The Third Circuit Court of Appeals has rejected an aggressive argument by the Equal Employment Opportunity Commission (EEOC) related to employers seeking releases of employment claims in severance agreements.  The court rejected the EEOC’s argument that it was retaliation for an employer to seek a release of employment claims from a former employee in exchange for the opportunity to continue working for the employer under an independent contractor relationship.

In 1999, Allstate Insurance Company decided to convert its employee agents to independent contractors.  As part of that program, Allstate terminated some 6,200 employed agents.  The agents were given four options at the time of termination, including one option (Conversion Option) to convert to independent contractor status with a bonus of at least $5,000, a forgiveness of any loans previously paid to cover office expenses and a future right to acquire transferable interest in their book of business.  In exchange for this Conversion Option, Allstate required the former employees to sign a release of all claims against Allstate.

The EEOC challenged the release of claims in the severance agreement, alleging that the Conversion Option was, in effect, retaliation because it allowed the employees to continue their careers only if they waived any discrimination claims.  The EEOC argued that withholding future work opportunities from former employees unless they signed a release of claims was a retaliatory act.  The employees’ refusal to waive their claims was, argued the EEOC, “protected activity” for purposes of anti-retaliation statutes.

The court found little merit in the EEOC’s argument.  The court noted that the EEOC’s claim that the employees received little or nothing in return for their waiver was incorrect—the employees were provided with a guaranteed conversion to independent contractor status, a bonus and other benefits to which they were not otherwise entitled.  The court said:

[T]he EEOC here fails to articulate any good reason why an employer cannot require a release of discrimination claims by a terminated employee in exchange for a new business relationship with the employer.

The court acknowledged the financial pressure employees may feel in that scenario, but determined it was no different than financial pressures associated with any other severance option.  More importantly, the court flatly rejected the EEOC’s argument that a refusal to sign a release constituted protected activity under federal anti-retaliation laws.

The court’s decision is significant because requiring a release of claims by a terminated employee in exchange for a new business relationship with the employer has been determined to be lawful.  It is also significant because it rejects one of many aggressive arguments the EEOC has recently been floating to invalidate severance agreements.  The EEOC has recently waged an aggressive campaign against release of claims provisions in severance agreements.  At least in this case, a federal court of appeals has rejected one of the EEOC’s aggressive interpretations.