United States: Having Your Cake And Eating It Too: Sixth Circuit Rules That Employees Need Not Return Severance Pay Before Suing

Seyfarth Synopsis: In a recent decision, the U.S. Court of Appeals for the Sixth Circuit ruled that former employees need not return severance pay before filing a lawsuit against an employer, when the employee alleges the severance agreement should be rescinded and is bringing discrimination claims under Title VII or the Equal Pay Act. This decision means that notwithstanding the fact that the employee signed a severance agreement and accepted severance pay upon leaving the company, the employee may still be able to sue and keep the severance money—if the employee claims she was coerced into signing the agreement. Given this, it is important for employers to review their severance practices, in order to ensure the process is fair, help protect against claims of coercion, and safeguard the company during the process.

When employers enter into severance agreements with departing employees, they do so with the expectation that the agreement will resolve all legal claims between the two parties. In exchange for additional compensation, the employee promises not to sue the company, and the two parties part ways. Most of the time this works, and the severance agreement is the end of it.

However, sometimes employees have second thoughts after signing a severance agreement. In such circumstances, employees argue that the severance agreement should be set aside, often alleging that they were coerced into signing, did not know what was contained in the agreement, and did not "knowingly and voluntarily" execute the contract. And if the employee can assert persuasive enough facts surrounding the presentation and execution of the agreement, sometimes employees can actually rescind severance agreements.

Notwithstanding this, at common law there was a legal doctrine that helped to preclude such attempts—the common law tender-back doctrine. That doctrine held that before someone can rescind a contract and sue, that person must "tender-back" (i.e., return) the money they received under the contract. In other words, if an employee claimed that she was coerced into signing a severance agreement, she would be required to return the severance payment before she could sue her former employer. Recently, however, the Sixth Circuit held that the tender-back doctrine does not apply to claims brought under Title VII or the Equal Pay Act, and the Court held that a former employee need not return her severance pay before filing suit.

Background on the Case

In McClellan v. Midwest Machining, Inc., the plaintiff brought a pregnancy discrimination claim under Title VII and alleged that the employer maintained a "sex-segregated workplace." In addition, the plaintiff claimed that the company paid men substantially more than their female counterparts, asserting a claim under the Equal Pay Act.

Faced with this lawsuit, the employer informed the plaintiff's attorney that she had signed a severance agreement when she was terminated, which released "any and all past, current and future claims" she had against the company in exchange for payment of $4,000. Rather than concede that the severance agreement applied, the plaintiff claimed that she had entered into the agreement under duress and without knowledge that she was releasing her discrimination claim, alleging that the company's president pressured her into signing, rushed her through the agreement, and used a "raised" tone of voice during the meeting. The plaintiff then attempted to return the $4,000 to the company, but the employer refused the check, stating that "[t]here is no legal basis for rescinding the severance agreement."

Ultimately, the district court allowed limited discovery on whether the plaintiff had "knowingly and voluntarily executed the agreement," and the court asked for briefing on application of the tender-back doctrine. The employer subsequently moved for summary judgment, alleging the severance agreement precluded the plaintiff's lawsuit and that the plaintiff could not proceed with the case because she did not tender back the consideration prior to filing suit.

The district court held that there were fact issues as to whether the plaintiff had "knowingly" and "voluntarily" executed the severance agreement. However, the court agreed with the employer that the tender-back doctrine precluded the plaintiff's claims, and it dismissed the case. The plaintiff appealed to the Sixth Circuit.

The Sixth Circuit's Decision

A divided panel of the Sixth Circuit held that the common law tender-back doctrine does not apply to claims brought under Title VII or the Equal Pay Act. The Sixth Circuit expressed concern that the tender-back doctrine would limit Title VII and Equal Pay Act claims and would frustrate the "remedial" nature of both statutes. The Court stated:

Accordingly, at least in the Sixth Circuit, employees who have previously signed a severance agreement need not return their severance pay before filing Title VII or Equal Pay Act claims. Instead, the Sixth Circuit stated that any severance pay previously paid to the employee could be deducted from any ultimate award in the lawsuit.

Takeaways

The Sixth Circuit's decision is unwelcome news to employers because it removes a deterrent to suits by former employees who previously signed severance agreements. However, it is important to remember that the Sixth Circuit's decision only relates to whether employees must return severance pay; it does not address whether employees can disclaim and void the actual severance agreement itself. Whether former employees can successfully do so depends on the circumstances under which the severance agreement was presented and executed.

Accordingly, now is a good time for employers to review their severance agreements and practices, to help avoid allegations similar to those brought in this lawsuit—that the employee was pressured into signing the agreement, rushed through the process, and not given an opportunity to fully understand its terms. Following are some best practices to consider:

• Give the employee time to review any severance agreement, even for younger employees. For employees over 40 years of age, employers must provide a 21-day period to review the agreement and allow the employee to revoke the agreement within 7 days. This is not a requirement for younger employees, but providing the employee with a reasonable time to review (anywhere from a few days to a week) insulates the employer from claims that the employee was coerced into signing.
• Allow the employee to take the severance agreement home with her. This allows the employee ample time to consider the proposal, and talk it over with her family. And an employee will be hard pressed to claim she did not voluntarily enter into the agreement when she took it home, executed it, and then returned it to the company.
• Inform the employee that she may consult an attorney, if she wishes. Although not necessary in every circumstance, encouraging that the employee consult an attorney will help protect the employer against claims of coercion.
• Consider having two managers or supervisors present the severance offer to the departing employee. This provides the company with an additional witness in the event the employee raises issues about the meeting down the road, and it avoids any "he said, she said" scenarios.
• Instruct the manager or supervisor relaying the severance offer to take notes, even if nothing of substance occurred during the meeting. This way, the company will have a record that the meeting occurred and knowledge as to whether any issues were raised during the meeting. If issues were raised, the company can proactively resolve them.

Above all, the goal of any severance offer is to treat the employee fairly and professionally, while at the same time protecting the company and ensuring closure for all sides. In order to accomplish this, it is important to protect the company during the severance process—including when presenting the severance offer to the employee—to limit after-the-fact allegations. And while the Sixth Circuit's McClellan v. Midwest Machining decision injects more uncertainty into severance agreements, with a little proactive planning employers can still ensure that severance agreements accomplish their goals.

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