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Employment Contracts and Severance Agreements: The Devil is in the Details

The Arizona Court of Appeals recently decided Swanson v. The Image Bank, Inc., a case that illustrates the importance of getting the details right when dealing with employment documents.

Mary Swanson worked at The Image Bank ("TIB") under a written contract that promised her one year's compensation if her employment was terminated for anything other than cause. The same contract said that if Swanson's employment was terminated without cause, then full payment to her of all amounts she was due, "shall be in full release and discharge of any claim or action she may have against the CompanyÂ…"

In July 1999, TIB discharged Swanson without cause. On the day she was terminated, TIB presented Swanson with a release and informed her that if she would sign the release, it would pay her the one year's salary promised in her employment agreement Swanson refused to sign the release and TIB then refused to pay the one year's compensation.

Swanson filed suit for breach of contract and sought treble damages under Arizona's wage statutes. The trial court found that TIB had breached its employment agreement by refusing to pay Swanson one year's salary as required by the agreement and, on the parties' cross motions for summary judgment, awarded Swanson treble damages, totaling $450,000, and attorneys' fees in the amount of $50,000.

TIB appealed on several grounds which were all rejected by the appeals court based upon the language of Swanson's employment contract. TIB also argued that its decision to withhold severance pay from Swanson until she executed a release was a good faith dispute and that the court, therefore, should not award treble damages. The appellate court disagreed, holding that TIB's request that Swanson execute a release at the time of termination could not be characterized as reasonable, good faith conduct because TIB's obligation to make the severance payments under the agreement was unconditional. The appeals court found that TIB's interpretation of the paragraph was unreasonable as a matter of law and that treble damages were therefore appropriate. The court also upheld the attorneys' fee award and awarded Swanson the fees she incurred defending the appeal.

Lessons for Employers

Where did TIB go wrong and how can your company avoid making the same mistake? TIB's problems began with the employment contract that did not require Swanson to execute a release of claims before she received her severance payments. Then, TIB appears to have ignored the language of the contract when it refused to pay Swanson the severance payment until she provided an executed release.

To avoid making the same mistake Employers should review their employment contracts severance policies and handbooks to be sure those documents require employees to execute a release of claims before they receive severance payments. Then, if you are considering a separation, carefully read these documents to ensure that the company complies with them in every detail. Contact counsel if you are unsure what the agreement requires the company to do, or if you wish to attempt to negotiate a new or different agreement in exchange for a release.

If all parties are in agreement and the modifications to the contract are documented well, an employment or severance agreement can be modified. However, if, like Swanson, a departing employee is unwilling to negotiate, then your company must follow the written agreement or suffer the consequences.

As shown by Swanson, employment contracts and severance agreements can be tricky, especially when the employer is dealing with an executive employee who is familiar with the laws and who has retained a savvy lawyer. The consequences of obtaining an unfavorable agreement can be very expensive, and it is far better to spend a small amount of money in advance consulting with your attorney than vast sums of money defending a lawsuit.

For more information about negotiating favorable and enforceable employment contracts and severance and release agreements with your departing employees, contact Sandra J. Creta at (602) 229-5334, Robert Jones at (602) 229-5496 or your Quarles & Brady Streich Lang, LLP attorney.

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