August 27, 2014

How to draft an effective employment termination agreement

Posted in Employment Law, Negotiation by Gene Killian |

In New Jersey state court (as opposed to federal court), we have an “offer of judgment” rule that has some punch to it.  You can read the rule here.  If you’re a defendant, here’s how it works.  You file a formal settlement offer with the Court and serve it on the plaintiff, on or before the 20th day before trial.  The plaintiff then has until 10 days before the actual trial date, or 90 days of service of the offer (whichever occurs earlier), to accept. If the plaintiff does not accept, and recovers more than nominal damages but less than 80% of your offer, you can get your attorneys’ fees back.  (But if there’s a no-cause, you don’t get your  fees back. Such is the lobbying power of the plaintiffs’ bar.) This is a nifty rule, since in the American litigation system, with certain exceptions, each side is expected to bear its own litigation expense.

From the defense perspective, this is a good tool to have. The problem is, it doesn’t apply to most employment cases. And, while employment statutes do allow for fee-shifting to employees in certain circumstances, that’s pretty unusual. If a separation agreement provides for attorneys’ fees and liquidated damages in the event of a breach, however, management (even at a big corporation) may still be able to recover fees for less-than-meritorious lawsuits.  Such was the case in the recent decision of Schiavi v. AT&T, which you can read here.

Basically, Schiavi was an AT&T employee who was assigned to work on a “revenue recovery task force.” Schiavi was unhappy with the assignment, and sent an email to management reading: “Hopefully the morale of [the task force] will change over time, but I must tell you many of the faces of my colleagues have been filled with sadness and despair, and several people even mentioned the only option being suicide. And they didn’t say this in a joking manner.” 

The word “suicide” tends to get management’s attention. AT&T’s Human Resources Director, Brennan, investigated the matter, and eventually Schiavi confessed that no one had actually threatened suicide. Needless to say, AT&T’s management was extremely unhappy with Schiavi for making such allegations, and terminated her.

In an effort to soften the blow, Brennan offered to allow Schiavi to resign rather than be fired, and to obtain severance pay in exchange for a release agreement.  The release agreement provided that AT&T would pay Schiavi $19,948 in severance, that it would not contest her claim for unemployment benefits, and that it would not disparage her. If contacted by prospective employers,  AT&T would provide only dates of employment, position held, and salary. Schiavi agreed never to seek employment from AT&T again, and to keep the agreement confidential.

Schiavi agreed not to bring any claims against AT&T relating to her employment or termination. The agreement also provided that, if Schiavi breached, she would be required to reimburse AT&T for the severance payment less $1000, plus attorneys’ fees in the event of litigation.

One day, Brennan was walking through the AT&T employee lunchroom, and guess who she ran into (awkward)? It turns out that Schiavi had taken a job with an AT&T contractor and accepted a temporary employment position at AT&T. AT&T immediately informed the contractor that Schiavi had to be released because she was ineligible to work at AT&T. That made Schiavi unhappy, so she sued AT&T for interference of contract and other alleged misdeeds.

Unbelievably, there was a six-day jury trial about this. (I remember the great CLE teacher Jim McElhaney once saying that judges become judges to avoid deciding things.) The jury found that Schiavi had breached the agreement and was liable to AT&T for damages, including restitution of $19,948, plus attorneys’ fees in the amount of $15,126, for a total judgment of $35,074.

It’s never fun when things blow up in your face, so Schiavi appealed (pro se). And the appeals court had no problem enforcing the agreement as written, holding: “AT&T clearly wanted to sever its relationship with Schiavi, which is why it proposed the severance agreement and included language precluding future employment ‘with the company.’ Clearly, Schiavi’s return to an AT&T workplace as a contract worker, rather than an employee, would have been inconsistent with the overall purpose of the agreement as developed at trial. Schiavi acknowledged at trial her understanding that ‘[she] could never work for AT&T again,’ and that there was nothing in the agreement that she could ‘work for AT&T as long as she was a contractor,’ or ‘a temporary employee.’”

As for the damages provisions in the separation agreement, Schiavi “had produced no evidence that those damage provisions were unreasonable in the context of this case.” Specifically, the Court found “nothing in the record to suggest that the damage provisions are unreasonable or grossly disproportionate to the actual harm sustained by AT&T.”

A few observations here.  From the management perspective, when terminating an employee, it’s generally a good idea to try to obtain a separation agreement with a release.  Will it be enforceable?  That turns on whether the agreement is fair - that is, whether the exchange of consideration seems equitable and reasonable. Courts may consider other factors as well, such as the employee's education and ability to fully understand the agreement, whether the employee had an opportunity to consult with counsel before signing the agreement, whether the restrictions imposed on the employee after termination are reasonable, and whether the agreement complies with any applicable legislation.

When preparing severance agreements, management also needs to consider pronouncements both from the increasingly aggressive National Labor Relations Board (NLRB) and the Equal Employment Opportunity Commission (EEOC). Companies probably aren’t allowed to impose severe or unreasonable restrictions on an employee's ability to discuss the severance agreement with other employees (see Section 7 of the NLRA), and the EEOC may sue an employer if a separation agreement requires an employee to give up his or her right to file administrative claims with the EEOC.   These issues didn’t come up in Schiavi...but they could.

- Gene Killian