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Severance Agreement ALERT

Employers should be aware that they may be assuming the risk of a legal retaliation claim if they enter into severance agreements with separating employees if the agreement contains certain types of provisions. Recently, courts in various jurisdictions have held that severance agreements, in which employees promise, in exchange for consideration received from the employer, not to file a discrimination charge with the Equal Employment Opportunity Commission ("EEOC"), or to withdraw a pending EEOC charge, are, on their face, retaliatory.

On August 8, 2006, the United States District Court for the District of Maryland held in EEOC v. Lockheed Martin Corp., 444 F. Supp.2d 414 (D. Md. 2006), that presenting a severance agreement with an overbroad release could be itself retaliatory. In that case, Lockheed Martin entered into a severance agreement with an employee who had previously filed a discrimination charge with the EEOC. The severance agreement provided that the employee must withdraw her pending EEOC charge. The EEOC filed suit against Lockheed Martin, arguing that the company had unlawfully retaliated against the employee under Title VII of the Civil Rights Act of 1964 on two grounds: (1) by conditioning the employee's receipt of severance benefits on the withdrawal of her EEOC charge, and (2) by requiring the employee to waive her right to file an EEOC charge. The court agreed with both arguments.

On the first issue, the court found that the employer had engaged in retaliation by requiring the employee to dismiss her EEOC charge in order to receive severance benefits. The court found that, if the employer was going to provide severance benefits to employees, it could not provide them only to employees who refrain from engaging in the protected activity of filing an EEOC charge. On the second issue, the court found that the severance agreement' release of claims was retaliatory on its face, because it required the employee to waive her right to file an EEOC charge, a protected activity under Title VII.

The court held that "conditioning severance payments on an employee agreeing not to file a charge with the EEOC is facially retaliatory" in violation of Title VII (and other civil rights laws). The court distinguished between a person filing lawsuits for personal relief (which can be waived), and the filing of a charge with the EEOC, because the recognized purpose of the latter is "to inform the EEOC of possible discrimination", which may affect numerous employees, not just the employee filing a charge. The EEOC is legally required to investigate charges of discrimination.

Other potentially retaliatory conduct would include requiring employees, as part of a written agreement, to avoid participating in an EEOC investigation or proceeding, or to avoid assisting others who file EEOC charges. Non-assistance agreements are legally void as being against public policy, because the EEOC acts not only on behalf of private parties, but also to vindicate the public interest in preventing employment discrimination. Not only are non-assistance agreements unenforceable, they may be found to be retaliatory.

Based upon the court's opinion in the Lockheed Martin case, and similar opinions from other courts, employers might wish to refrain from conditioning the receipt of severance payments on the waiver of the right to file an EEOC charge, or the withdrawal of such a charge. Not all courts are in agreement on this issue, however.

On October 24, 2006, in the case of EEOC v. Sundance Rehabilitation Corp., 2006 WL 3007322 (6th Cir. Oct. 24, 2006), the United States Court of Appeals for the Sixth Circuit (which has jurisdiction over employers located in Tennessee, Kentucky, Ohio and Michigan) held in a 2-1 decision that an employer does not engage in unlawful retaliation under Title VII merely by offering separating employees a severance or separation agreement containing a promise not to file an EEOC charge. In the Sundance case, the employer offered a separation agreement to a separating employee in which the employee was asked to agree that she would "not institute, commence ... or otherwise pursue any ... complaint, claim [or] charge" against the employer "in any administrative, judicial or other forum" with respect to any acts or events occurring during her employment.

The EEOC argued that the separation agreement constituted a per se violation of the anti-retaliation provisions of Title VII and other federal anti-discrimination laws, amounting to a "preemptive strike against future protected activity." The EEOC argued that the separation agreement improperly conditioned severance pay on promises from the terminated employee not to file charges with the EEOC, nor to participate in EEOC proceedings, and allowed the employer to sue for the return of the payments if the former employee engaged in such protected activity.

The Sixth Circuit observed that courts have held that prohibitions on filing charges with the EEOC are void and unenforceable as against public policy. It agreed that allowing the filing of charges to be obstructed by enforcing a waiver of the right to file a charge could impede the EEOC in enforcing the civil rights laws, because the EEOC depends upon the filing of charges to notify it of possible discrimination. However, the court also noted that, while an employee cannot waive her right to file a charge with the EEOC, she could waive the right to recover damages in her own lawsuit, and the waiver of a right to file a cause of action was not invalid just because it was conjoined with a void waiver of the right to file an EEOC charge.

The court noted that the EEOC's position was that the "offering the separation agreement itself amounts to retaliation", because it contained a promise that the employee would not file an EEOC charge. The court rejected this position. Key to the court's decision was that the separation agreement did not appear to prevent the employee from participating in EEOC proceedings, which would have rendered it unenforceable. The court held that including an unenforceable charge-filing ban in a separation agreement does not make the mere offering of such an agreement in and of itself retaliatory.

The court found that the employee had not been deprived of anything by the offering of the separation agreement. Those employees who rejected the agreement did not give up any rights. Those employees who accepted the agreement could later argue that the non-charge filing provisions are unenforceable and possibly keep the money paid to them.

Thus, under the current state of the law, employers operating with the Sixth Circuit may continue to offer separation/severance agreements to separating employees containing promises not to file EEOC charges without thereby engaging in retaliation under the federal anti-discrimination laws. Employers operating in other jurisdictions may or may not be able to do so. Also, in most jurisdictions, it is permissible to have employees agree to forego any personal legal relief stemming from the filing of an EEOC charge.

Given the closeness of the 2-1 decision in the Sundance case, employers in the Sixth Circuit should stay abreast of further legal developments on this issue. Also, the U.S. Supreme Court may later be called upon to resolve the split among the courts on this issue.

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