In a February 2023 Iowa Court of Appeals case, David Allen Schmitz (Schmitz) sued the Nevada Community School District and Dr. Steve Gray, the Superintendent, alleging he was terminated for being a whistleblower. His whistleblowing claim was originally dismissed by the District Court and this dismissal was affirmed by the Iowa Court of Appeals.

The core of this case goes to the issue of the validity of the separation (or severance) agreement Schmitz signed, and whether or not the claim waiver in that separation agreement defeated a whistleblower claim.

About the Case

Schmitz first began working for the school district in July 2014 as a food service director. While Schmitz had inherited a deficit in the dietary services budget, during the term of his employment budget issues continued, and Schmitz was counseled on budget as well as general employee morale. Anonymous allegations were made regarding potential food theft in the department with the state auditor’s office eventually concluding that no final resolution could be reached as department records had not been properly maintained.

Schmitz was ultimately terminated from employment, signing a separation agreement in March 2020. Subsequently, in October 2020, Schmitz filed a petition against the defendants alleging wrongful termination in violation of public policy, violation of the whistleblower statute as well as a defamation claim. All claims were subsequently dismissed in 2022 via a summary judgment motion.

Separation Agreements

Schmitz’s argument regarding why the separation agreement did not serve to prevent him from bringing any type of lawsuit was that “his separation agreement is voidable because he executed it under economic duress.” His claim relied on other cases that the agreement is voidable if there is an improper threat to the person entering the contract.

The specifics of the Age Discrimination and Employment Act w require a 21-day notice period before any severance agreement must be signed, as well as a 7-day rescission. These standards were originally created to avoid the questions of threat or undue influence. Schmitz alleged while he had adequate time that because he had unequal bargaining power with the school district that economic duress should be presumed. 

If taken to its logical conclusion, such a legal argument could invalidate all severance agreements as the employer might be viewed as generally having greater bargaining power than the employee. Mitigating circumstances undercutting Schmitz’s claim were that he acknowledged as part of the lawsuit that he read and understood the contract, did not seek to negotiate the terms, and returned the contract before its signing deadline. Additionally, although it allowed rescission, he did not rescind the contract at any point. The fact that appropriate time was given to consider the contract was a factor in the Court’s decision with the Court specifically stating, “… we caution parties against providing minimal opportunity to consider an agreement and seek legal counsel…” The Court further found that those circumstances did not exist in this case and adequate time was given.

Whistleblowing

While addressing the whistleblower issues, the Court does note that the school district did not have any reason to believe that the alleged whistleblowing activity, specifically communication with the Department of Education, was anything other than standard administrative processes, noting that to have a whistleblower claim you must connect the “whistleblowing” with a retaliatory action as “…this nexus is an essential element to the whistleblower statute…” The Court found that Schmitz did not establish all of the elements of economic duress and that additionally his acceptance of the benefits of the contract, specifically the severance pay, further supported his voluntary acceptance of the contract. 

The Big Picture

Employers frequently use separation (severance) agreements with an offer of additional pay to offset the potential of an employee suing or engaging in other activities which would be damaging to the employer. As noted above, providing appropriate time to consider the severance agreement and make an informed decision is critical to showing that the severance agreement was voluntarily accepted thereby maintaining its integrity. The standard time of 21 days (or longer if it is more than one person being terminated)¹ is an excellent benchmark for an employer to use in order to show that a reasonable consideration period was granted.

Severance agreements should also state that the employee has the right to consult an attorney as well as include the rescission clause to give the employer the most options in enforcing the agreement. While in any termination action, economic duress could potentially be argued, it is important to note that the alternative offer here, which was two weeks’ notice and a hearing regarding termination, was considered by the Court to be appropriate and reasonable. The Court specifically indicated that terminating an employee with two weeks’ notice is by no means an inappropriate act. Extrapolating from the Court’s statements, if the termination is a standard termination without “any strings attached”, it would not normally form the basis of economic duress.

[1] As required under the Older Workers Benefit Protection Act (OWBPA), applicable to employees age 40 or older.