In a decision that could have employers rethinking how they offer employees a severance agreement, in McClellan v. Midwest Machining, Inc. the Sixth Circuit held that former employees seeking to void severance agreements do not have to give the severance pay back before filing suit under Title VII or the Equal Pay Act.
The facts of this case help give this legal holding some flavor. In late August 2015, Jena McClellan informed her employer, Midwest Machining, Inc., that she was pregnant. After doing so, McClellan says her supervisor started making negative comments about her pregnancy and was annoyed about the pre-natal doctor’s appointments. About three months later, Midwest Machining terminated her. The decision does not provide the articulated reason for termination.
On the date of her termination, the company’s president called McClellan into his office, gave her a severance agreement, and said that she “needed to sign then if [she] wanted any severance.” The door was shut to his office, and McClellan said she did not feel free to leave. The two reviewed the agreement together, but McClellan says the president did so very quickly, did not ensure that she understood the agreement, and used a “raised” tone during the entire meeting.
McClellan testified that she felt pressured and bullied, and she signed the agreement without the benefit of a lawyer’s counsel. The agreement waived all of her claims. McClellan later testified that she did not understand that the claims she was waiving included discrimination claims; she thought it was only claims for unpaid wages and benefits. Midwest Machining paid McClellan $4,000 in exchange for signing the agreement, and she accepted the money.
Summary Judgment Initially Granted to Employer
McClellan filed an EEOC charge claiming Midwest Machining discriminated against her, and she received her right-to-sue letter. On November 6, 2016, about a year after her termination, she finally met with an attorney, who immediately filed a lawsuit alleging pregnancy discrimination in violation of the Pregnancy Discrimination Act (which is part of Title VII) and pay discrimination in violation of the Equal Pay Act (EPA), among other claims.
Midwest Machining’s counsel informed McClellan’s lawyer of the release in the severance agreement. McClellan, at the direction of her lawyer, then sent a letter (about three weeks after the suit was filed) stating that she was rescinding the severance agreement. She enclosed a $4,000 check, the amount of the severance.
Midwest Machining responded by returning the check to McClellan, stating there was no legal basis for her to rescind the severance agreement. A couple of months later, Midwest Machining moved for summary judgment because McClellan did not “tender back” the $4,000 before she actually filed suit. After some legal wrangling, the trial court eventually agreed, relying on the common law “tender-back doctrine,” which provides that “even if a party signs a release under duress,” she must return the severance monies before she can file a lawsuit. The district court held that even if McClellan signed the severance agreement under duress (a disputed issue of fact), she did not “tender back” the severance money before she filed suit. Therefore, the district court held that she had ratified the contract waiving her claims and her lawsuit had to be dismissed.
Sixth Circuit Reverses
McClellan appealed to the Sixth Circuit, which reversed, holding that a plaintiff “is not required” to give back the severance monies before bringing claims for violations of Title VII or the EPA. The Sixth Circuit noted its concern – as expressed by other courts – that the employees would have spent their severance money already and would not be able to pay it back.
“[W]e worry that requiring recently-discharged employees to return their severance before they can bring claims under Title VII and the EPA would serve only to protect malfeasant employers at the expense of employees’ statutory protections at the very time that those employees are most economically vulnerable.”
As opposed to being a bar to suit, under the Sixth Circuit’s holding, the amount of the severance is to be deducted from any judgment awarded to a plaintiff-employee. Other federal circuits have similar holdings involving other federal employment statutes. The Sixth Circuit sent the case back to the district court for further proceedings. A dissent was filed, arguing that the case should have been remanded for further fact finding on the “tender-back” doctrine and ratification of the contract.
Employers should not overreact to this decision as it does not mean that severance agreements are a waste of money. This decision only addresses what happens when an employee claims duress and seeks to void the severance agreement. The key is to offer severance in a way to avoid a claim of duress.
Perhaps the biggest takeaway from this decision is don’t pressure (or look like you are pressuring) separating employees to sign severance agreements. Make sure that nothing about the circumstances surrounding the severance offer could later be used to show that the employee was under duress, fraudulently induced to sign the agreement, or any other act that would give the employee an argument to claim the contract was voidable.
Assuming McClellan’s story is true – the president of a company tells a departing employee that she has to sign the agreement that day if she wants to receive her severance – what can we learn?
- Remember your goal is to get the employee to sign the agreement (and release any claims). The situation will be uncomfortable because the employee is losing a job, but be nice. If the company representative is intimidating or could otherwise be characterized as a bully—maybe use someone else to deliver the message. It is usually best to have two people (so if the employee later accuses someone of bad behavior, the company has a witness).
- Give the employee a reasonable amount of time to review the agreement. If the employee is age 40 or older, follow the Older Worker’s Benefits Protection Act requirements and give the employee at least 21 days to review the agreement and seven days to revoke after signing. If the employee is not yet age 40, then give a reasonable time—say five days. Keep in mind that what is reasonable can change based on the circumstances. Five days on Monday gives the employee a week to consult a lawyer. Five days on Friday before a holiday weekend may not be a reasonable amount of time.
- Allow the employee to take the agreement home to review. Think of it from the employee’s perspective—would you feel pressured or fully understand an agreement that gives up your rights while the company president is standing over your shoulder?
- Encourage the employee to consult a lawyer as needed.
Even if you follow all of these practices, if an employee claims she was pressured to sign a severance agreement under duress and argues that the contract is voidable, understand the employee does not have to give the severance money back before filing a Title VII or EPA lawsuit, at least in the Sixth Circuit.