Nov. 20, 2015 Severance Agreements - Do's and Don'ts For Employers

Law360, New York (November 20, 2015, 11:36 AM ET) --

“Breaking up is hard to do.” This is as true with romantic relationships as it is when an employer wants to gracefully extricate a problem employee. Scenario: employer decides to terminate an employee and he/she agrees to sign a severance agreement in exchange for an extra payout. All is well until employee sues employer for discrimination, claiming some or all of the severance agreement was unenforceable. Or, a government agency shows up to audit the employer’s documents and fines employer for using severance agreements that curb the ability to report wrongdoing to that agency. Scarier still, an employer is sued in federal court for violating Title VII based solely on language used in employee agreements. In light of increased scrutiny by government agencies and mixed federal case law, these are all possibilities for employers who do not take a hard look at severance agreements. This article discusses recent attention that government agencies have focused on employer-employee agreements, and provides suggested best practices for an employer to withstand scrutiny by those agencies.  

Recent SEC Enforcement of Overly Broad Confidentiality Provisions

The U.S. Securities and Exchange Commission has recently taken an interest in confidentiality provisions imposed by employers. The SEC brought an enforcement action against KBR Inc. for requiring witnesses in internal investigations to agree not to disclose the subject matter of the interview without prior authorization of the legal department. The SEC alleged that this practice violated 17 C.F.R. § 240.21F-17(a), which prohibits “tak[ing] any action to impede an individual from communicating directly with [SEC] staff about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement ...”

Notably, there were no actual instances where a KBR employee was prevented from speaking with the SEC or where KBR took action to enforce this clause. However, the SEC asserted that this provision undermined the purpose of the law, which was to encourage individuals to report to the SEC. KBR agreed to cease and desist from committing future violations and to pay a $130,000 penalty in April 2015.[1] In the cease and desist order, the SEC approved a clause for future agreements that stated: “nothing in this Confidentiality Statement prohibits me from reporting possible violations of federal law or regulation to any government agency or entity … or making other disclosures that are protected under the whistleblower provisions of federal law or regulation,” the employee does not need prior authorization of the legal department to make this disclosure, and the employee need not notify the company of the disclosure.[2]

The EEOC’s Enforcement Position and Recent Lawsuits

The Equal Employment Opportunity Commission has recently decided to focus on employer policies that “discourage” individuals from exercising their rights. Specifically, the EEOC identified “preserving access to the legal system” as a “National Priority” in its Strategic Enforcement Plan for Fiscal Years 2013-2016. It warned: “The EEOC will also target policies and practices that discourage or prohibit individuals from exercising their rights under employment discrimination statutes, or which impeded the EEOC’s investigative or enforcement efforts. These policies or practices include ... overly broad waivers, settlement provisions that prohibit filing charges with the EEOC or providing information to assist in the investigation or prosecution of claims of unlawful discrimination ...”[3]

The EEOC has sought to enforce this plan in federal court and filed suits against employers with overly broad agreements. In January 2014, the EEOC brought suit against CVS, alleging that CVS resisted employees’ rights under Title VII of the Civil Rights Act of 1964 by using confidentiality, non-disparagement and general release provisions in its severance agreements that did not include any exception for participation in EEOC proceedings. The district court granted summary judgment to CVS on procedural grounds, finding that the EEOC must first seek conciliation with CVS. However, the court opined in a footnote that Title VII requires “some retaliatory or discriminatory act,” signaling that this claim would fail on the merits as well.[4]

While its suit against CVS was unsuccessful, the EEOC had better luck in Florida district court. The EEOC filed suit against Doherty Enterprises Inc. in September 2014 for requiring employees to sign an agreement stating that all employment-related claims would be submitted to arbitration, with no exception for filing EEOC claims. The federal judge denied Doherty’s motion to dismiss, expressly rejecting the CVS court’s reasoning. The judge found that that the EEOC did not have to seek conciliation before bringing suit and that a Title VII claim for resistance of employee rights is not limited to cases involving an unlawful employment practice.[5] Thus, the EEOC’s suit against Doherty, based solely on the content of its agreements with employees, will go forward. In an EEOC press release following the decision, EEOC Regional Attorney Robert E. Weisberg stated that the “court's order recognizes EEOC's critical role in eradicating employment discrimination … [and] Title VII gives the agency the authority to take immediate action to challenge the use of these types of overly broad arbitration agreements.”[6]

Recommended Best Practices for Severance Agreements

In light of increased attention by the SEC and EEOC regarding employer-employee agreements, it is vital that all severance agreements containing a broad general release or a confidentiality provision include a savings clause permitting the employee to bring administrative proceedings and report potential violations of law to government agencies. Additionally, many agreements include a clause stating that the individual will not voluntarily participate in other litigation or claims against the company. A savings clause must also be included in this circumstance to ensure individuals are not unduly restricted from participating in administrative proceedings brought by other employees. If there are multiple such clauses spread throughout the agreement, consider a catch-all provision that will cover all instances in the agreement and ensure none are inadvertently omitted.

A sample savings clause for severance agreements, which incorporates the concerns raised by the SEC and EEOC, is as follows:

This agreement does not limit [employee’s] ability to bring an administrative charge with the Equal Employment Opportunity Commission,[7] but [employee] expressly waives and releases any right to recover any type of personal relief from the [employer], including monetary damages or reinstatement, in any administrative action or proceeding, whether state or federal, and whether brought by [employee] or on [employee’s] behalf by an administrative agency, related in any way to the matters released herein.[8] Furthermore, nothing in this Agreement prohibits [employee] from reporting possible violations of federal law or regulation to any government agency or entity, including but not limited to the Equal Employment Opportunity Commission, the California Department of Fair Employment and Housing, Department of Justice, the Securities and Exchange Commission, the Congress, and any agency Inspector General,[9] or making other disclosures that are protected under the whistleblower provisions of law. [Employee] does not need prior authorization of the [Legal Department] to make any such reports or disclosures and is not required to notify the company that he or she has made such reports or disclosures.
 

To the extent you are entering into a settlement agreement with a current employee, beware of Section 7 of the National Labor Relations Act, even if employees are not unionized. Section 7 states that employers cannot restrict an employee’s ability to discuss working conditions with other employees. Thus, any confidentiality restrictions should avoid overly broad language and specifically carve out these rights.

Finally, include a severability clause in all severance agreements stating that any clause found by a court to be unenforceable will be deemed deleted from the agreement, and the remaining provisions will be valid and enforceable. This will help to ensure the continuing validity of the severance agreement even if the former employee later sues, claiming a particular provision is invalid. 

While the recent interest taken by government agencies in employer-employee agreements can be concerning for employers seeking to amicably end an employee relationship, the proper use of the savings clause described above can ensure that “breakups” with employees go smoothly.


Jennifer Fontaine is an associate in Paul Plevin's San Diego, California, office.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.


[1] Order Instituting Cease-And-Desist Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934, Making Findings, and Imposing a Cease-And-Desist Order (April 1, 2015), available at http://www.sec.gov/litigation/admin/2015/34-74619.pdf
 

[2] Id.
 

[3] U.S. Equal Employment Opportunity Commission, Strategic Enforcement Plan (FY 2013-2016), available at http://www.eeoc.gov/eeoc/plan/sep.cfm (emphasis added).
 

[4] Equal Employment Opportunity Commission v. CVS Pharmacy, Inc., 70 F. Supp. 3d 937 (N.D. Ill. 2014).
 

[5] Equal Employment Opportunity Comm'n v. Doherty Enterprises, Inc., No. 14-81184-CIV, 2015 WL 5118067, at *5 (S.D. Fla. Sept. 1, 2015).
 

[6] U.S. Equal Employment Opportunity Commission, Press Release 9-2-15, available at http://www.eeoc.gov/eeoc/newsroom/release/9-2-15.cfm
 

[7] Make sure to include the name of the applicable agency in your state that is charged with enforcing state antidiscrimination laws.
 

[8] An important exception to the savings clause obligation is that employers may require an employee to waive the right to recover personal relief in any administrative action. See EEOC v. Cosmair, Inc., 821 F.2d 1085 (5th Cir. 1987) (an agreement to waive the right to file a charge is void, but the waiver of the employee’s right to file suit and recover thereon or to recover in a suit brought by the EEOC on his or her behalf is valid); E.E.O.C. v. Waffle House, Inc., 534 U.S. 279, 304 (2002) (citing Cosmair for same principle); EEOC Enforcement Guidance on Non-Waivable Employee Rights under EEOC Enforced Statutes (Apr. 10, 1997), available at http://www.eeoc.gov/policy/docs/waiver.html (recognizing that a valid waiver or settlement agreement precludes the EEOC from recovering victim-specific relief for an employee).
 

[9] Again, include any applicable state agencies charged with enforcing state antidiscrimination laws.