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Severance Packages Can Lead to Discrimination Suits

Laid-off employees who reject a severance offer can nevertheless sue the employer for discrimination if they believe the package was less attractive than that of their colleagues because of discriminatory reasons.

Wednesday, October 3, 2012
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Karla Gerner was employed by Chesterfield County, Virginia for more than 25 years, the last 12 as its human resources management director, when her job was eliminated in December 2009 because of reorganization. She declined a severance offer of three months' pay and benefits in exchange for her voluntary resignation and waiver of any cause of action against the county. She was then terminated with no pay or benefits.

Gerner subsequently sued on the basis of sex under Title VII of the Civil Rights Act of 1964, alleging that prior male department directors -- even those performing below expectations -- were transferred to jobs with less responsibility and kept on the payroll for six months or longer to enhance their retirement benefits. She cited four male comparators as examples.

"It's very rare that Title VII comes up in the context of severance agreements," says Jeff Mandel, managing partner of the Orlando office of Fisher & Phillips, an employment law firm representing management.

A district court judge granted the county's motion to dismiss Gerner's lawsuit. The judge ruled that severance benefits must be a "contractual entitlement." He also concluded that since the severance package was offered to Gerner after she was terminated, it could not constitute an adverse employment action -- one of the prongs a plaintiff must meet to establish a gender discrimination case.

The U.S. Court of Appeals for the Fourth Circuit ruled that the lower court misapplied the law and remanded Gerner's lawsuit for further proceedings. On the first point, the appeals court cited a Supreme Court ruling that a benefit needn't be a contractual entitlement, but only part and parcel of the employment relationship in order to bar discrimination in offering it. On the second point, the panel noted Gerner's assertion that she wasn't terminated until she rejected the county's severance package. Besides, the appeals court added, Title VII protects former as well as current employees.

Because the Fourth Circuit ruled on a motion to dismiss and no discovery had commenced, it didn't address whether the evidence supported Gerner's allegations. The case is pending in the district court, with a trial scheduled for Dec. 17 and 18.

"There is not an obligation to pay severance of any kind unless [employees] have an employment agreement," says Don Lindner, executive compensation practice leader for WorldatWork. Providing severance, however, is a vital piece of an overall talent management strategy, he adds.

"[Severance offers] can be different for any host of reasons. But they can't be different for a prohibited reason" such as race, religion, gender and the like, says Mark D. Dix, managing partner at Broad & Dix in Richmond, Va., who argued the Gerner case on her behalf before the Virginia appeals court.

"If you want to be safe, just have a uniform policy," Dix says. And, he adds, "Document, document, document."

Having a uniform severance policy doesn't necessarily mean making the same offer to every employee, Mandel says. "Uniform in formula, not necessarily uniform in results," he says. "Objective criteria, to the extent possible, should be uniformly applied to reduce the possibility of a discrimination claim." A survey of WorldatWork members last year found that years of service was by far the most commonly used standard in calculating severance benefits, followed by position and pay.

Documenting the reasons for differing severance offers is important, but so is when you do it, says Jeffrey Hirsch, an associate professor of labor and employment law at the University of North Carolina. "If you start documenting after a lawsuit is filed, you lose credibility."

Severance benefits are inherently discriminatory unless all employees receive the same package. Chances are a rank-and-file worker will get a less generous package than an executive, but discrimination is problematic only when it involves a protected class such as women or people of a particular religion.

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Companies might devise a formula to equitably make severance offers, such as a certain percentage of salary for employees who have worked, say five years or less, a different percentage of salary for those who worked, say, six to 10 years, and so forth, says Tashwanda C. Pinchback, an associate attorney in the Atlanta office of Troutman Sanders who represents employers in state and federal labor and employment-law litigation.

HR executives would be wise to study a company's past severance practices and proceed cautiously if deviating sharply from them. Doing so "could be used against them in claims of discrimination," Pinchback says. "At the end of the day, it's important to have it documented, and if you deviate from it, document why you deviated."

The WorldatWork survey found that many companies still maintain a formal written severance plan that has been past practice for three groups -- one for the CEO, one for direct reports and another for everybody else.

"The best policy is to have a policy and abide by it," Lindner says. "Administer it consistently. That means treating people the same way in the same circumstances." There can be exceptions. An employer might offer a troublesome worker a better severance package than the standard for similar co-workers to encourage him to resign, and be justified in doing so, Lindner says.

HR professionals shouldn't count on non-disclosure pacts to prevent word from leaking out regarding the details of severance offers. "People are human. They talk," Hirsch says.

On its face, Gerner appears to have a plausible case, Hirsch says. Winning it, however, won't be easy. "The big factual issue is the comparator evidence," he says. "She's going to have to show they are similarly situated, and that whatever differences weren't due to something that was non-discriminatory -- seniority, slightly different job titles, job duties."

Discrimination is hard to prove, Mandel adds. "It's a tough burden for plaintiffs."

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