When Settlement Isn’t the End: the EEOC’s War on Certainty in Severance Agreements

In Business Law, Litigation by Coolidge Wall

Imagine this scenario faced by many employers with exiting employees: the employer gives the exiting employee the option to contractually waive any future right to sue the employer in exchange for a lump sum, a golden (or silver) parachute. The employee has signed the severance agreement, cashed the check, and that chapter of the company’s life is closed.

Or is it?

Recently, the Equal Employment Opportunity Commission (“EEOC”) has sued national pharmacy chain CVS for provisions CVS included in severance agreements with employees. The EEOC claims that the severance agreements condition severance benefits on a variety of “fine print” clauses that force exiting employees to give up their access to the justice system. See EEOC v. CVS Pharmacy, Inc., No. 1:14-CV-863 (N.D. Ill.)(filed February 7, 2014).

Exactly. Why would an employer pay an employee to leave without neutralizing the potential for future liability?

But the EEOC’s position is that this type of a deal, severance for certainty, is illegal. As Regional Attorney John C. Hendrickson, lead counsel for the EEOC in the case, explained:

“Charges and communication with employees play a critical role in the EEOC’s enforcement process because they inform the agency of employer practices that might violate the law. For this reason, the right to communicate with the EEOC is a right that is protected by federal law. When an employer attempts to limit that communication, the employer effectively is attempting to buy employee silence about potential violations of the law. Put simply, that is a deal that employers cannot lawfully make.”

See https://www.eeoc.gov//eeoc/newsroom/release/. In particular, the EEOC focused on the following types of clauses as chilling employees’ ability to report illegal employer practices in the workplace:

  1. A cooperation clause: where the employee agrees to notify in-house counsel if s/he receives an administrative complaint against the employer;
  2. A non-disparagement clause: where the employee agrees not to make statements against the employer that will harm the employer’s reputation or otherwise disparage the company;
  3. A confidentiality clause: where the employee agrees not to disclose information about the company’s confidential information, which includes personnel information, compensation information, and intra-company staffing/succession plans;
  4. A general release of claims: where the employee agrees to release the employer of all claims, including claims of unlawful discrimination;
  5. Covenant not to sue: where the employee represents that s/he has not filed any claims against the company, whether with a court or an agency (interestingly, the EEOC pointed out language in the severance agreement in which it states that “[n]othing in this paragraph is intended to or shall interfere with the Employee’s right to participate in a proceeding with any appropriate federal, state or local government agency enforcing discrimination laws, nor shall this Agreement prohibit Employee from cooperating with any such agency in its investigation”); and
  6. Attorneys’ fees provision: where the employee agrees to repay the company’s attorneys’ fees if the employee violates the severance agreement.

If these provisions sound familiar, that is because they are staples in the majority of severance agreements.

What makes this pending case so worrisome for employers, and their counsel, is the potentially far-reaching effects of a decision in the EEOC’s favor. Employers need to consider what, if anything, they can do to protect themselves from being the next company’s whose severance agreement ends up in the EEOC’s cross-hairs.

One option would be to omit all of the clauses that the EEOC found offensive. Of course, that comes with a substantial amount of risk. Another option is to broaden any language excluding protected activity, like reporting workplace discrimination to the EEOC, from the actions the employee refrains from taking. That has its own problems, as companies and their counsel will likely struggle to narrowly tailor the exception without eviscerating the entire severance agreement.

The irony is the EEOC may “win” by getting a judgment that prevents one company from enforcing the provisions of its standard severance agreement, only to “lose” by making paying severance benefits less attractive to companies when they let employees go. Currently, companies often pay severance benefits in exchange for certainty. If the certainty is taken away, many companies will lose the economic motivator to provide such benefits. Whether the EEOC v. CVS case will result in a public policy “fail” for employers, employees, protected activity, or all of the above remains to be seen…

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