Many employers have had employees sign separation agreements releasing all claims in exchange for severance pay. But what happens when an employee signs a separation agreement and receives severance pay, but then changes her mind, alleging that she was pressured into signing the agreement and that the release is invalid, and decides to pursue her discrimination claims in court? Must the employee give back the severance pay before filing suit?
In a matter of first impression, the U.S. Court of Appeals for the Sixth Circuit, in McClellan v. Midwest Machining, Inc., 900 F.3d 297 (6th Cir. 2018), held that the tender-back doctrine does not apply to claims brought under Title VII or the Equal Pay Act (EPA). The Sixth Circuit, relying upon the United States Supreme Court’s similar decisions in Hogue v. Southern R.R. Co. and Oubre v. Entergy Operations, Inc., reversed the district court’s grant of summary judgment for the employer, finding that the plaintiff was not required to pay back consideration received as part of a severance agreement before bringing suit under Title VII or the EPA.
After McClellan announced her pregnancy to her employer, Midwest Machining, she claimed that she was subjected to discriminatory behavior. Specifically, McClellan alleged that her supervisor made negative comments about her and her pregnancy and was not happy she was attending pre-natal doctor’s appointments. Shortly thereafter, her employment was terminated. On the day she was fired, she was called into her supervisor’s office and was told that she needed to sign a severance agreement if she wanted to receive any severance pay. The door to her supervisor’s office was closed and McClellan alleged that she did not feel free to leave. Unclear about what claims she was waiving, and feeling pressured and bullied by her supervisor, McClellan claims she agreed to sign the severance agreement and received $4,000 in severance pay.
McClellan filed an EEOC charge claiming that Midwest Machining discriminated against her. She received a right-to-sue letter and filed a lawsuit claiming pregnancy discrimination under Title VII, in addition to claims under the EPA and Michigan state law. In response to the lawsuit, counsel for Midwest Machining informed McClellan’s lawyer of the severance agreement. McClellan then sent a check for $4,000 (the severance amount) to Midwest Machining along with a letter stating that she was rescinding the severance agreement alleging the release was invalid, but Midwest Machining returned it, stating there was no legal basis for rescinding it. Thereafter, Midwest Machining moved for summary judgment on the basis that McClellan did not “tender back” the $4,000 before she actually filed suit. Although the district court concluded that there was a dispute over whether McClellan knowingly and voluntarily signed the severance agreement, the district court granted summary judgment based on the tender-back doctrine, which requires a plaintiff to pay back consideration received through a severance agreement before filing suit.
On appeal, the Sixth Circuit reversed the decision concluding (in agreement with the EEOC, which submitted a brief in support of McClellan’s position) that the tender-back doctrine does not apply to claims brought under Title VII and the EPA. The Sixth Circuit relied on the Supreme Court’s reasoning in Oubre v. Entergy Operations, Inc., 522 U.S. 422 (1998) and Hogue v. Southern R.R. Co., 390 U.S. 516 (1968). In Oubre, the Supreme Court held that employees need not tender back payments in the context of the Age Discrimination in Employment Act (ADEA). Likewise, the Supreme Court in Hogue held that a plaintiff was not required to tender back payments received before bringing suit under the Federal Employers Liability Act (FELA). Notably, other circuits, including the Fifth Circuit, have applied Oubre and Hogue to reject the use of the tender-back doctrine in suits brought under federal remedial statutes. See e.g., Botefur v. City of Eagle Point, 7 F.3d 152, 156 (9th Cir.1993) (recognizing that “the rule announced in Hogue, that tender back is not required for suit under the FELA, is generalizable to suits under other federal compensatory statutes” and finding no tender back requirement for § 1983 plaintiff); Smith v. Pinell, 597 F.2d 994, 996 (5th Cir.1979) (same for Jones Act plaintiff).
In reaching its holding, the court also recognized that employees who have lost their jobs would have spent their severance money already and would not have the ability to tender back the severance. Thus, instead of being a bar to filing suit, the Sixth Circuit held that the amount of severance should be deducted from any future award to the plaintiff.
In this case, the Sixth Circuit determined that, as with several other federal remedial statutes (discussed in Oubre and Hogue), that the tender-back doctrine does not apply to claims brought under Title VII and the EPA. Although the Sixth Circuit did not consider the validity of the release and whether it was entered into voluntarily, which is something the parties would have to litigate in any case where a release bars the claims at issue, it makes it clear that a plaintiff does not have to return the severance payment to the employer before filing suit. Note that although this case is not binding on Texas courts because it is out of the Sixth Circuit (which has jurisdiction over federal appeals arising from Kentucky, Michigan, Ohio and Tennessee), a court in the Fifth Circuit may find this to be persuasive authority.
This case also serves as an important reminder that employers should be careful not to pressure separating employees into signing severance agreements. An employer can minimize the chances that an employee will challenge a release by doing the opposite—i.e., providing the employee with an appropriate amount of time to review the agreement (which is required if the employee is over 40 and subject to the Older Workers’ Benefit Protection Act), making the release clear, avoiding actions that could be perceived as intimidating and/or bullying, and advising the employee that he or she should consult with an attorney before signing the agreement.