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.

Factual Summary

Tender Me This: Sixth Circuit Holds Employees Don’t Have to Give Severance Money Back before Filing Title VII or EPA LawsuitThe 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.

Takeaways

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.

The Past Really Is Dead: Ninth Circuit Shuts Door on Use of Past Salary as “Factor Other Than Sex” Under the Equal Pay ActIn setting a new employee’s pay, what do you consider? Past experience? Check. Education? Check. Salary at the last job? Not so fast. In a recent Ninth Circuit decision, the court framed the question as follows:

Can an employer justify a wage differential between male and female employees by relying on prior salary?

The court said not just no, but heck no and overturned a 1982 case that suggested otherwise.

The Facts

In 2009, the Fresno County Office of Education hired Aileen Rizo as a math consultant. In setting her salary, Fresno County applied Standard Operating Procedure 1440 (SOP 1440) that dictated a new hire’s salary was set by adding 5 percent to that person’s prior salary, and then using that amount to put him or her in the salary schedule. This is how Fresno County set everyone’s salary—regardless of race or sex or anything else.

A few years later, Ms. Rizo was talking with her coworkers and found that her male colleagues hired after she was hired were making more money. Suffice it to say, she was not happy about that and filed a complaint. Fresno County responded that they were setting everyone’s salary the same way and, in fact, this process placed more women in higher compensation steps than men. Still not happy, Ms. Rizo filed a lawsuit under a number of state and federal statutes, including the federal Equal Pay Act (EPA).

The Law

The EPA provides that no employer shall discriminate between employees on the basis of sex

“by paying wages to employees . . . at a rate less than the rate at which he pays wages to employees of the opposite sex . . . for equal work on jobs the performance of which requires equal skill, effort, and responsibility, and which are performed under similar working conditions. . . .”

Unlike Title VII, the EPA does not require a plaintiff to show that the employer intended to discriminate. Instead, the plaintiff need only show that she is doing the same job as a male employee (and she only needs to have one male comparator) but is paid less. If the plaintiff can establish those facts (and that is not always easy), the employer must prove one of four affirmative defenses. In this case, the relevant affirmative defense was that the pay differential was “based on any factor other than sex.”

Back to Fresno and the Ninth Circuit

Fresno County conceded that it paid Rizo less than her male counterparts. However, it moved for summary judgment noting that SOP 1440’s reliance on an employee’s prior salary was a “factor other than sex” under the EPA. The district court denied Fresno County’s motion but certified it for immediate appeal.

A three judge panel vacated the district court’s decision. The panel held that a prior Ninth Circuit decision, Kouba v. Allstate Insurance Co., had settled the issue back in 1982. Under Kouba, an employer could rely on prior salary as a “factor other than sex.” Ms. Rizo did not take that decision lying down and asked for the entire Ninth Circuit to weigh in.

In an en banc decision, the Ninth Circuit did so, indicating its intent to “clarify the law, including the vitality and effect of Kouba.” It certainly clarified its position, holding that:

“Prior salary alone or in combination with other factors cannot justify a wage differential. To hold otherwise—to allow employers to capitalize on the persistence of the wage gap and perpetuate that gap ad infinitum—would be contrary to the text and history of the Equal Pay Act, and would vitiate the very purpose for which the Act stands.”

That is pretty clear.

Now What?

Some jurisdictions have already prohibited asking about prior salary in an effort to close the gender wage gap and this is more evidence that relying on prior salary is not viewed as gender neutral.

  • Employers in the Ninth Circuit (which covers the entire West Coast) should take any consideration of prior salary out of their matrix. Stick to experience (years and otherwise), education, skills, etc.
  • Employers in other areas of the country should check their state laws and federal circuits to find out if they can rely on prior salary.
  • Finally, employers (with the assistance of counsel) should regularly look at pay data to compare long-term employees versus more recent hires to see if you have a potential problem.

If you have a male employee making more money than a female counterpart, be careful. That is the kind of thing that gets you a lawsuit.

Pay the Man! (Or Woman)—But Differently? 11th Circuit Reinstates Sex Discrimination Pay ClaimWhen you promote someone into a position, do you have to pay him what you paid his predecessor? As with so many things – it depends. Can you pay less if the promotee has less experience and a lower prior salary than the predecessor? Maybe. However, if the new promotee is a female replacing a male make sure you can defend any pay differential under both the Equal Pay Act (EPA) and Title VII. In Bowen v. Manheim Remarketing, the Eleventh Circuit examines just such a pay disparity and concludes that a reasonable jury could find that it was based on sex.

Background

Qunesha Bowen worked for Manheim for three years as a car detailer. In 2005, Manheim promoted her to arbitration manager and gave her a hefty raise — about $6,000 (around 23 percent) —which was about $14,000 below her male predecessor’s salary. She did not catch up to her predecessor’s salary for six years. When she learned of the disparity, she sued for sex discrimination under the EPA and Title VII.

Manheim moved for summary judgment explaining that the pay differential between Bowen and her predecessor was not based on sex. In establishing both its affirmative defense under the EPA and its legitimate nondiscriminatory reason under Title VII, Manheim argued that the predecessor’s longer experience with the company (six years versus Bowen’s three years), prior management and mechanical experience (which Bowen lacked), and his $46,350 salary prior to promotion (as compared to Bowen’s $26,000) justified the pay differential. For her part, Bowen offered evidence that her performance was good, her pay was at the bottom of the pay range and, importantly, testimony from a company Human Resources manager who had reviewed company pay records and concluded that female employees were paid less than their male counterparts. The HR manager also reported conversations she had with Bowen’s supervisors (who set her pay) that suggested a bias against women. For example, she reported that Bowen’s general manager said he would be a “laughing stock” if he hired a female assistant general manager and he would never have a woman work as a mechanic.

The District Court granted summary judgment in favor of Manheim, finding that the company showed the pay disparity was based on “factors other than sex” and no reasonable jury could conclude it was sex discrimination.

Eleventh Circuit Reversal

In a fairly succinct opinion, the Eleventh Circuit reversed, finding sufficient evidence to let a jury decide whether Bowen’s salary was lower than her predecessor’s because of her sex.  The court noted that not only was Bowen’s salary significantly lower than her predecessor’s, it was significantly lower than the salary range midpoint:

Manheim did not simply pay Bowen’s male predecessor a much greater starting salary; it set the predecessor’s salary near the midpoint of the compensation range for arbitration managers but consistently set Bowen’s salary at the bottom of the range. A jury could find that prior salary and prior experience alone do not explain Manheim’s disparate approach to Bowen’s salary over time. Once Bowen established herself as an effective arbitration manager, prior salary and prior experience would not seem to justify treating her different than the predecessor.

The court also noted that in proving its affirmative defense under the EPA, Manheim had to prove that none of its decision-makers were influenced by sex bias and the HR manager’s testimony provided evidence that Bowen’s managers took sex into account in personnel matters. The court further found that Bowen offered sufficient evidence from which a jury could find that sex was “a motivating factor” for the pay disparity.

Takeaways

As always, in reviewing an order on summary judgment, we have to remember that the court must consider the facts in the light most favorable to the plaintiff. We don’t know what the disputed facts will show and what the jury will conclude. With that said, here are some things that this decision made me think about:

  • Keep an eye on your pay ranges. If you have established pay ranges, be sure to compare everyone in a particular job or department. Make sure you can explain why someone is at the bottom of the range while their coworkers are at the middle.
  • Keep a close eye on pay comparators – particularly if comparators are different sexes. While Title VII requires a plaintiff to establish intentional discrimination, under the EPA a plaintiff only needs to establish a pay disparity with one male comparator and then the employer bears the burden to prove that the disparity is based on a factor other than sex and the decision-makers were not influenced by sex. The Eleventh Circuit makes it clear in this decision that a decision-maker’s comments about any personnel matter can be relevant.
  • Don’t discount a predecessor as a comparator. In this case, Bowen pointed not to a coworker but to a predecessor as her comparator, and the court said that was fine. If there are good reasons to pay a new person less than a predecessor, you can do it, but be careful. For example, if you pay Jane less than her predecessor, Bob, because he had been doing the job for three years, make sure that when Jane hits her three-year anniversary her pay looks a lot like Bob’s did (or that you have concrete reasons that it doesn’t—like her documented performance).
  • If Human Resources (with or without legal counsel) is going to look at pay differentials, think about how you will use or react to any unpleasant conclusions. If the audit reflects that women are paid less than men, take concrete steps to address the differences and do it quickly. You may want to perform such audits with legal counsel so that the results can be privileged.
  • Don’t forget that pay claims are a gift that keeps giving. This case was filed in 2015 – almost 10 years after Bowen’s promotion. While she can only go back a couple of years on her backpay, she was still able to challenge the 2005 decision because every paycheck renewed her statute of limitations (per the Ledbetter Fair Pay Act).

Pay disparities can crop up any time, and you have to be vigilant. Sometimes you have to pay someone more for a job than the predecessor because they won’t take it otherwise. On the other hand, sometimes you can replace someone with a less expensive employee. If either happens, make sure you have thought about how you can defend a discrimination claim.