David J. Walton and Jason A. Cabrera
David J. Walton and Jason A. Cabrera ()

Severance and separation agreements between employers and departing employees are a standard device in labor and employment law, providing companies with some certainty against future legal claims and former employees with extra salary or benefits or both. But over the last few years, the Equal Employment Opportunity Commission has taken aggressive action against severance agreements that may restrict the rights of former employees to file charges of discrimination with the agency.

On Feb. 7, perhaps demonstrating an escalation of an already-aggressive posture, the EEOC filed suit against CVS Pharmacy over its standard severance agreement used with its nonexempt employees, in EEOC v. CVS Pharmacy, Civ. No. 1:14-cv-00863, in the U.S. District Court for the Northern District of Illinois. Given that the CVS agreement does not seem to contain any extreme or extraordinary clauses, this EEOC action should be a warning to both employers and counsel alike to review their severance agreements more closely or to prepare for an increasing risk that the EEOC might find their agreements actionable.

Existing Law

In what has become black-letter law by this point, an agreement between an employer and a departing employee that purports to restrict the right of an employee to file a charge of discrimination with the EEOC (or a similar state or local agency) is unenforceable as against public policy. The U.S. Court of Appeals for the Fifth Circuit held as much back in 1987, and other circuit courts have routinely followed that court’s lead. Although courts have enforced agreements to waive the right to a recovery after a charge of discrimination was filed, most courts will not sanction employers that use clauses that purport to restrict the right to file the charge in the first place.

Ongoing Trend

Prior actions by the EEOC certainly show the commission’s aggressiveness in this arena, but those cases usually contained particularly objectionable language or punitive actions by the companies against former employees. For example, Baker and Taylor Inc., the large book distributor based in Charlotte, faced an EEOC lawsuit in 2013 over its severance agreements. B&T conditioned the payment of severance benefits on the employee not filing any complaint about his or her employment or termination with any administrative agency. The agreement contained an exclusion for participating or cooperating with the EEOC and even a contradictory provision later in the agreement about the right to file an administrative charge, both of which the commission felt were insufficient to guarantee an employee’s right to file a charge.

B&T settled with the EEOC within two months after the suit was filed, agreeing to include a specific disclaimer about the right to file charges with the EEOC or state and local counterparts, to advise former employees of their right to file charges, to refrain from asserting a limitations defense for any charges filed within 180 days of the consent decree, to a host of other requirements, and to submit to EEOC supervision for the next three years.

In 2012, we discovered that Trinity Health Corp., based in Michigan, would routinely deny severance pay to former employees who had filed charges of discrimination with the EEOC after the EEOC filed suit against them. This policy was plainly contrary to the law, and Trinity agreed to change its policy, submit to two years of reporting to the EEOC, and pay $25,000 to a former employee who had her severance payments stopped under the old policy.

In both situations, the EEOC actions against those agreements are not surprising, because the clauses were clearly unenforceable.

EEOC v. CVS

The case filed earlier this month against CVS is different than the situations noted above and could foreshadow a dramatic escalation in the already-aggressive EEOC posture toward severance agreements. The terms in the CVS agreement are garden-variety clauses that do not, at first blush, appear to run afoul of the available case law. If the EEOC will choose to litigate over agreements like those used by CVS, many more companies could be at risk.

In the CVS action, the EEOC appears to object mostly to the use of certain words in the disclaimer paragraphs of the agreement. In its complaint, the commission addresses five main clauses: cooperation, nondisparagement, nondisclosure of confidential information, general release of claims, and no pending actions/covenant not to sue.

For three sections, the EEOC focused on certain terms that it apparently found most objectionable. The EEOC highlighted in its complaint the inclusion of the phrases “administrative investigation” and “any investigator” in the paragraph requiring the employee to notify CVS if he or she receives any inquiry regarding a civil, criminal or administrative investigation from any investigator, attorney or third party.

The EEOC highlighted the word “charges” in the general release section that releases CVS from “any and all causes of action, lawsuits, proceedings, complaints, charges, debts contracts, judgments, damages, claims.” The EEOC even highlighted the word “complaint” in the covenant-not-to-sue paragraph that required the employee “not to initiate or file … any action, lawsuit, complaint or proceeding.” The EEOC noted that only one disclaimer was found (in the covenant-not-to-sue paragraph) that stated nothing was intended to or did interfere with the employee’s right to participate or cooperate with any agency in a discrimination investigation. More than 650 employees signed the separation agreements over which the EEOC has filed suit.

None of the complained-about provisions ring any of the traditional alarm bells for unenforceable terms. Most severance agreements include at least some of the sections found in the CVS action and many include all of them. None of the quoted provisions forbid the filing of a complaint with an administrative agency, the sort of obviously unenforceable provision found in the B&T agreement and others that prompted past EEOC actions. Although the agreement does include a clause on employee reimbursement for CVS’s attorney fees, it applies only if a court finds a breach by the employee and there is no clause requiring the return of severance pay. In short, if the EEOC is truly going to make a federal case out of the language used by CVS, then companies around the country will have to decide whether they want to reform their severance agreements or to fight the EEOC if their agreements are challenged.

Ways Forward

Reforming severance agreements (and keeping them constantly updated) are relatively simple tasks that may be worth their costs. Although the EEOC has not given explicit guidance on what language would be sufficient to withstand their scrutiny, some solutions can be inferred from the text of their complaint against CVS. Employers and counsel should consider separately including an explicit section regarding the rights of employees to file charges and to participate and cooperate in investigations. Or consider adding into each relevant release section the standard “nothing is intended to or shall restrict” disclaimer language regarding the right of employees to initiate and participate in EEOC investigations. Companies and their attorneys should consider making these slight changes, and these changes might be enough to satisfy the EEOC (or so the EEOC complaint against CVS would suggest).

Preparing to fight the EEOC in court is another option, albeit likely more expensive. The EEOC is not given as much deference as other administrative agencies and their interpretations of what is required by statute will not prove persuasive in every case. Yet, the EEOC does have more success than failure in this area and the prospect of fighting them to secure a favorable judgment is likely a multiyear endeavor.

Waiting for Guidance

The widespread use of severance agreements, their usefulness to both companies and departing employees, and the aggressive EEOC posture all combine to suggest this situation will not resolve itself anytime soon. With the prospects of a change in the law or a change in the posture of the EEOC both slim, the only guaranteed outcome is that employers and their attorneys have a lot riding on CVS. While we wait for the CVS litigation to work its way through the courts and hopefully give all more guidance, companies and attorneys can take steps now to examine their existing severance agreements, to reform those that are outdated, contradictory or obviously unenforceable, and to keep a vigilant eye on this most-recent test of the EEOC’s position.

David J. Walton is vice chair of Cozen O’Connor’s labor and employment department. He concentrates his practice on all aspects of employment litigation and labor law.

Jason A. Cabrera is an associate in the firm’s labor and employment department.