By:  Brendan J. Begley

In appropriate circumstances, a severance agreement containing release-of-claims provisions may be the most desirable way to end an employment relationship with an employee. Such agreements can facilitate a smooth transition while greatly reducing the employer’s exposure to costly lawsuits alleging wrongful termination, discrimination, retaliation, or other theories of recovery. However, there can be downsides to such agreements too.

Indeed, if employers use such agreements haphazardly, it may lead to claims that severance pay was doled out on a discriminatory basis. Similar problems also may arise if there is no valid formula established to determine the amount of severance pay. Even when such safeguards are in place, overbroad language in a severance agreement – particularly in the release provisions – may increase (rather than decrease) the odds of unwanted litigation.

For example, just this week the U.S. Equal Employment Opportunity Commission (“EEOC”) sued a book distributor, Baker & Taylor, Inc., alleging that certain release provisions in the company’s severance agreement were unlawful. The EEOC, which is an administrative agency, challenged the employer for having severed employees promise never to file any complaint in any court or administrative agency against the company arising from the employment relationship or termination.

Additionally, the EEOC challenged a provision wherein severed employees would promise not to discuss the termination of employment “in any way that would reflect negatively on the [employer].” The EEOC was troubled by this condition even though the agreement expressly did not prevent severed employees “from truthfully responding to a subpoena or otherwise complying with a government investigation.”

According to the EEOC, these terms interfere “with an employee’s right to file a charge” and thereby interfere with the federal agency’s “statutorily assigned responsibility to investigate charges of discrimination.” The EEOC also alleged that severance agreements containing such terms “run afoul of the anti-retaliation provisions” expressed in one of the agency’s enforcement guidelines.

It remains to be seen whether the federal court in Illinois will agree with the EEOC’s contentions. In the meantime, employers who wish to consider using severance and/or release agreements should consult with legal counsel to minimize their exposure to costly litigation as well as potential challenges from governmental agencies.