The inclusion of a “no-rehire” provision in separation agreement is fairly commonplace. Likewise, a damages provision (including liquidated damages and attorneys’ fees) in the event of a breach by the former employee are routinely included as well. In practice however, what happens when a terminated employee tests the limits of a no-rehire provision to which she agreed? Exhibit A is Schiavi v. AT&T Corp., decided in August by a New Jersey appellate court.
Background
AT&T terminated MaryLynn Schiavi’s employment in 2000 for sending an email to senior executives, including the CEO, to express her co-workers’ frustration concerning their service on a revenue recovery task force. In the email, Schiavi stated: “Hopefully the morale … will change over time, but I must tell you many of the faces of my colleagues have been filled with sadness and despair, and several people even mentioned the only option being suicide. And they didn’t say this in a joking manner.” AT&T’s Human Resources Director asked Schiavi to identify which employees were potentially suicidal, but Schiavi refused and eventually recanted the statement that some of her colleagues had threatened suicide.
AT&T determined that Schiavi violated its code of conduct and that the violation warranted termination. Although AT&T believed that Schiavi’s termination was justified and that it was under no obligation to provide her severance benefits or allow her to resign, it nonetheless agreed to provide $19,948 in severance pay and to classify her separation as a resignation in exchange for Schiavi executing a separation agreement with a general release of claims. Schiavi agreed and she executed the agreement and accepted the severance.
The separation agreement contained a no-rehire provision whereby Schiavi agreed that her employment with AT&T ended on August 21, 2000 and that she “will not apply for or seek employment with the Company at any time thereafter.”Schiavi testified that she understood this to mean that she could not work for AT&T ever again. If Schiavi breached the agreement, she was required to repay her severance benefits and pay all attorneys’ fees and costs related to AT&T’s enforcement of its rights.
In 2005, Schiavi responded to a job listing for a temporary contract assignment posted by the manager of AT&T’s Internet Security News Network (ISNN). The AT&T contractor hired Schiavi for the ISNN position and she commenced work at AT&T’s Bedminster office. As part of her acceptance, Schiavi acknowledged that she “agree[d] to accept a temporary work assignment to AT&T.” She was engaged to work for the exclusive benefit of AT&T, and was supervised by AT&T employees.
A couple of months into her contract work for AT&T, the same HR Director who investigated Schiavi’s email and handled her termination five years earlier encountered Schiavi in the Bedminster cafeteria (oops), and learned that Schiavi was working as a contractor at AT&T’s facility. Shortly thereafter, HR informed ISNN that Schiavi must be released from her engagement because she was ineligible to work at AT&T under the terms of her 2000 separation agreement. Schiavi was then informed that her assignment was ending.
The Lawsuit
Schiavi filed a lawsuit against AT&T alleging a multitude of contract and tort claims. AT&T counterclaimed, alleging that Schiavi breached the separation agreement. Following a six-day trial in 2012, a unanimous jury found that AT&T committed no wrongdoing and found that Schiavi breached the separation agreement and was liable to AT&T for damages. The trial judge entered judgment for AT&T in the amount of $35,074 (which included the severance AT&T paid to Schiavi plus its attorneys’ fees).
Schiavi appealed, but the Appellate Division panel affirmed the judgment against her. The court was not persuaded by the distinction that Schiavi advanced between employment and engagement as a contractor. Essentially, Schiavi argued that working as an independent contractor on an exclusive engagement for AT&T at AT&T’s facility under the supervision of AT&T employees did not run afoul of the no-hire provision in her separation agreement. The court, however, found: “AT&T clearly wanted to sever its relationship with Schiavi, which is why it proposed the severance agreement and included language precluding future employment ‘with the Company.’ Clearly, Schiavi’s return to an AT&T workplace as a contract worker, rather than an employee, would have been inconsistent with the overall purpose of the agreement as developed at trial. Schiavi acknowledged at trial her understanding ‘that [she] could never work for AT&T again,’ and that there was nothing in the agreement that she could ‘work for AT&T as long as [she was] a contractor’ or ‘a temporary employee.'”
The court further found, in the context of this case, nothing in the record to suggest that the damages provision (including liquidated damages and attorneys’ fees) was unreasonable or grossly disproportionate to the actual harm sustained by AT&T. The court explained, “[I]n order to ensure a clean break with no residual claims or litigation, [AT&T] agreed to give [Schiavi] severance pay in return for certain promises, including the promise not to return to the company or file suit. By breaching the contract, Schiavi deprived AT&T of the benefit of its agreement, and we see nothing unreasonable in the requirement that she forfeit the severance pay she received in return for the promises she breached. … We find no reason to find the shifting of counsel fees unreasonable in this case, inasmuch as one of the goals of the agreement from AT&T’s point of view was to avoid the expense of litigation.”
Takeaways
Just last week, Schiavi appealed to the New Jersey Supreme Court. We will monitor the case to see whether New Jersey’s highest court takes a different position than the trial court and the Appellate Division. In the meantime, what can employers learn from this case? First, it should go without saying that the best practice is for employers to obtain a release from discharged employees (particularly in tricky termination situations). Second, when appropriate, employers should continue to use no-hire provisions in separation agreements, settlement agreements and the like to prevent problem employees from resurfacing down the road. Finally, and most importantly given the contours of this case, employers should carefully word their no-hire provisions to avoid getting “Schiavied.” Had AT&T broadened its no-hire provision a bit to include, for example, engagements as a contractor for AT&T, work in an AT&T facility under the direction of AT&T personnel and/or work for an AT&T affiliate or related party, there would have been less ambiguity and Schiavi’s dispute would likely have been nipped in the bud without the time, expense and uncertainty of eight years (and counting) of protracted litigation.