By: Claudia D. Orr
The United States Court of Appeals for the Sixth Circuit just ruled that the tender back doctrine does not apply to claims brought under Title VII or the Equal Pay Act. See McClellan v Midwest Machining, Inc. What is the tender back rule and why does it matter so much?
The tender back rule is a legal concept related to release agreements. For example, if you pay a former employee money (often severance at time of termination) in exchange for a release of all claims and she changes her mind and wants to sue, the former employee can, provided at or before the time of filing the lawsuit the former employee “tenders back” the money paid in consideration of the release.
I have used the tender back rule many times to obtain dismissal of lawsuits. I have even had release agreements enforced by the court when the former employee failed to sign the agreement or wrote “refused” on the signature line but then kept the money that had been paid. Ah, good times for a defense attorney. You can’t keep the money paid for the release and file suit without returning it.
So now that you know what the tender back rule is, let’s look at the case at issue. Plaintiff Jena McClellan began working for Defendant Midwest Machining, Inc. (“MMI”) in 2008. In August 2015, after McClellan announced she was pregnant, her supervisor allegedly began making negative comments and showed annoyance at her absences for prenatal appointments. Three months later, McClellan was fired.
At the termination meeting, McClellan was handed an agreement that provided severance in exchange for a release of all past, current and future claims. McClellan later testified she felt bullied at the meeting and pressured to sign when she did not have a clear understanding of which claims were being released. McClellan signed the agreement and accepted the payments totalling $4000.
Three quick learning points: First, you cannot release future claims, so that reference makes no sense to me. Second, the agreement should specifically mention state and federal civil rights laws so there is no confusion that they are within the scope of the release. Third, never force the individual to make their decision at the meeting or the agreement may be set aside due to coercion or duress. Always provide a couple of days and state the deadline in the agreement.
After releasing all claims, McClellan filed a charge with the Equal Employment Opportunity Commission and received her notice of right to sue. McClellan filed suit in the United States District Court for the Western District of Michigan, alleging MMI paid her less than male coworkers because of her sex (in violation of the Equal Pay Act) and that she was discharged because of her pregnancy (in violation of Title VII, as amended by the Pregnancy Discrimination Act). McClellan also alleged the same wrongdoing under Michigan’s Minimum Wage Law and the Elliott-Larsen Civil Rights Act.
Defense counsel for MMI advised McClellan’s attorney of the release agreement. In response, her attorney sent a letter “rescinding” the agreement and enclosing a check for $4000. MMI’s attorney mailed the check back and filed a motion to dismiss based on the release and failure to tender back the payment at or before the time suit was filed.
While the district court found there were genuine issues of material fact concerning whether McClellan “knowingly and voluntarily” signed the agreement, it nonetheless granted MMI’s motion to dismiss because McClellan had failed to tender back the consideration she had been paid. On appeal, the Sixth Circuit reversed, concluding that “the tender-back doctrine does not apply to claims brought under Title VII and the Equal Pay Act…”
The appellate court first noted that the district court failed to recognize that the tender back rule is grounded in state contract law. Thus, agreements tainted by “mistake, duress, or even fraud are voidable at the option of the innocent party,” but “before the innocent party can elect avoidance, she must first tender back any benefits received under the contract.” “If she fails to do so within a reasonable time after learning of her rights…she ratifies the contract and so makes it binding.”
The court reviewed its prior unpublished decisions addressing the tender back rule’s application to claims brought under other federal statutes and found that many of its unpublished decisions upheld the tender back rule. The only published opinion by the court held that the plaintiff was not required to tender back the consideration before pursing a claim under the Age Discrimination in Employment Act (“ADEA”).
That decision had relied upon the Supreme Court’s ruling in the context of the Federal Employers Liability Act. In addition, in 1998, a highly divided Supreme Court found the tender back rule inapplicable to claims brought under the ADEA in Oubre v Entergy Operations, in part because the release at issue failed to comply with the requirements for a valid release of ADEA claims.
After reviewing opinions from other circuits, the Sixth Circuit concluded that the tender back rule should not apply to claims under Title VII or the Equal Pay Act. Thus, as with the ADEA, any sums paid for the release “shall be deducted from any award determined to be due to the injured employee.” The appellate court also concluded that, even if applicable, McClellan attempted to tender back the $4000 and there is no requirement that it occur before filing suit, as long as it is returned “within a reasonable time after learning of her rights”.
The dissent found the tender back doctrine to be centuries old in the common law and applicable to claims under Title VII and the Equal Protection Act because Congress failed to specifically to over ride it and displace it when passing these laws. The dissent also distinguished releases of ADEA claims given the specific detailed requirements for such releases as required by the Older Worker Benefit Protection Act. The dissent (Judge Thapar) has become my new hero, but unfortunately his opinion is not the one that now is binding on us.
So, we have long known there was an issue with the tender back rule when it came to claims under the Age Discrimination in Employment Act (“ADEA”). But I had hoped that this quirk was because of the protections afforded to the older worker. Sorry, but as someone who is now in her early 60s, I find it offensive that Congress believed it necessary to provide those 40 and older with 21 days to think about whether to sign a release agreement (because apparently us “older” workers need that much time to understand what we are reading, if we can even find our readers during that 3 weeks) and then another 7 days to revoke it (so that when our kids see what we have signed and say “hell no” there is still a chance to get us out of the agreement) and a warning that “you should see an attorney before you sign this”! Sorry, I digress. Seriously, I just thought (or lived under the delusion) that the inapplicability of the tender back rule to ADEA claims was more protectionism afforded us “seniors”.
So, knowing that a release of claims under the ADEA had to tell the former employee to see a lawyer before they sign it (and no good ever comes of that), I would often suggest to clients that we not add all of the bells and whistles to have a valid ADEA release if the amount of consideration was relatively small and the strength of such a claim relatively weak.
After all, what are you really buying if the former employee can still sue, use the severance you paid to fund the lawsuit and, after defending against the claims for a couple of years, the court may consider offsetting the amount against a judgement. When you consider that most lawsuits are either dismissed or settled, is the previously paid amount truly offset against the settlement? The plaintiff just demands more and the employer tries to offer less and it all gets lost in the negotiation. So, again I ask, what are you buying if you don’t get the freedom from suit? This is a game changer. Always work with an experienced employment attorney, such as the author, when you are determining whether to offer an employee severance, in exchange for a release.
This article was written by Claudia D. Orr, who is Secretary of the Board of Detroit SHRM, a member of the Legal Affairs Committee, and an experienced labor/employment attorney at the Detroit office of Plunkett Cooney (a full service law firm and resource partner of Detroit SHRM) and an arbitrator with the American Arbitration Association. She can be reached at firstname.lastname@example.org or at (313) 983-4863. For further information go to: http://www.plunkettcooney.com/people-105.html.
Detroit SHRM encourages members to share these articles with others, inside and outside their organization, as long as its name and logo, and the author’s information, is included in the re-post of the article. August 2018.