Many employers have a standard severance agreement that they routinely use with minor modification when terminating an employee either as part of a reduction-in-force or for performance or other reasons. Obviously, the major benefit to the employer of a severance agreement is the elimination of the risk related to legal claims by the departing employee for a reasonable amount of consideration paid to the employee. If an employer believes the severance agreement does not eliminate the risk related to potential legal claims, it has little incentive to enter such an arrangement. The EEOC’s recent aggressive position challenging what most employers would consider standard severance agreement provisions has thrown a monkey wrench into the practice.
Most severance agreements include standard language that derives from a consent decree entered between the EEOC and the Eastman Kodak Company in 2006. The company had used a severance agreement that precluded employees from helping other employees with their EEOC charges. The EEOC understandably took offense to the language and a consent decree was entered in which the company agreed to use certain proscribed language in all future severance agreements. The EEOC blessed language provided that the employee signing the severance agreement was barred from filing a suit, charge or complaint regarding their employment, but explicitly allowed the employee to file a charge with the EEOC or any similar state or local agency so long as the employee waived their right to recover any monetary damages if such a charge was filed. Because this language was blessed by the EEOC it became standard language that many companies routinely include in their severance agreements.
In 2013, the EEOC announced that as part of its new strategic enforcement plan it would focus on “policies or practices that discourage or prohibit individuals from exercising their rights under employment discrimination statutes, or which impede 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…” In keeping with the new strategic enforcement plan, the EEOC brought suit earlier this year against CVS Pharmacy, Inc. claiming that the severance agreement used by the company (which is modeled after the Kodak consent decree) violates Title VII because it is overly broad and misleading. The EEOC claims that the language in the agreement violates Title VII because it interferes with an employee’s right to file charges and communicate and participate in EEOC investigations. The EEOC identified the following provisions in the severance agreement as offensive: (1) a cooperation clause, (2) a non-disparagement clause, (3) a nondisclosure of confidential information clause, (4) a general release of claims, (5) a covenant not to sue and (6) a breach clause that allows for employer injunction relief and attorneys’ fees. It is the EEOC’s position that the use of the severance agreement containing these provisions constitutes a pattern and practice of denying employees the full exercise of their Title VII rights.
Should Your Standard Severance Agreement Be Revised in Light of the EEOC’s Position?
While it remains to be seen how this litigation will play out, it is an important reminder that severance agreements are not boilerplate documents to be used without some review and consideration. The EEOC’s current position should be carefully considered when using the company’s standard severance agreement, particularly if the agreement is going to be used on a broad class of employees during a reduction-in-force. Given the EEOC’s current enforcement activity, it is worth considering whether additional sentences should be added emphasizing the employee’s right to exercise Title VII rights by communicating with the EEOC during an investigation or whether the non-disparagement clause and cooperation clauses are valuable enough to the company to keep in the agreement, if those clauses heighten risk that the agreement will be challenged by the EEOC.
Severance agreements are a standard part of an employer’s legal risk management process. However, the EEOC’s current enforcement activity warrants attention and severance agreements should not be used without some review of the agreement for red flags that make it susceptible to challenge.