Employers often include covenants not to sue in severance agreements to prevent their employees from filing charges or suits. Covenants not to sue differ from general releases because they prohibit employees from suing on claims after the execution of the severance agreement, whereas general releases immediately discharge existing claims or rights. Employers should carefully review their covenants not to sue in light of the Equal Employment Opportunity Commission’s (EEOC) recent lawsuit challenging the use of such covenants.
The EEOC is focusing on policies and practices that allegedly discourage or prohibit individuals from exercising their rights under employment discrimination statutes, or impede the EEOC’s investigative or enforcement efforts. As part of its initiative, the EEOC is targeting covenants not to sue in severance agreements.
On May 20, 2013, the EEOC filed a pattern or practice suit against Baker & Taylor, Inc., alleging that it violated Title VII by forcing employees to sign unlawful severance agreements in order to receive severance pay. This suit illustrates the EEOC’s strategy of targeting employers’ policies that have the potential to affect numerous employees. The EEOC alleges that since July 2011, Baker & Taylor required 25 employees to enter into purportedly unlawful and unenforceable severance agreements.
In addition to containing a general release, Baker & Taylor’s severance agreement also prohibits former employees from filing a complaint against Baker & Taylor with any administrative agency in the United States regarding their employment with, or termination from, Baker & Taylor. The severance agreement also prohibits employees from discussing or commenting on their termination in any way that would negatively reflect on the company. The severance agreement does not, however, prohibit employees from responding truthfully to a subpoena or government investigation.
The EEOC alleges that Baker & Taylor’s severance agreement violates employees’ Title VII right to participate and cooperate with the EEOC and Fair Employment Practice Agencies (FEPAs). The EEOC also alleges that such agreements have a chilling effect on the willingness and ability of employees to come forward and assist in EEOC and FEPAs’ investigations. The EEOC believes this chilling effect might hinder EEOC investigations as the agency often relies on employees to alert it of potential discrimination.
Although the EEOC’s suit against Baker & Taylor should prompt employers to review their severance agreements, employers can still obtain strong, effective severance agreements. An employer may include a general release to waive current and pending claims and bar employees from filing a claim related to events that occurred up to the time of the execution of the severance agreement. However, an employer may not prohibit an employee from filing charges that relate to future events. Nor can an employer prevent an employee from participating in administrative agency investigations or filing claims with administrative agencies based on future events. A well drafted severance agreement also must not contain an overbroad non-disparagement provision to withstand the EEOC’s scrutiny. The EEOC’s position on covenants not to sue is not controlling and has not recently been tested by the courts. However, courts often enforce general releases unrelated to future events contained in severance agreements.
The EEOC’s initiative and lawsuit serve as poignant reminders that the EEOC is actively examining employers’ policies and procedures related to severance agreements and other areas of employment law.