Court Says Employee Who Signed Severance Agreement Can Still Sue…and Keep the Money

A federal appeals court just ruled that an employee who received severance pay for signing a separation agreement can still keep the money even though she is now suing the employer for the same claims that she released in the agreement. How does that work?

Jena McClellan alleged that after she told her employer, Midwest Machining, Inc., that she was pregnant, she was harassed, criticized for missing work due to pre-natal medical appointments and terminated despite an excellent work record.  On her last day, the company president called her in and allegedly bullied her into accepting a modest severance payment in return for a separation agreement and release of claims.

Where’s the Payback?

She later sued the company, contending that the separation agreement was invalid because she was coerced into signing it and that she should be allowed to proceed with her claim of pregnancy discrimination.  The trial court dismissed the claim on the grounds that McClellan failed to tender back (repay) the severance pay and therefore had ratified her acceptance of the separation agreement.

On appeal, however, the Sixth Circuit Court of Appeals reversed, declaring that despite not repaying the severance, McClellan could proceed with her claim that the agreement was invalid and that she was discriminated against unlawfully.   They explained that while tender back would be required in most civil cases, federal discrimination claims are different because the litigant, in addition to seeking personal relief, is also pursuing the public interest in eliminating discrimination in the workplace.

Moreover, the “economic realities” are that in many cases, the employee will have already spent the money and will not have the ability to pay it back.  Employers would then be less motivated to honor their obligations under the separation agreement knowing that the employee might not be able to meet the tender-back requirement in order to sue.

As a result, the Sixth Circuit concluded that while the severance amount should be deducted from McClellan’s monetary damages if she ultimately prevails in her claims, she would not be required to tender back the severance in order to pursue her legal claims.

Special Note for Minnesota Employers: In case you are feeling fortunate that this was a Sixth Circuit decision and would not apply in Minnesota, bear in mind that the court in this case made special reference to the fact that the Eight Circuit Court of Appeals – which covers Minnesota – has already ruled that litigants in discrimination cases need not tender back their severance payments.

Bottom Line

This case undermines the finality of separation agreements, one of the primary reasons for offering them in the first place.  Therefore, if employees are now freer to sue without having to worry about paying back the severance, employers must do everything they can to insure their agreements are valid.

This means that in addition to including the necessary consideration and rescission periods required under certain state and federal discrimination laws, be sure that the agreement is clear and easy enough to understand, that the employee’s questions are answered and that there is no hint of coercion of any sort directed toward the employee.

If it can be shown that the employee had a fair opportunity to evaluate the benefits and burdens of signing the agreement, a judge is not likely to allow that employee to further litigate claims that were willfully and voluntarily released.