The Sixth Circuit Court of Appeals, whose jurisdiction includes Michigan, ruled against a machine parts manufacturer last August when it overturned a lower court decision that held an employee’s severance agreement barred her lawsuit alleging Title VII discrimination and violation of the Equal Pay Act.
Last Monday the U.S. Supreme Court (SCOTUS) upheld the Sixth Circuit Court of Appeals decision in this case by turning away the Defendant’s petition for review. This action affirmed the Sixth Circuit’s holding that a contract’s rule, called the tender back doctrine, which states that “an innocent party to a contract can void the deal if it was tainted by duress, mistakes, or fraud as long as any benefits the person received are tendered back first within a reasonable time frame.” If the person waits too long the agreement is deemed to be ratified.
As many who have used severance agreements may know, there is already plenty of “exits” built into most properly drafted severance agreements. As compelled by the Age Discrimination in Employment Act (ADEA), to be enforceable, a severance agreement must permit an employee 21 days to review the agreement, think about it, and even have legal counsel opine on it. Additionally, most severance agreements also contain a seven-day revocation or withdrawal clause whereby even after the employee signs the agreement, they have the right to nullify the agreement. What is the employer looking for in this agreement exchange? The answer, among other terms, is mostly a liability release by the employee stating no claims of adverse employment action will be brought against the employer. Consideration for the release of claims in the severance package that is offered can be negotiated by both parties if necessary.
As reported, a lot of the above did not happen in the case of Midwest Machining Inc. v. Jena McClellan when her termination from employment at the company for poor performance and attendance occured. The Plaintiff, Ms. McClellan, who was pregnant at the time, was offered $4,000 severance in exchange for her agreement to waive all legal claims against the company. She was not afforded much time for review and consideration of the agreement when the company terminated her employment.
Subsequently, she filed a pregnancy discrimination charge against the company with the Equal Employment Opportunity Commission (EEOC) and then brought her lawsuit. She also sued for pay discrimination alleging that while employed she was paid less than her male counterparts.
When the lawsuit was brought, the company’s attorney informed the Plaintiff’s attorney about the severance agreement. The Plaintiff then sent the employer a check for $4,000 ostensibly returning the severance benefit to the employer. The employer refused to accept the money and stated there was no legal basis for Plaintiff to “renege on the deal.” The discrimination complaints were brought before the severance money was tendered back in this case.
The lower Court held that the tender back doctrine did not apply and ruled for the employer. On appeal the Sixth Circuit held that Title VII and the Equal Pay Act were not subject to the tender-back doctrine. Their reasoning for not strictly applying this rule in the case of discrimination and pay claims is employees are often forced to take these severance deals because they are economically vulnerable. In this case, the employer was found to have pushed the severance deal on her and did not give her proper time and resources to review and consider the agreement.
Pursuant to another SCOTUS case that the Sixth Circuit referred to for its conclusion, SCOTUS said it “ is more consistent with the objective of the act to hold… that… the sum paid shall be deducted from any award determined to be due to the injured employee.”
Midwest Machining Inc. v. Jena McClellan was sent back to the lower court for a hearing on the Plaintiff’s discrimination claims.
In refusing to review this case, SCOTUS has held Title VII and the Equal Pay Act overrides the common law contract rules (tender back doctrine) if the employer does not allow for an employee’s careful consideration of the severance agreement before signing.
This ruling reminds employers that in order for severance agreements to comply with the Age Discrimination in Employment Act (ADEA) and other laws they must not only include review and revocation periods, but the employer must allow the employee time to carefully review the agreement before signing. It is recommended when executing a severance agreement to have a witness in the meeting and clearly recommend the employee take time to review the agreement and discuss it with family and legal counsel before signing it. Lastly, employers should have qualified legal counsel develop and review severance agreements to ensure they include all necessary employee rights and are implemented in the appropriate way.
Source: Legal Waiver Doesn’t Bar Pregnancy Bias Suit 6th Circ. Says. LAW 360 by Vin Gurrieri 8/16/2018; High Court Passes on Revived Pay Bias, Pregnancy Suit. LAW 360 by Adam Lidgett 6/10/2019