Discriminatory Severance Packages Are Actionable

Federal Court of Appeals Reminds Us That Discriminatory Severance Packages Are Actionable.

By Hugh W. Cuthbertson

In March 2012, the U.S. Court of Appeals for the Fourth Circuit in Richmond, Virginia, issued a decision (Gerner v. County of Chesterfield, Virginia) reminding everyone that a severance package that an employer is not legally obligated to provide, but is nevertheless voluntarily offered to an employee in connection with his or her termination, is nonetheless actionable under the federal employment discrimination laws, if it is not offered on a non discriminatory basis.

The Facts

The plaintiff, Karla Gerner, was hired by the County of Chesterfield, Virginia, in June 1983, and became the County’s Director of Human Resources Management in 1997. On December 15, 2009, she was informed that her position was being eliminated as part of a re-organization.

The County asked Ms. Gerner to sign a severance agreement that provided her with three months’ pay and health benefits in exchange for her voluntary resignation and a waiver of any claims against the County. Ms. Gerner considered the offer for several days, but declined. The County then terminated her employment without any severance pay or benefits.

Ms. Gerner filed an action against the County under Title VII of the Civil Rights Act of 1964, alleging sex discrimination, because she had not been offered the same “sweetheart” severance package offered to similarly situated male counterparts when the County sought to terminate their employment. Specifically, Ms. Gerner claimed that prior male department directors, including employees who were not meeting performance expectations, either were transferred to positions with less responsibility while keeping their salary and benefits or were kept on the payroll with benefits for up to six months or more with enhanced retirement benefits.

The district court dismissed the complaint on the ground that the County’s alleged offer of a less favorable severance package did not constitute an “adverse employment action,” because 1) Ms. Gerner was not contractually entitled to any severance package at all and 2) the offer of a severance package could not constitute an employment action, because it was made after her employment had been terminated. The court of appeals reversed the district court’s decision.

The Appellate Court’s Decision

The Fourth Circuit noted that there is no requirement that an employment benefit be a matter of contractual right in order for its denial to provide a basis for a Title VII claim. Quoting the U.S. Supreme Court in Hishon v. King & Spalding, a 1984 decision, the court of appeals explained that any “benefit that is part and parcel of the employment relationship may not be doled out in a discriminatory fashion, even if the employer would be free under the employment contract simply not to provide any benefit at all.” Thus, it held, the discriminatory denial of a non-contractual employment benefit constitutes an adverse employment action.

The court of appeals also found the district court’s second point – that the benefit was not offered until afterMs. Gerson’s employment was terminated – unpersuasive for two reasons. First, as a factual matter, Ms. Gerson was not actually terminated until after she had declined the County’s offer. Therefore, the offer was made before she was terminated. Second, the appellate court reasoned that since Title VII protects both current and past employees from discriminatory adverse employment actions, Ms. Gerson’s employment status at the time the offer was made did not really matter.

Connecticut law

Although neither the Connecticut Supreme Court nor the U.S. Court of Appeals for the Second Circuit has rendered a decision on this precise issue, there does exist one Connecticut Superior Court decision that is on point, although it is not frequently cited. In 2002, Judge Corradino issued a ruling in Etter v. Advest, Inc., denying an employer’s motion to strike a complaint which alleged that the terms and conditions of severance offered to a female employee were not equivalent those offered to similarly-situated males who left the employer’s employment. Judge Corradino ruled that, although an employee is not entitled to severance pay unless provided for under a plan or by contractual arrangement, a benefit offered to one class of employees when employment is terminated constitutes a privilege “arising out of the employment relationship,” such that the failure to make a like offer to a discriminated against class creates a like privilege in that class under the Connecticut Fair Employment Practices Act. Although Judge Corradino’s decision was not appealed and, therefore, does not constitute controlling law in Connecticut, it is “on the books.”

Legal Significance

Employers should take note of the Fourth Circuit’s decision in Gerner, as well as Judge Corradino’s decision in Etter, because it is often assumed that, unless contractually obligated to offer severance benefits, there are no constraints on an employer’s discretion in deciding what, if any, severance benefits to offer in any given case. Instead, what these cases caution is that employers should be aware not only of any written severance policies, but also whether they have any past practices concerning the granting of severance benefits, regardless of whether any written severance policy exists.

In this regard, although, as a general matter, Connecticut’s wage and hour law does not require an employer to provide fringe benefits (severance pay has been held by more than one Connecticut Superior Court to constitute a fringe benefit), an employer that does have a policy or practice of providing fringe benefits must provide those benefits to employees on their termination in accordance with the employer’s policy. Under Connecticut law, an employee may sue to enforce this right and, if successful, may recover double damages and attorney’s fees.

Thus, if an employer has a written policy of providing severance benefits, there needs to be an awareness of what that policy is and how it has been applied. If an employer has no written policy, but nevertheless has a past practice of providing severance benefits, it should be understood what the employer’s past practice has been and what, if any, reason there has been to depart from it.

For any questions regarding this topic, please feel free to contact the author of this blog or any of his colleagues.