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Company dodges a bullet, learns hard lesson about severance agreements

July 19, 2014

By Michael J. Burns, courtesy of SBAM Approved Partner ASE

The employer in a recent Michigan Appeals Court case prevailed in the case but paid a price in aggravation and legal fees because of the poorly-written agreement it concluded with two key employees. The case was Klein v. HP Pelzer Automotive Systems, Inc. (No. 31670, July 8, 2014).

In 2009 the Defendant-employer, HP Peltzer Automotive Systems, Inc. found itself in bankruptcy brought on by the Great Recession. The then-President of the company needed to downsize the workforce but was determined to keep two key employees (who happened to be married to one another) as the company worked its way through its financial problems. In a letter to each, the President offered continued employment along with a severance agreement that stated in part:

“This letter acknowledges that you and your position will not be involved in the restructuring activities.

This letter further acknowledges, if your employment with HP Pelzer Automotive Systems, Inc. is terminated or ended in any manner in the future you will be entitled to a minimum severance pay equal to 1 (one) full year of compensation.

The full year compensation will be based on the previous 12 months’ salary, bonus, etc., from the previous 12 months.

Thank you for your continued support . . . .”

Note that the letter included no ending point to this offer of continued employment and severance incentive.

In 2011, the new President of the company sent out a letter to the two employees rescinding the “severance agreement.” Simply stated, the letter said that the company had accomplished its financial restructuring and was no longer in financial distress. Therefore the reason for the severance agreement had passed.

The employees did not see it that way. They chose to challenge the new President’s attempt to rescind the severance arrangement by notifying the employer the agreement was still in effect. In addition, “they are seriously considering retirement.” In fact, one month later they resigned.

When the employer failed to honor the rescinded agreements, Plaintiff-employees filed a three-count complaint against defendant-employer, alleging breach of express contract, breach of implied contract, and promissory estoppels.

The lower court granted the Plaintiff-employees Summary Judgment, stating the original agreement set out in the letter was clear and unambiguous as to the payment of severance when employment ceased for any reason. However there was some question as to whether the President at the time had the authority to bind the company irrevocably to the severance agreement.

Among other issues, the Defendant-employer argued several points in its defense that are also pertinent to employers and HR departments:

  • The structure of the letter did not pre-suppose a perpetual and unilateral right to the severance benefit.
  • The severance benefit was designed to encourage the employees to stay, not to resign and collect a severance.
  • Their compensation and benefits were only to be paid during the restructuring period, and their continued employment was a condition of agreement; and, the Plaintiffs knew that the compensation and benefits could be revoked or changed at any time because the 2009 letters required no performance.

On appeal the Michigan Court of Appeals brought the case down to 1) whether the original letters amounted to a unilateral contract, and 2) whether the taking back of the severance benefit was a breach of an implied contract.

To the first issue, the Court held that the agreement did not involve a unilateral contract because the employees were not required to work at all after receiving the letters. Rather, the plain language of the letters enabled plaintiffs to resign immediately and collect the severance pay offered. The letters required no action or forbearance. Without that consideration, the Court ruled that the defendants’ promise in the letters was not legally binding.

To the second issue, the Court went back in Michigan common law and its famous (in employment law circles) Toussaint v. Blue Cross Blue Shield ruling of 1980 to recall that policy statements such as those being challenged here should only a be a “Flexible framework for operational guidance” rather than “a perpetually binding contractual obligation.” Businesses need to be “adaptable and responsive to change.” Therefore there could be not implied contract either.

In summary, this employer attempted in good faith to accommodate both the organization’s need to retain key employees by way of a retention incentive agreement, and the key employees’ need for an incentive to stay despite the potential of losing their jobs later. But its poorly-worded “agreement” left the termination date wide open. This led the employees to believe they had a severance benefit in perpetuity. Luckily for the employer, the Appeals Court came to its rescue.

The moral of the story is to treat your employee agreements with care and concern regardless of urgency, or risk being taken advantage of by employees and subjected to the uncertain mercies of the court system.

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