August 3, 2012
By: Michael J. Neary
A recent opinion by the United States Court of Appeals for the Fourth Circuit clarifies that employers must ensure that their severance offers do not violate anti-discrimination laws. The Fourth Circuit recently held that Title VII of the Civil Rights Act, which prohibits discrimination in the workplace, applies to severance packages offered after the conclusion of employment in exchange for a release of all legal claims. In Gerner v. County of Chesterfield Virginia, Karla Gerner, a female employee, alleged that similarly situated male employees were given “sweetheart” walk away packages that were more favorable than the three months of severance pay and benefits offered in exchange for her legal release. Ms. Gerner declined her severance offer and subsequently filed a charge of gender discrimination with the Equal Employment Opportunity Commission.
Karla Gerner had worked for Chesterfield County for over twenty-five years when she received notice that the County planned to eliminate her position due to a re-organization. The County offered Ms. Gerner three months of pay and health benefits in exchange for her resigning voluntarily and waiving any cause or action against the County. Ms. Gerner considered the offer for a few days and then declined it. Thereafter, the County retroactively terminated Ms. Gerner without any severance pay or benefits.
After exhausting her administrative remedies, Ms. Gerner then filed a lawsuit alleging gender discrimination in violation of Title VII, which prohibits an employer from "discriminat[ing] against any individual with respect to [her] compensation, terms, conditions, or privileges of employment, because of such individual’s . . . sex." Ms. Gerner alleged that male department heads who were not meeting performance expectations were transferred or allowed to remain on the payroll to increase their retirement benefits while the County forced her out.
Is Severance Part of the Employment Relationship?
The County argued that a severance package was not part of the employment relationship, and that therefore, Ms. Gerner did not state a claim for relief. The trial court agreed and dismissed her case on two grounds. The trial court first held that the severance offer was not a contractual entitlement and did not therefore provide the basis for an adverse employment action. The trial court also held that the severance package had been offered after the conclusion of Ms. Gerner’s employment. Consequently, according to the trial court, the severance package could not constitute an adverse employment action under Title VII. Ms. Gerner appealed to the Fourth Circuit.
On appeal, the Fourth Circuit rejected both holdings. The appellate court concluded that the key to whether a benefit provided by an employer could constitute an adverse employment action is whether the benefit is part of the employment relationship. If it is, then an employer cannot dispense the benefit in a discriminatory fashion even if the benefit was not a “contractual right” of the employee.
Title VII Applies to Current, Potential, and Past Employees
Having rejected the trial court’s first basis for its ruling, the appellate court went on to reject the trial court’s rationale that Ms. Gerner suffered no adverse employment act because the severance was offered after her employment ended. In so holding, the court first determined that Ms. Gerner alleged that she was given a period of time to decide whether to accept the severance pay and health benefits in exchange for a release while she remained an employee. Contrary to the trial court’s ruling, the Gerner court found that the factual allegations in the complaint asserted that the employer offered the severance package at a time when Ms. Gerner still worked for the County.
More substantively, the Gerner court then rejected the rationale applied by the trial court that Title VII does not protect former employees from discriminatory acts occurring after the conclusion of employment. To that end, the court unequivocally held that Title VII applies broadly to potential, current, and past employees. The Gerner court reasoned that a contrary holding would undermine the goal of Title VII to eliminate discrimination in employment in all its forms. As a result of this analysis, the Fourth Circuit reversed the dismissal and sent the case back to the trial court to proceed into discovery.
Steps Employers Should Take When Structuring Severance Packages
The Gerner decision is instructive for employers. The case reiterates that employers have to structure their severance packages consistently to avoid employment claims. Offering consistent severance packages is often a difficult task for employers of all sizes because the terms of prior severance packages might not be known to current management. The Gerner decision clarifies that management must:
- Make it a priority to fully understand what the company offered in the past (and why it did so) before presenting a severance package to a departing employee; and
- Strive for consistency in the severance packages offered, or at the very least thoroughly document the business justifications why a current severance package deviates from what the company has done in the past.
These steps are necessary to ensure that a company’s good faith effort to transition an employee to a future career, in exchange for a release, does not result in a costly employment claim.
Michael J. Neary is an employment and litigation attorney at Lerch, Early & Brewer in Bethesda, Maryland who helps businesses avoid litigation by counseling employers on compliance with federal employment statutes and regulations. For more information on structuring severance packages to avoid discrimination claims, contact Mike at (301) 657-0730 or email@example.com.