Severance Agreements: EEOC Suit Against CVS Could Be Test Case

When corporate America downsizes, the pink slips usually come with a lot of fine print.

The terms of a standard severance agreement are filled with legalese such as “general release of claims,” “nondisparagement” and “covenant not to sue.” Employers rely on these contracts to end the threat of lawsuits. For giving up their rights to sue, departing employees receive money or benefits.

But the Equal Employment Opportunity Commission has taken issue with the fine print in one large corporation’s severance agreement. And the lawsuit is shaping up to be a test case on a widely used employment practice.

This month, in Chicago federal court, the EEOC sued CVS Caremark, the nation’s second-largest drugstore chain, for having an “overly broad” and “misleading” severance contract, also known as a separation or termination agreement.

The federal agency’s interest in a private contract stems from its extensive mandate to enforce laws against workplace bias. This includes targeting policies and practices that discourage people from exercising their rights under job-discrimination laws or that impede the agency’s enforcement efforts.

One of those rights is that employees who sign separation agreements can still file a complaint with the EEOC if they believe they were discriminated against during their employment or wrongfully terminated. In addition, a severance pact can’t prohibit a discharged employee from participating in an EEOC investigation.

The EEOC claims that CVS interferes with a worker’s rights to bring charges with the agency. But CVS said the EEOC’s suit is “unwarranted,” because its severance agreement includes language “to state that it does not prohibit employees from doing so.”

“We have been cooperating with the agency and remain willing to cooperate; we are disappointed that the EEOC has taken this aggressive action,” said the company, based in Woonsocket, R.I.

Because the EEOC brought the suit even though CVS expressly protected employees’ rights under discrimination laws, the case is being closely watched.

Chicago-based law firm Winston & Strawn sent an alert to its corporate clients via email summarizing the suit. It concluded that “employers should consider re-evaluating their separation agreements to ensure that they will not become the EEOC’s next litigation target.”

In an interview, Jon Hyman, an Ohio lawyer who represents companies in employment matters, explained that the issue is important because CVS’s contract is pretty standard and includes garden-variety provisions that lawyers for years have been advising their clients to include.

“If the EEOC wins this case, which I think is a long shot, it would really turn employment severance agreements on their head,” Hyman said.

Linda Friedman, a Chicago lawyer who represents workers in employment matters, said she is pleased the EEOC is scrutinizing the severance agreement because such contracts can be confusing to employees who are stressed after just losing their jobs. Termination agreements usually prevent departing employees from disparaging their former employers or disclosing confidential information.

“How can you participate (in an EEOC matter) when you don’t have the right to disparage?” Friedman said. “What companies give with one hand, they take away with the other.”

According to the suit, CVS used the severance agreement in question for employees who didn’t work at its drugstores. CVS told the EEOC that more than 650 workers signed the contract in 2012, the suit said.

The EEOC acknowledges in the suit that CVS’s separation agreement includes a carve-out under the section “No Pending Actions; Covenant Not to Sue” that doesn’t stop employees from participating in an EEOC proceeding.

But the agency took issue with the carve-out, because it said it was buried in the five-page contract. It is a “single qualifying sentence that is not repeated anywhere else in the agreement,” the suit said.

Other parts of the contract, the EEOC said, bar employees from cooperating with an attorney or investigator unless they notify the company, and from disclosing information about the company’s personnel and its wage and benefit structures.

The agreement gives departing employees the general impression that they should “keep their mouths shut” and don’t dare even consider complaining about CVS’s workplace to any federal or state agency, said John Hendrickson, regional attorney at the EEOC’s Chicago office.

In the suit, the EEOC highlighted its objections to several aspects of the agreement, including these:

-The “cooperation” paragraph would require employees to notify CVS’s general counsel promptly by telephone and in writing if they were to receive an inquiry from an investigator with regard to an administrative proceeding related to the corporation.

-In the “general release of claims” section, the company includes language that states employees release “any claim of unlawful discrimination of any kind.”

-The “covenant not to sue” paragraph states that an employee agrees “not to initiate or file, or cause to be initiated or file, any action, lawsuit, complaint or proceeding” asserting any of the claims released in the agreement. If an employee violates the provision, the individual has to reimburse CVS for any legal fees.

“If you have one pound of rights buried in 50 pounds of prohibitions, people are going to react to the prohibitions,” Hendrickson said. “That’s why we did this.”

The EEOC is not alleging any underlying discriminatory behavior by CVS, and it is not seeking any compensation on behalf of former CVS employees. The agency would like to permanently stop CVS from using the separation agreement.

In addition, the EEOC asked the court to order CVS to take other corrective actions, such as informing employees that they retain the right to file a discrimination charge with the EEOC and cooperate with the agency without facing retaliation.

“One of our enforcement priorities is preserving access to the legal system,” Hendrickson said. “This agreement stands between people who signed these and any complaint they want to make. We want to take that barrier down and keep it down.”