Latest Wrinkle in Employers’ Severance Policies

More of a case has been made for some much-needed and immediate reviews of employers’ severance policies.

476619387 -- money and gavelAs this story from Bloomberg lays it out, the U.S. Supreme Court just decided in favor of the Obama Administration and its Internal Revenue Service in a dispute over taxes on severance compensation, overturning a lower-court decision that could have forced the IRS to refund more than $1 billion.

In its ruling in the case of Quality Stores Inc., the court has said payments to laid-off workers are subject to Social Security and Medicare taxes under the Federal Insurance Contributions Act. In essence, the defunct company fired 3,100 workers when it closed its stores in 2001 and 2002, paid the taxes on their severance and then asked a bankruptcy judge to order the IRS to refund $1 million.

Obviously, this is a huge victory for the IRS, which has been fighting more than 2,400 refund claims from companies and their ex-employees. It’s also a huge wake-up call in the business community. As Bob Hertzberg — the lawyer representing Quality Stores before the Supreme Court — told Bloomberg: “The decision is a huge blow for employers and employees alike. In addition to the impact on Quality Stores and its former employees, this ruling has far-reaching implications for the thousands of other organizations and workers fighting for refunds.”

This news comes right on the heels of a news analysis by HRE Staff Writer Mark McGraw about a U.S. Equal Employment Opportunity Commission lawsuit against CVS Pharmacy Inc. that experts say could also shake up how companies approach severance agreements.

In that case, the EEOC is charging that CVS “conditioned the receipt of severance benefits for certain employees on an overly broad agreement set forth in five pages of small print,” and interfered with their right to file discrimination charges and/or communicate and cooperate with the EEOC, according to the suit.

As A. John Harper III, a partner in the labor and employment practice group in the Houston office of Haynes and Boone, told McGraw, the provisions in the CVS separation agreement coming under scrutiny are “common in many severance and other employment-related agreements.”

Comments he got from Robert Hale, a Boston-based partner and chair of Goodwin Procter’s labor and employment practice, are worth repeating, too:

If the EEOC wins here, that would make it difficult for employers to reach agreements that prevent former employees who accept severance pay [from making] disparaging statements or [disclosing] personnel information that many employers understandably view as confidential.”

At the very least, as this case makes its way through the courts and as the Quality Stores decision continues reverberating, employers should be closely evaluating their severance agreements. As Hale puts it,

HR should work with counsel to take a hard look at existing severance agreement forms to determine whether any steps should be taken to reduce the risk that a decision in this case would make those existing agreements more vulnerable to legal challenge.”