establish a prima facie case of gender discrimination, the employee must show: 1) membership in a protected class; 2) satisfactory job performance; 3) adverse employment action; and 4) that similarly situated employees outside the protected class received more favorable treatment.

The district court dismissed Gerner's complaint because it believed that she failed to allege a “factual basis” for the third element, that is, that she failed to allege an adverse employment action. The court found that the County's offer of a less favorable severance package did not constitute an adverse employment action for two reasons. First, the court held that the severance benefit offer must be a “contractual entitlement” to provide the basis of an adverse employment action under Title VII. Second, the court held that because the offer of the severance package was made after Gerner had been terminated, it could not constitute an adverse employment action.

The Fourth Circuit considered and rejected both of those conclusions. Relying on an earlier Supreme Court decision, Hishon v. King and Spalding, 467 U.S. 69 (1984), the Fourth Circuit rejected the notion that an employment benefit must be a contractual right in order for its denial to provide the basis of a Title VII claim.

In Hishon, the Supreme Court held that any benefit that is part and parcel of the employment relationship may not be doled out in a discriminatory fashion, even if the employer would be free under the employment contract simply not to provide the benefit at all. Thus, even though the County was not obligated to offer any severance benefits to Gerner, when it decided to do so it could not offer Garner a lesser benefit because of her gender than what it offered to her male comparators.

Regarding the second claim, that Gerner was no longer an employee when the severance was offered, the Fourth Circuit had little difficulty resolving that issue. As the Fourth Circuit noted, according to the timeline offered by Gerner, at the Dec. 15, 2009, meeting, County officials informed her that her position was being eliminated, but offered to permit her to resign with three months' severance pay and health benefits if she signed a waiver of claims against the County.

Gerner also alleged that the County permitted her to consider the offer until Dec. 21, 2009, and that she did so and then rejected the offer. Only after she refused the County's offer of severance, did the County terminate her employment, making the termination retroactive to Dec. 15, 2009. On these allegations, it is hard to establish that Gerner had been terminated before the severance benefits were offered.

Moreover, even if Gerner had been terminated, that fact would not bar her claims. Under Title VII, it is unlawful for an employer to discriminate against “any individual” on the basis of membership in a protected class. The courts have consistently interpreted this intentionally broad language to apply to potential, current and past employees. Thus, as a former employee, Gerner could still press her Title VII claims. (Karla Gerner v. County of Chesterfield, Virginia, Fourth Circuit No. 11-1218, Decided March 16, 2012.)

Bottom Line

This is an interesting decision because it highlights difficulties an employer faces when deciding on the appropriate severance that should be awarded to a departing employee in exchange for a release of claims. Often, when employers are considering this issue, they necessarily focus on the risk that the departing employee may present in the event of litigation. The riskier the case, the more generous the severance benefits.

This decision adds a new wrinkle to that consideration because it highlights the fact that employers must not only figure out the appropriate severance to offer so that the employee accepts it, they must also make sure that the offer to that particular employee is not deemed discriminatory by another employee whose termination may not present as much of a risk to the employer.

One way to avoid this vexing problem is simply to use a set formula to provide a certain amount of severance benefits based on years of employment, salary level or job title. However, by following such a set, lockstep approach, you may lose your flexibility to fashion an appropriate severance package to deal with a particularly risky termination.

Kevin McCormick is a Partner in the Baltimore office of Whiteford Taylor Preston, LLP.

In an interesting published decision, the U.S. Court of Appeals for the Fourth Circuit has held that an offer of less favorable severance benefits to a female may constitute sex discrimination in violation of Title VII.

Background Facts

Karla Gerner began working for Chesterfield County, VA, in June 1983. By July 1997, she was the County's Director of Human Resources. Throughout Gerner's career, she always received positive performance evaluations.

After more than 25 years of employment by the County, including 12 as Department Director, Gerner was informed by County officials on Dec. 15, 2009, that her position was being eliminated due to reorganization. The officials asked Gerner to sign an agreement that offered her three months' pay and health benefits in exchange for her voluntary resignation and a waiver of any claims against the County.

Gerner considered the offer for a few days and ultimately declined it. The County then terminated her employment effective Dec. 15, 2009, without any severance pay or benefits.

The Litigation

Unhappy with that turn of events, Gerner filed a claim with the EEOC, alleging sex discrimination in violation of Title VII of the Civil Rights Act of 1964, as amended. In short, Gerner alleged that the County did not offer her the same “sweetheart” severance package it offered to other similarly situated male counterparts when it sought to terminate their employment.

Gerner alleged that prior male department directors, including employees who were not meeting performance expectations, were transferred to positions with less responsibility while being allowed to continue their salary and benefits, and were kept on the payroll with benefits for up to six months or more to enhance their retirement benefits. Gerner identified four specific male comparators whom she claimed were treated more favorably than was she.

The County moved to dismiss Gerner's complaint with two primary arguments. The first was that the severance offer did not constitute an actionable adverse employment action that would trigger a violation under Title VII. The second was that Gerner's complaint failed to describe adequately the male comparators whom she claimed were treated more favorably. The trial court agreed with the County and summarily dismissed Gerner's
complaint.

The Appeal

In considering this novel issue, the Fourth Circuit first reviewed the specific language of Title VII, which prohibits an employer from discriminating against “any individual” with respect to compensation, terms, conditions or privileges of employment because of such individual's sex. To establish a prima facie case of gender discrimination, the employee must show: 1) membership in a protected class; 2) satisfactory job performance; 3) adverse employment action; and 4) that similarly situated employees outside the protected class received more favorable treatment.

The district court dismissed Gerner's complaint because it believed that she failed to allege a “factual basis” for the third element, that is, that she failed to allege an adverse employment action. The court found that the County's offer of a less favorable severance package did not constitute an adverse employment action for two reasons. First, the court held that the severance benefit offer must be a “contractual entitlement” to provide the basis of an adverse employment action under Title VII. Second, the court held that because the offer of the severance package was made after Gerner had been terminated, it could not constitute an adverse employment action.

The Fourth Circuit considered and rejected both of those conclusions. Relying on an earlier Supreme Court decision, Hishon v. King and Spalding , 467 U.S. 69 (1984), the Fourth Circuit rejected the notion that an employment benefit must be a contractual right in order for its denial to provide the basis of a Title VII claim.

In Hishon, the Supreme Court held that any benefit that is part and parcel of the employment relationship may not be doled out in a discriminatory fashion, even if the employer would be free under the employment contract simply not to provide the benefit at all. Thus, even though the County was not obligated to offer any severance benefits to Gerner, when it decided to do so it could not offer Garner a lesser benefit because of her gender than what it offered to her male comparators.

Regarding the second claim, that Gerner was no longer an employee when the severance was offered, the Fourth Circuit had little difficulty resolving that issue. As the Fourth Circuit noted, according to the timeline offered by Gerner, at the Dec. 15, 2009, meeting, County officials informed her that her position was being eliminated, but offered to permit her to resign with three months' severance pay and health benefits if she signed a waiver of claims against the County.

Gerner also alleged that the County permitted her to consider the offer until Dec. 21, 2009, and that she did so and then rejected the offer. Only after she refused the County's offer of severance, did the County terminate her employment, making the termination retroactive to Dec. 15, 2009. On these allegations, it is hard to establish that Gerner had been terminated before the severance benefits were offered.

Moreover, even if Gerner had been terminated, that fact would not bar her claims. Under Title VII, it is unlawful for an employer to discriminate against “any individual” on the basis of membership in a protected class. The courts have consistently interpreted this intentionally broad language to apply to potential, current and past employees. Thus, as a former employee, Gerner could still press her Title VII claims. (Karla Gerner v. County of Chesterfield, Virginia, Fourth Circuit No. 11-1218, Decided March 16, 2012.)

Bottom Line

This is an interesting decision because it highlights difficulties an employer faces when deciding on the appropriate severance that should be awarded to a departing employee in exchange for a release of claims. Often, when employers are considering this issue, they necessarily focus on the risk that the departing employee may present in the event of litigation. The riskier the case, the more generous the severance benefits.

This decision adds a new wrinkle to that consideration because it highlights the fact that employers must not only figure out the appropriate severance to offer so that the employee accepts it, they must also make sure that the offer to that particular employee is not deemed discriminatory by another employee whose termination may not present as much of a risk to the employer.

One way to avoid this vexing problem is simply to use a set formula to provide a certain amount of severance benefits based on years of employment, salary level or job title. However, by following such a set, lockstep approach, you may lose your flexibility to fashion an appropriate severance package to deal with a particularly risky termination.

Kevin McCormick is a Partner in the Baltimore office of Whiteford Taylor Preston, LLP.