Category Archives: Terminations
In a recent case, the U.S. Supreme Court addressed the issue of whether severance payments made to employees who were involuntarily terminated as part of a Chapter 11 bankruptcy were taxable wages. U.S. v. Quality Stores, Inc.,No. 12-1408 (U.S. Mar. 25, 2014).
In the case, Quality Stores, Inc. paid severance payments to employees and initially withheld taxes required under the Federal Insurance Contributions Act (FICA). Later, believing that the payments should not have been taxed as wages under FICA, Quality Stores sought a refund from the Internal Revenue Service (IRS) on behalf of itself and about 1,850 former employees. After the IRS neither allowed nor denied the refund, Quality Stores initiated proceedings in the Bankruptcy Court, which granted summary judgment in Quality Stores’ favor on the issue. The district court and Sixth Circuit affirmed, concluding that the severance payments were not wages under FICA. However, the Supreme Court reversed, holding that the severance payments were wages subject to FICA tax because they were “remuneration made only to employees in consideration for employment.”
Takeaway: When paying severance to an employee, an employer should give careful consideration to whether the severance payments are taxable wages for purposes of FICA.
On February 7, 2014, the EEOC filed suit in the United States District Court for the Northern District of Illinois in Chicago against the large prescription and healthcare related services provider, CVS, contending that its actions concerning severance benefits violate Title VII of the Civil Rights Act of 1964. Specifically, this law provides the EEOC with the ability to seek immediate redress to remedy any potential injury which would result from an employer attempting to prohibit communication to the agency to address discrimination.
The EEOC based this Complaint on the theory that CVS was conditioning the receipt of severance benefits on an agreement which it interpreted to “interfere with employees’ rights to file discrimination charges and/or communicate and cooperate with the EEOC,” including limitations on the departing parties ability to cooperate, non-disparagement clauses, and non-disclosure of confidential information. Additionally, the Separation Agreements included general releases of claims, covenants not to sue, and consequences for breach. In the Complaint, the EEOC stresses the policy consideration that any conduct taken by an employer to limit employees’ access to report violations is unlawful. The EEOC’s stated concern is to “preserve access to the legal system” and to ensure that employees remain “free from fear of adverse consequences” if they are to report potential unlawful action.
Takeaway: The timeline for resolution of the CVS lawsuit could be a few months or take several years. In the interim, employers should evaluate whether severance, benefits, or contractual agreements with their employees limit the rights to seek federal intervention for unlawful acts undertaken by the employer to avoid running afoul of the EEOC’s policy mandate outlined in the CVS lawsuit.
When is it in an employer’s interest to tell an employee to talk to an attorney? Believe it or not, that is sometimes the case.
A common example is when entering a separation agreement and release purporting to release the employee’s rights under Title VII or the Age Discrimination in Employment Act. In this circumstance, the statutes and the EEOC require an affirmative statement in the release that the employee is advised to seek review of counsel. Passive language doesn’t work. In some cases, even statements such as “employee acknowledges that he/she has been advised to seek counsel prior to executing this agreement” have been found by courts to fall short and make for an invalid release.
Another example is when an employee has been named as a co-defendant with the employer in a suit such as a harassment action. In these circumstances, the interest of the employer and that of the employee may not be aligned and the same attorney may not be able to maintain a privileged and confidential relationship with both parties. If that is the case, the employee is commonly told to have separate counsel even if counsel’s fees are covered by the employer and/or its insurer under indemnification laws and policies.
Another example occurs when an employee contests a wage garnishment or personnel document subpoena served on the employer by a creditor or in a marital dissolution dispute. The employer must comply with the law, and it is the employee’s obligation to contest a garnishment or subpoena through his or her own counsel.
Takeaway: Sometimes an employer needs to tell an employee to seek counsel since that is good protection for the employer. Talk to your legal counsel to see if you are dealing with such a situation.
Many collective bargaining agreements have a provision that requires “just cause” before a unionized employee may be terminated. In a union context, the phrase “just cause” can have a very different meaning from the same term as used in a non-union employment agreement.
Whether “just cause” exists for unionized employees depends on a variety of factors, including the language of the collective bargaining agreement, analogous arbitration decisions, the employer’s arbitration history with the union, and the facts and circumstances of each particular case.
Although it is not always easy to predict whether an arbitrator will agree that there is just cause for an employee’s termination, arbitrators will often consider the “seven tests” developed by Arbitrator Carroll Daugherty in Enterprise Wire Co., 46 LA 359 (1966), to determine whether just cause is present. These “seven tests” are as follows:
- Was the employee forewarned of the consequences of his or her actions?
- Are the employer’s rules reasonably related to business efficiency and performance the employer might reasonably expect from the employee?
- Was an effort made before discipline or discharge to determine whether the employee was guilty as charged?
- Was the investigation conducted fairly and objectively?
- Did the employer obtain substantial evidence of the employee’s guilt?
- Were the rules applied fairly and without discrimination?
- Was the degree of discipline reasonably related to the seriousness of the employee’s offense and the employee’s past record?
Takeaway: Employers with unionized workforces should familiarize themselves with the “seven tests” of just cause termination. When the requirements of the seven tests are satisfied, it is likely that the employer has just cause for termination.
It depends – Minnesota’s drug and alcohol testing statute imposes a number of conditions on an employer’s ability to terminate an employee for a positive drug or alcohol test. Here’s what employers need to know about the statute’s requirements:
- General Requirements for Drug Testing: Minnesota law permits an employer to administer drug tests of employees only pursuant to a written policy that complies with certain statutory requirements. Among other things, the statute requires that when an employee tests positive for drug or alcohol use: (i) the result must be confirmed by a “confirmatory test;” (ii) the employee must be given written notice of the right to explain the positive test, for example, by identifying any medications the employee is taking or providing other information concerning the reliability of the test; and (iii) the employee may request a “confirmatory retest” of the original sample at the employee’s own expense.
- First Time Positive Test By a Current Employee: If the positive test result was the first time that the employee tested positive, the law requires that, before terminating the employee, the employer must generally provide the employee with an opportunity to participate in counseling or treatment, whichever is more appropriate, as determined by a certified chemical use counselor or a physician trained in the diagnosis and treatment of chemical dependency. The employee may be terminated only if he or she refuses to participate in counseling or treatment or if he or she fails to complete the program successfully. This rule does not apply if the employee has tested positive for the employer before.
- Health and Safety Exception: If an employer believes that it is reasonably necessary to protect the health or safety of the employee, co-employees, or the public, an employer may temporarily suspend an employee who tests positive or transfer him or her to another position at the same rate of pay pending the outcome of the confirmatory test and, if requested, the confirmatory retest. If the employee is suspended without pay, and the confirmatory test or retest comes back negative, the employee must be reinstated with back pay.
- Withdrawal of Job Offer for Job Applicants: If a job applicant receives a job offer contingent on passing a drug and alcohol test, the employer must verify a positive test result with a confirmatory test before withdrawing the job offer. Unlike current employees, however, the employer does not need to offer the job applicant an opportunity to participate in counseling or treatment before withdrawing the job offer.
See generally Minn. Stat. § 181.953.
Takeaway: When an employee or job applicant tests positive on a drug and alcohol test, employers should make sure that they have complied with all statutory requirements before terminating the employee or withdrawing a job offer.
There are a lot of loose terms in the world of employment law. Terms such as “at-will”, “contract”, “progressive discipline” and other common terms have meaning that many of us think we know, but when pressed may get a little vague. A very common such term in the termination context is “just cause” termination.
Usually, “just cause” is a provision in an employment contract. It differentiates the basis for a termination from that of a reduction in force or simple exertion of at-will employment rights by requiring a reason for a termination. In a pure at-will employment situation, employers do not have to provide a reason for termination unless there is a request made by statute. In an employment contract with a just cause provision, the employer articulates the basis for the cause in order to terminate the contract without notice, and/or provide different, or reduced or no severance benefits.
The meaning of “just cause” in an employment contract should be distinguished from the meaning of “just cause” in a union setting. Most collective bargaining agreements require “just cause” for discipline and discharge. If a union files a grievance over the termination of a union member, the employer typically has the burden to show “just cause” existed for the termination during a labor arbitration hearing. In the union context, “just cause” is a term of art that labor lawyers and labor arbitrators understand has a certain meaning, which can be very different from the meaning of “just cause” in an employment contract.
In the employment context, “just cause” is protection for the employer (who can avoid severance in a severe misconduct situation) and for the employee (who obtains severance unless there is demonstrable just cause). More senior executives require this protection. Some contracts simply use the term in an undefined manner and apparently rely upon, one would say charitably, the “common opinion of mankind.” Good luck enforcing that one in court.
A well-drafted just cause provision in an employment contract lists the bases for termination in ways that are objectively definable. That’s easier said than done, of course. In extreme situations, such as conviction of a felony or misappropriation of funds, the definition can be set forth in a very straight-forward way. But in situations that sound in dissatisfaction with the employee’s performance, disputable subjective elements can creep in. That is why it is common to see in a just cause provision notice and opportunity to cure provisions that will allow the employer to spell out the reasons for the termination and demand reasonable cure and, thereby, create a clear and objective record. Of course, this may not work according to plan since the employee can dispute the reasons or only partially comply or other such complications. But the best advice is not to “go generic”, but to work with legal counsel in drafting just cause provisions that fit the specifics of a particular executive employment situation.
Takeaway: As Carl Sandberg said, “Be careful how you use strong words.” “Just cause” is a term that requires careful and specific articulation in the employment contract in order to have meaning and value in determining the employer’s rights and obligations in executive employment terminations. The best advice is to seek advice.
Many employers use severance agreements containing confidentiality provisions, but worry about how enforceable such provisions are. According to a recent case, they are very enforceable.
The case of Hallmark Cards, Inc. v. Murley, 703 F.3d 456 (8th Cir. 2013), will be very helpful to employers seeking to enforce such confidentiality provisions. In Hallmark Cards, the employer sued its former vice president of marketing, who received a severance package of $735,000 after her position was eliminated due to a corporate restructuring. The jury found that the former employee had breached the confidentiality provision of the severance agreement by disclosing Hallmark’s confidential information to her new employer, a competitor. The jury awarded Hallmark Cards the full value of the severance package and the employee’s compensation paid by her new employer. The former employee appealed.
On appeal, the former employee argued that she had complied with some provisions of the severance agreement and therefore she should not have to pay back the full severance amount. The former employee also argued her former employer was not entitled to any of her compensation from her new employer.
Hallmark argued that it was entitled to the full amount of damages awarded because the only reason the new employer paid her compensation was because she provided the new employer with Hallmark’s confidential information.
The Eighth Circuit Court of Appeals upheld the jury’s award of a full refund to Hallmark of its $735,000 severance payment, but held Hallmark was not entitled to the award of the former employee’s compensation from her new employer. The court rejected the former employee’s argument that Hallmark got some value for the severance agreement and thus was not entitled to get all of its severance payment back. The Eighth Circuit reasoned that the confidentiality provision was the primary purpose of the agreement and that the language of the agreement clearly indicated that preserving confidentiality was a priority.
The Eighth Circuit held, however, that Hallmark was not entitled to be put in a better position than it would have been in if the former employee had not breached the severance agreement. Accordingly, Hallmark was not entitled to the former employee’s compensation from her new employer.
Takeaway: The Hallmark Cards case shows employers can enforce properly drafted confidentiality agreements in severance agreements. To have the best chance for success, employers should have their attorneys draft or review the confidentiality provisions prior to giving the severance agreement to the employee, and then call their attorneys if they obtain evidence that a former employee has breached the confidentiality provision.
The Minnesota Supreme Court recently determined that claims alleging wrongful termination under the Minnesota Drug and Alcohol Testing in the Workplace statute are subject to a six-year statute of limitations in Sipe v. STS Manufacturing, Inc., No. A11-2082 (Minn. July 31, 2013). Mr. Sipe had alleged that he was improperly terminated for a first positive drug test without being offered an opportunity for rehabilitation or counseling pursuant to Minn. Stat. § 181.953, subd. 10. He did not commence his lawsuit until nearly three years later.
The Minnesota Court of Appeals previously held that Mr. Sipe’s claim was subject to a two-year statute of limitations under Minn. Stat. § 541.07(1) and dismissed his lawsuit. The Court of Appeals determined that Mr. Sipe’s wrongful discharge claim constituted an “other tort resulting in personal injury” bringing it within the two-year limitations period. The Minnesota Supreme Court, however, held that such “other torts” were limited to common law claims and did not include statutory claims, such as that created by the Minnesota drug testing law. As a result, the Court held that Mr. Sipe’s claim was subject to the six-year limitations period applicable to “liability created by statute.” Minn. Stat. § 541.05, subd. 1(2).
Takeaway: Prior to taking a discharge action, Minnesota employers should be mindful of their statutory obligations, including the obligation to offer rehabilitation or counseling to employees who test positive for drugs for the first time. If an employer instead fires the employee without making such an offer, the employee has a full six years to bring a claim under Minnesota’s drug testing law.
When obtaining a release of claims from an employee, it’s important for employers to include a 15-day rescission period for the release to be effective under the Minnesota Human Rights Act (MHRA).
The MHRA provides that a waiver or release of claims under the MHRA “may be rescinded within 15 calendar days of its execution” and that the “waiving or releasing party shall be informed in writing of the right to rescind the waiver or release.” Minn. Stat. § 363A.31, Subd. 2. To be effective, the rescission must be in writing and delivered to the waived or released party by hand or mail within the 15-day period.
The requirement for a 15-day rescission period has one important exception, however. The 15-day rescission period is not required for a claim that has been filed with the Minnesota Department of Human Rights, another administrative agency (like the EEOC), or a judicial body. Therefore, if an employee or former employee has already filed a charge of discrimination or a lawsuit, the 15-day rescission period is not required.
Takeaways: When requesting a release from an employee or former employee in Minnesota, employers need to make sure that they include the 15-day rescission period – unless the employee or former employee has already filed a charge of discrimination or a lawsuit.
“Hey, I was Just Trying to be a Nice Guy!” – Don’t be Inconsistent When Discussing An Employee Termination
A case out of the Eleventh Federal Circuit provides a cautionary tale for any employer who is trying to cut a terminated former employee a break in references. Maybe don’t be a “nice guy”:
In Kragor v. Takedo Pharmaceuticals of America, Inc., 702 F.3d 1304 (11th Cir. 2012), the Appellate Court reversed and set for trial an age discrimination case in which a manager who had terminated an employee for misconduct disavowed the reason in a subsequent reference call. He apparently wanted to help out the former employee—who learned about the kindness and brought it into evidence as proof that the reasons given for the termination were pretextual. The Appeals Court found this contradiction created a triable case to allow the age discrimination case to proceed:
When the employer’s actual decisionmaker, after terminating an employee for misconduct (or the appearance of misconduct), says without qualification that the employee is exceptional, did nothing wrong, did everything right, and should not have been fired, that contradiction—when combined with a prima facie case—is enough to create a jury question on the ultimate issue of discrimination.
So much for trying to be a “nice guy.”
Takeaways: Be cautious in staying consistent with the reasons provided for a termination and statements to third parties. Good intentions do not always lead to good results. When you want to give a more positive reference after a troubled termination, work with legal counsel on maintaining consistency with the company’s reasons for termination.
Receipt of severance pay will typically either delay an applicant’s eligibility for unemployment benefits or will reduce the amount of benefits they receive. Minnesota law provides that an applicant is ineligible for unemployment insurance benefits during any week in which the applicant receives “severance pay … paid by an employer because of, upon, or after separation from employment” if the severance pay is “equal to or in excess of the applicant’s weekly unemployment benefit amount.” Minn. Stat. § 268.085, Subd. 3(a)(2).
The severance payments will affect the applicant’s eligibility for “all the weeks of payment.” When the severance payments are made periodically, the “weeks of payment” are calculated by dividing the total amount of the payments by the applicant’s last level of regular weekly pay from the employer. When the severance payment is made in a lump sum, the “weeks of payment” are calculated by dividing the amount of the lump sum by the applicant’s last level of regular weekly pay from the employer. See Minn. Stat. § 268.085, Subd. 3(b).
If the severance payment amount per week is equal to or greater than the applicant’s weekly unemployment benefit amount, the applicant is not eligible to receive unemployment benefits that week. If the amount of severance payment per week is less than the applicant’s weekly unemployment benefit amount, the applicant’s unemployment benefits are reduced by the amount of the severance payment for that week.
Takeaway: The impact of severance payments on a former employee’s eligibility for unemployment benefits is one factor, among many, that an employer may want to consider when determining whether to offer severance pay to an employee and, if so, how much.
When an employer presents a separation agreement to an employee, the basic equation is severance to the employee in exchange for a release to the employer. But sometimes employers put more care into structuring the severance than to making sure that what they are getting out of it, the release, is correct and complete.
Often the language of the release is taken from stock agreements or previous releases. But each release needs to be carefully reviewed and legal counsel consulted, if necessary, to make sure it is up-to-date, sufficient in scope, and legally enforceable.
Touchstones in reviewing a release include:
- Compliance with the applicable state employment discrimination laws;
- Compliance with state unemployment compensation and workers compensation laws;
- Sufficiency of the scope of the released parties;
- Use of the required consideration and rescission periods under federal employment discrimination laws;
- “Carve-outs” for preserved claims and indemnification rights, if any;
- Reference in the release to the laws and causes of action that actually apply to the employer’s situation;
- Clarity on the preservation of claims that may arise after the release;
- Clarity on the consequences of a rescission to released claims not subject to statutory rescission; and
- A determination of whether the release is to be mutual and, if so, how that is phrased.
This is just a beginning inventory.
Takeaway: Beware of “off-the-shelf” releases that run the risk of paying severance for an unenforceable or ineffective release. For the release to be a complete and secure “walk-away” requires careful review of each release, which likely includes review of counsel, under the always important “ounce of prevention” doctrine.