The Perils of Poorly Drafted Severance Agreements
Author: Nils C. Shillito, Stephen D. Hans & Associates, P.C.
On May 3rd, the New York State Supreme Court Appellate Division, First Department handed down a decision in the case of Johnson v. Lebanese American University (LAU) (You can read or download the decision from the court’s website here: www.courts.state.ny.us/courts/ad1/). The decision revived a lawsuit filed by a former employee of the University who alleged that he was unlawfully terminated because he is gay. At the time of his termination, the plaintiff was presented with a severance agreement, which included a release of claims against the University in exchange for payment of $4,651. The University successfully argued at the trial court level that the case should be dismissed because the employee had unequivocally released all possible legal claims by signing the release and accepting the payment after he was fired.
Unfortunately for LAU, the Appellate Division reinstated the lawsuit, essentially finding, among other things, that the specific language of the release could be open to interpretation as to whether it was intended to cover the employee’s claims of discrimination. The appellate decision also found that there was a disputed question of fact as to whether the severance agreement payment constituted money to which the employee was already entitled.
The decision highlights two of the many potential pitfalls employers can run into when trying to utilize and implement severance agreements without the assistance of experienced employment counsel:
1. The language of the release contained in the severance agreement MUST be carefully drafted to leave no doubt that it is intended to cover all possible claims that could later be asserted by the employee, including claims of employment discrimination; and
2. The employer must provide sufficient consideration for the release, which MUST be an amount that the terminated employee has not already earned under the terms of his/her employment (i.e. a final paycheck representing wages/salary or severance pay that has been previously agreed upon in an existing employment contract, etc.).
Although, in this particular case, there were questions as to both of these issues, and the employer may eventually still prevail, the court nonetheless allowed the case to go forward through the litigation discovery process, which means the University may now be mired in expensive litigation for some time. If drafted well and properly implemented, a severance agreement with a release of claims can be an important tool in managing an employer’s exposure to employment-related liabilities and litigation expenses. However, if a severance agreement is written poorly and prepared without the assistance of an experienced employment attorney, an employer may end up making severance payments and receiving little of value in return.
For assistance with drafting employment and severance agreements, or for advice on how to conduct the termination of a difficult employee properly, call us at (718) 275-6700 or email us to arrange a consultation to find out how our attorneys can help your business.