Severance agreements

7th Circuit Affirms Summary Judgment in Age Discrimination Lawsuit

On December 18, 2018, the 7th Circuit affirmed an order of summary judgment in favor of the defendant-employer in an age discrimination lawsuit filed under the Age Discrimination in Employment Act ("ADEA").  Wrolstad v. CUNA Mutual Insurance Society, No. 17-1920 (7th Cir. 12/18/2018).  The plaintiff was employed by the defendant for 25 years.  His position was eliminated in a corporate restructuring, when he was 52-years-old.  He applied for several open positions, but was not rehired.  One particular position for which he had applied was given to a 23-year-old.  He signed a severance agreement waiving all claims against the defendant in exchange for 50 weeks of severance pay.  Subsequently, he filed a charge of age discrimination with the EEOC.

7th Circuit Affirms Summary Judgment for Employer on Claim for Breach of Employment Separation Agreement

On November 1, 2018, the 7th Circuit affirmed an order of summary judgment in favor of an employer-defendant on a breach of contract claim brought by a former employee-physician, who alleged that the defendant breached her employment separation agreement by releasing a credentialing form with some "fair" ratings to a potential employer.  Gallo v. Mayo Clinic Health System-Franciscan Medical Center, Inc., No 17-1623 (7th Cir. 11/1/2018).  The plaintiff resigned her employment and entered into an employment separation agreement to prevent the defendant from saying anything negative about her to prospective employers in response to employment inquiries.  Subsequently, her former supervisor rated her performance as "fair" on two criteria in a credentialing form.  She sued for breach of the separation agreement, alleging that as a result of the breach, she was not hired for a subsequent position by a prospective employer with whom she had entered into employment contract negotiations.  The separation agreement indicated that no reference will be made to any performance issue and nothing derogatory will be stated to potential employers seeking a reference.

7th Circuit Reverses Attorneys' Fees Award against the EEOC for Prevailing Title VII Defendant

On June 8, 2018, the 7th Circuit reversed an order of the district court which had awarded the prevailing defendant, CVS Pharmacy, Inc. ("CVS") its attorneys' fees against the United States Equal Employment Opportunity Commission ("EEOC"), in the wake of the EEOC's unsuccessful attempt to challenge the validity and enforceability of CVS's standard employee severance agreement and release.  Equal Employment Opportunity Commission v. CVS Pharmacy, Inc., No. 17-1828 (7th Cir. 6/8/2018).  The EEOC filed a complaint against CVS alleging that CVS was using a severance agreement that chilled its employees' exercise of their rights under Title VII of the Civil Rights Act of 1964, as amended ("Title VII").  The EEOC contended that CVS's use of the severance agreement was a pattern or practice of resistance to the rights protected by Title VII.  The district court ruled against the EEOC on this issue and the 7th Circuit affirmed.  Subsequently, the district court awarded CVS $307,902.30 in attorneys' fees against the EEOC.

Illinois Appellate Court Affirms $2,838,968 Judgment for Executive Severance Pay and Bonus

On July 18, 2017, the Illinois Appellate Court, First District, affirmed the trial court's judgment in favor of an executive employee against his employer in the amount of $2,838,968 for his earned bonus and severance pay.  Schultze v. ABN AMRO, Inc., et al., 2017 IL App (1st) 162140 (7/18/2017).  The plaintiff filed a lawsuit alleging that the defendants violated the Illinois Wage Payment and Collection Act (the "Act") by failing to pay him the proper amount of his earned bonus and severance pay.  After trial, the trial court ruled in favor of the plaintiff, and ordered the defendants to pay him $2 million as an earned bonus and $375,000 as severance, plus 5% interest and attorneys' fees.  On appeal, the defendants argued that the bonus was discretionary and that the plaintiff failed to execute a separation agreement and release that was a condition of receiving any severance.

Executive's Claim for Breach of Severance Payment Provision in Employment Contract Proceeds to Trial

On February 24, 2017, the Illinois Appellate Court, First District, reversed an order of summary judgment in favor of a defendant employer in a lawsuit for breach of an employment agreement.  Rosenberger v. United Community Bancshares, Inc., 2017 IL App (1st) 161102 (2/24/2017).  This case involved an executive employment contract that provided the executive, a Chief Lending Officer, with a 3-year term of employment.  The contract contained a severance compensation provision, which stated that if the company terminated the executive's employment prior to the expiration of his employment term for any reason other than cause, the executive would be entitled to a lump-sum severance payment equal to two times his annual base salary then if effect.

$2.4 Million Jury Verdict on Breach of Employment Contract and Tortious Interference Claims

On March 28, 2016, the Illinois Appellate Court, First District, affirmed a $2.4 Million jury verdict in a lawsuit for breach of an employment agreement and tortious interference with the employment contract.  Koehler v. The Packer Group, et al., 2016 IL App (1st) 142767 (3/28/2016).  The plaintiff, who was employed as a CEO, alleged that he was demoted and then discharged after revealing financial improprieties to the company's board.  He sued the company for breach of his employment contract and also sued certain individuals for tortious interference with contract, claiming that they induced the company to breach its employment agreement with him.  After a three-week trial, the jury returned a large verdict for the plaintiff.

Employment Separation Agreement with Release of Claims in Exchange for Severance Valid and Enforceable

On December 17, 2015, the 7th Circuit upheld an important employment law ruling of the United States District Court for the Northern District of Illinois, that an employment separation agreement which provides an employee with severance payments in exchange for a release of employment discrimination, retaliation and other employment law claims, and which contains the other standard terms typically found in a severance agreement, is valid and enforceable.  CVS v. EEOC, No. 14-3653 (7th Cir., 12/17/2015).  This decision provides employers with valuable guidance on drafting legally effective employment separation agreements, because it spells out the terms of a severance or separation agreement which a court will enforce.  It also rejects the argument advanced by the EEOC, that standard severance agreements constitute a pattern and practice of discrimination in violation of Title VII because they discourage employees from filing EEOC charges.

Judge Darrah Dismisses the EEOC's Lawsuit against CVS

On October 7, 2014, U.S. District Court Judge John W. Darrah issued a Written Opinion and Order granting CVS's Motion for Summary Judgment and dismissing the EEOC's lawsuit against CVS.  Equal Employment Opportunity Commission v. CVS Pharmacy, Inc., No. 14-cv-863 (N.D.Ill.2014).  In this lawsuit, the EEOC alleged that CVS's Severance Agreement is invalid and unenforceable under Title VII of the Civil Rights Act of 1964.  The case was closely watched by employment law attorneys because the terms and conditions of CVS's Severance Agreement are typical of those commonly used by employment lawyers in severance or separation agreements.  Some employment law attorneys were concerned that invalidation of the standard terms and conditions of severance or separation agreements would create obstacles to negotiating settlements of employment law claims.  The incentive for most employers to pay employees monetary settlements of employment law claims is to receive a release of claims and an agreement to not sue in exchange for the payment.  If these terms were declared unenforceable, the incentive would be lost, and it would take some very creative lawyering to structure viable settlements of employment law claims.  In view of Judge Darrah's dismissal of the EEOC's lawsuit, this will not be the case.

EEOC's Challenge to CVS's Severance Agreement Dismisssed

A federal judge in Chicago recently dismissed the EEOC's lawsuit against CVS.  The EEOC had alleged that CVS's standard severance agreement is unenforceable under Title VII.  The EEOC's attempt to invalidate CVS's severance agreement was closely watched by employment lawyers.  That's because CVS's severance agreement is typical of severance agreements used by many other employers.  If customary terms of separation agreements, such as a general release of claims, confidentiality clause, and covenant to not sue, were declared unenforceable, employers would have less incentive to settle employment law claims.  Why pay an employee a substantial amount of money to settle an employment law claim without getting a general release in exchange?  This is the dilemma that employment attorneys would have faced when trying to resolve employment law claims, if the EEOC had succeeded.

U.S. Supreme Court Rules that Severance Payments are Taxable Wages for FICA Purposes

On March 25, 2014, the United States Supreme Court held that severance payments made by an employer to its involuntarily terminated employees constitute taxable wages for purposes of FICA.  United States v. Quality Stores, 572 U.S.__ (2014).  The Supreme Court reversed the holding of the Sixth Circuit Court of Appeals, that severance payments are exempt from FICA taxation.  The Supreme Court based its decision in part upon the broad definition of "wages" under FICA as "all remuneration for employment," as well as the broad definition of "employment" under FICA as "any service of whatever nature performed...by an employee for the person employing him."  Notably, the Supreme Court stated that severance payments are also wages for purposes of income tax withholding.  United States v. Quality Stores. 

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