AN EMPLOYER’S EXPENSIVE LESSON IN SEVERANCE AGREEMENTS
Although the case this entry addresses comes to us from the U.S. District Court of South Dakota, it holds a valuable lesson for all employers - what an employer may consider an “informal” communication with its employees may well constitute a legally binding contract.
In March 2009, the President of Masco Builder Cabinet Group ("MBCG") distributed a memo to its Rapid City employees advising them that the Rapid City plant would be closing at the end of September 2009. The company did not expect to find a buyer. The memo said that "[a]ll employees will be offered a severance package and we are identifying resources to assist them with their job search." On that same day, two MBCG representatives met with Rapid City employees and told them that employees who stay until the closing will receive severance. At some point thereafter, MBCG representatives again met with employees to affirm those representations stating that the company “will pay severance as we have in all other plant closures in accordance with what has already been announced.”
In August 2009, MBCG found a buyer, and the buyer agreed to hire many of MBCG’s employees. As a result, MBCG decided to only pay severance to employees who weren't hired by the buyer, because those who were hired suffered no loss. As you might expect, MBCG’s employees disagreed citing the memo and the verbal commitment to pay severance; neither of which mentioned anything about what would happen if the company was bought and the buyer hired the employees.
The employees filed a class action: Baker v. Masco Builder Cabinet Group, Inc., No. CIV. 09-5085-JLV, 2012 BL 327872 (D.S.D. Dec. 14, 2012). Both sides filed motions for summary judgment because the facts were undisputed.
The court found MBCG’s conduct with respect to its severance communications evidenced its intent to enter into a binding agreement and its consent to contract. The court further found that the employees upheld their end of the bargain by staying on until the company closed its doors. Whether another company opened those doors with the same employees the next day was of no consequence to the contract between MBCG and its employees. MBCG owed $2,005,403 in severance pay to the 100 employees who stayed with it.
Here’s the takeaway for employers – when offering a retention bonus to incentivize employees to stay until the end in a plant closing, address in all severance materials, including informal memos and emails (which are ill-advised; there really is no such thing as “informal” if the communication is disseminated to employees), how the agreement will be affected if the company is bought and there is a rehire. Communications with employees such as memos, emails and statements at meetings may all be used as evidence to show that the employer and the employee had a “meeting of the minds” as to what promise or offer was made by the employer. The best way to avoid the costly error of MBCG is to seek advice of experienced employment counsel to help navigate through a plant closing or reduction in force.