Writing the Severance Agreement

For years, employers have used severance agreements when discharging employees. 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 often the employee gets a better severance package, perhaps some additional pay or health care coverage.

However, these severance agreements have been challenged in recent court cases, particularly agreements that require employees to waive their right to file an administrative charge with the Equal Employment Opportunity Commission (EEOC) or other government agency. 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.

Illegal and Retaliatory Language

In August 2006, a Maryland federal district court found language in a settlement agreement provision was 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 EEOC v. Ventura Foods, LLC. In this Minnesota 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 claim 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 presented 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 she did not have a case for discrimination but decided that the language in the release—which required agreeing not to file suit as a condition for benefits—was retaliatory and thus 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 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.”

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