Individuals offered less favorable severance packages than others in similar positions can sue for discrimination under Title VII, according to Karla Gerner v. County of Chesterfield, Va., a new decision by the United States Court of Appeals for the Fourth Circuit.
The plaintiff, Karla Gerner, was Chesterfield County’s human resources director and had been with the county for over 25 years. When the county identified her position to be eliminated in a RIF, they offered her severance pay of three months pay and health benefits in exchange for her voluntary resignation and waiver of claims. Gerner rejected the offer, and the county then formally terminated her.
Gerner filed a sex discrimination claim in federal court. She alleged the county in the past offered men in similar director-level positions much more favorable severance pay when they were fired. For example, she claimed that male employees who were poor performers had been allowed to transfer to other positions at full salary or had been given six months severance pay and benefits.
The district court judge hearing the case granted the county's motion to dismiss. The district court judge reasoned that severance pay does not constitute an actionable "adverse employment action" under Title VII. The district judge held (1) Gerner was not contractually entitled to severance, and (2) Gerner was terminated prior to the severance offer. Gerner appealed the decision to the Fourth Circuit.
The Fourth Circuit relied on the Supreme Court's landmark decision in Hishon v. King & Spalding, 467 U.S. 69 (1984), which held 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 not to provide the benefit at all. Based on Hishon, the Fourth Circuit reversed the district judge's ruling and found that a claim based on severance benefits that are discretionary could meet the test of being “part and parcel of the employment relationship.”
The Fourth Circuit also emphasized that federal courts consistently have held that Title VII applies to potential, current, and past employees. The Fourth Circuit therefore ruled that it also was error to dismiss the case simply because the county had offered Gerner the option of severance and a voluntary resignation after deciding to fire her.
The county also contended that Gerner made insufficient factual allegations that the severance offered in her situation was “part and parcel” of her employment relationship with the county. The Fourth Circuit acknowledged that the argument may have merit, but pointed out that the district court had not considered the issue, and, for that reason, left it to the district court to further consider the case on remand.
The Fourth Circuit’s decision is significant. This is the first time severance pay has been found to be a benefit subject to a Title VII discrimination claim. While Gerner only is controlling authority for federal courts within the Fourth Circuit (Maryland, North Carolina, South Carolina, Virginia, West Virginia), it has national implications. Because the Fourth Circuit is generally considered to be a more pro-employer, conservative court, the decision is likely to be adopted by other courts.
The ruling highlights that employers must consider potential legal challenges when fashioning severance packages. Many employers don't have a standard severance pay policy. Often, they decide upon severance in individual situations, and the amount they offer may vary markedly from one employee as compared to another, especially over a period of years.
Gerner makes clear that, if severance pay for arguably similar workers is different, employers need to justify these different payments with a valid rationale. A pattern of inconsistent severance pay over a period of multiple terminations may be very difficult to explain and defend. As with other employment decisions, employers may be effectively forced to adopt written policies and develop more formal and standardized severance practices or risk discrimination claims.