Mike Allmand v. Jon Pavletic - Dissenting

IN THE SUPREME COURT OF TENNESSEE

AT JACKSON

November 5, 2008 Session

MIKE ALLMAND v. JON PAVLETIC ET AL.

Rule 23 Certified Question of Law

United States District Court for the Western District of Tennessee

No. 06-2128 DP Bernice Bouie Donald, Judge

No. M2008-00459-SC-R23-CQ - Filed August 26, 2009

WILLIAM C. KOCH , JR., J., dissenting.

This Court accepted a question of law certified by the United States District Court for the

Western District of Tennessee regarding the authority of municipal utility boards to enter into

employment contracts with at-will employees that provide for severance benefits if the employee is

terminated without cause. While the Court has decided that “some form of severance compensation

. . . [may be] permissible,” it has concluded that the particular severance provisions in the two

employment contracts at issue in this case are not enforceable. I respectfully disagree.

I.

Mike Allmand is a long-time employee of the City of Ripley. Since 1980, he has managed

Ripley Power and Light Company (“Ripley Power”) under five employment contracts. In more

recent times, he was also employed as the general manager of the Ripley Gas, Water and Wastewater

Department (“Ripley Gas”).

After a decision was made in mid-2003 to merge Ripley Power and Ripley Gas, Mr. Allmand

and Ripley Gas entered into an employment contract on October 31, 2003, naming Mr. Allmand as

the president and chief executive officer of Ripley Gas. Less than two months later, on December

11, 2003, Ripley Power and Mr. Allmand entered into a new employment contract naming him as

the president and chief executive officer of Ripley Power. These dual employments were apparently

intended to facilitate the planned merger of Ripley Power and Ripley Gas.

Mr. Allmand is an at-will employee. However, both his October 31, 2003 contract with

Ripley Gas and his December 11, 2003 contract with Ripley Power were for multi-year terms. The

Ripley Gas contract was for an eight-year term, and the Ripley Power contract was for a fourteen-

year term. Both contracts also contained separate severance provisions that would be triggered

unless Mr. Allmand “voluntarily abandoned his job” or “engaged in intentional misconduct.” Under

the Ripley Power contract, Mr. Allmand was entitled “to receive [his] annual salary, compensation,

and all benefits for the remaining term of the Agreement.” These payments would be made

“pursuant to the Employer’s normal bi-weekly pay schedule.” Under the Ripley Gas contract, Mr.

Allmand was entitled “to receive [his] annual salary, compensation, and all benefits for the

remaining term of the Agreement or a period of five years from the date of . . . termination,

whichever is greater.” This contract also required the severance payments to be made “pursuant to

the Employer’s normal bi-weekly pay schedule.”

In July 2004, following a local election in April 2004, Ripley’s Board of Mayor and

Aldermen voted to abolish the Board of Public Utilities and to assume its oversight responsibilities.

On November 7, 2005, the Board of Mayor and Aldermen terminated Mr. Allmand’s contracts with

Ripley Gas and Ripley Power. It abolished the position of president and chief executive officer of

Ripley Gas and hired a new superintendent. The Board of Mayor and Aldermen also abolished the

position of president and chief executive officer of Ripley Power but retained Mr. Allmand as the

superintendent of the Electric Department.

On February 24, 2006, Mr. Allmand filed suit in the United States District Court for the

Western District of Tennessee. His complaint contained a claim for breach of his employment

contracts and sought his “severance pay benefits” as part of his damages. One of the Ripley

defendants’ defenses to Mr. Allmand’s breach of contract claim was that both the October 31, 2003

and the December 11, 2003 contracts were void because they conflicted with Mr. Allmand’s status

as an at-will employee.

On July 23, 2007, the District Court granted the Ripley defendants a partial summary

judgment regarding Mr. Allmand’s employment contracts. The court held that these contracts “are

voidable as to all provisions contingent upon a definite term of employment.” However, the court

also determined that the contracts were valid “[w]ith respect to those provisions not contingent upon

a definite term of employment, such as compensation, retirement, and annual/sick leave.” When the

parties disagreed over the application of this ruling to the severance provisions in Mr. Allmand’s

contracts, the District Court filed an order of clarification on August 8, 2007, stating:

The Court finds that the issue of severance is not precluded by the

Court’s holding that the Board lacked the authority to contract for a

term of years. The issue of severance is not inconsistent with an at

will contract. Accordingly, the issue of severance is not rendered

moot by the Court’s earlier order.

At this juncture, the Ripley defendants filed a motion seeking reconsideration, permission

to pursue an interlocutory appeal to the United States Court of Appeals for the Sixth Circuit, or

certification of the issue to this Court in accordance with Tenn. Sup. Ct. R. 23. The District Court

chose the certification option. In its amended certification order entered on September 5, 2007, the

District Court certified the following question of law:

Whether a municipal utility board has the authority to enter into a

contract with an appointed city official who serves at the will and

pleasure of the Board of Mayor and Aldermen whereby the utility

board contracts to continue to pay the official’s salary for a multi-year

time period [8 and 14 years] after the official’s employment is

terminated.

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As I construe this order, the District Court has requested this Court to address only one question of

law – the question regarding whether employment contracts with at-will employees of municipal

utilities boards may include severance provisions such as those found in Mr. Allmand’s contracts.1

I would answer that question in the affirmative.

In its answer to the District Court’s certified question, the Court states that “some form of

severance compensation” for at-will employees of local governments might be permissible but then

holds that the particular severance provisions in Mr. Allmand’s two employment contracts are not

only “inconsistent with the at-will nature of the employment” but also do not authorize an award of

severance. The Court bases this conclusion on the following considerations: (1) the fact that the

“practical effect” of the contracts “establish[es] precisely the type of long-term obligation that the

City’s charter forbids”; (2) that the severance provisions in Mr. Allmand’s employment contracts

“have few of the characteristics associated with a traditional severance package”; (3) that Mr.

Allmand’s contracts mention “severance payment” only once between them; and (4) that the

severance provisions have the “practical effect” of liquidated damages provisions.

I have concluded that the severance provisions in Mr. Allmand’s contracts are entirely

consistent with severance provisions generally used in both the public and private sectors and that

they cannot be equated with liquidated damages provisions because, as this Court noted in Guiliano

v. Cleo, Inc., 995 S.W.2d 88, 97 (Tenn. 1999), they are payable even when the employment contract

is not breached. With regard to the “onerous requirement[s]” of these contracts, I would hold that

the validity and enforceability of a contract does not generally rest on whether one of the contracting

parties has made a bad deal. Ellis v. Pauline S. Sprouse Residuary Trust, 280 S.W.3d 806, 814

(Tenn. 2009).

II.

In its most general sense, severance pay includes any payment “made by an employer to an

employee for permanently terminating the employment relationship primarily for reasons beyond the

control of the employee.” 1 Howard A. Specter & Matthew W. Finkin, Individual Employment Law

and Litigation § 5.26, at 327 (1989) (quoting Everett D. Hawkins, Dismissal Compensation 5

(1940)). In the private sector, neither federal nor state law requires employers to provide severance

pay;2 thus it is purely a matter of contract between the employer and the employee. Thus, contractual

severance pay provisions should be construed and enforced using the traditional canons of contract

construction.

1

Because the District Court had already determined that Tennessee law does not permit the multi-year terms

in Mr. Allmand’s contracts, it did not request this Court to address that question. The validity of the multi-year

employment provisions and the severance provisions are separate and distinct issues.

2

Gerard P. Panaro, Guidelines for Severance Pay, Nov./Dec. 2006, at 7, available at 12 No. 6 HR Advisor:

Legal and Practical Guidance 7 (W estlaw) (hereinafter “Panaro”). It is not uncommon for government employers to

enact statutes or ordinances requiring or permitting severance payments to their employees.

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Severance agreements arise in essentially two contexts. First, they are negotiated either at

the beginning of employment or when an employee is offered a new position with different or

expanded responsibilities. In this circumstance, the agreement serves as an inducement for the

employee to accept the employment or to continue his or her employment with new duties and

responsibilities. Second, severance agreements are negotiated after an employer has decided to

terminate an employee.3 In this circumstance, the agreement serves as a means to avoid controversy

and litigation over the termination. This case involves the first type of severance agreement – one

that was entered into as an inducement for an employee to assume additional responsibilities. When

Mr. Allmand’s employment agreements were negotiated and signed, the Ripley employers had not

decided to terminate him.

During the past three decades, employment contracts containing severance provisions have

become a normal part of executive recruitment in the private sector. Executives began insisting on

severance provisions because they provided added protection. John Tarrant, Perks and Parachutes:

Negotiating Your Executive Employment Contract 13 (1985) (hereinafter “Tarrant”). Now, many

companies and executives prefer “to establish and fix in advance the amount the company will be

required to pay and the executive will be entitled to receive in the event of a termination by the

company without cause or resignation for good reason.” Robert Salwen, 2001 Guide to Executive

Employment Contracts 26 (2000) (hereinafter “Salwen”).4 A recent study that examined 100

executive employment contracts found that 98% of these contracts included severance provisions

for executives who are terminated without cause before the expiration of the contract. Salwen, at

52 tbl.2-27.

Severance provisions are now considered to be one of the six basic ingredients of any

executive employment contract.5 Tarrant, at 23. Severance payments may take the form of “salary

continuation” (continued payments equal to full salary or a portion thereof for a specified period of

time), or a lump sum payment on the date of termination, or a combination of both.6 Salwen, at 26;

Jeffrey S. Klein et al., Thirty-Fifth Annual Institute on Employment Law, Drafting Employment

Agreements 175, 186 (PLI Oct. 2006). Whether the severance payments are paid in installments or

in a lump sum is generally a matter of negotiation between the employer and the employee. Panaro,

at 7.

3

This Court recognized this type of severance agreement in Guiliano v. Cleo, Inc., 995 S.W .2d at 97. W hile

the Court in Guiliano v. Cleo, Inc. did not explicitly mention the first type of severance agreement, the opinion,

reasonably interpreted, does not categorically exclude the existence of other types of severance agreements.

4

See also Michael B. Snyder, Benefits Guide § 9:45 (June 2009), available at, BNGD § 9:45 (W estlaw)

(hereinafter “Snyder”) (reporting that a recent survey of 124 large employers by Hewitt Associates found that they

provided severance benefits to their executives).

5

The other five basic ingredients are: (1) the term of the contract, (2) the duties of the job, (3) the compensation,

(4) the benefits, and (5) the grounds and procedure for termination. Tarrant, at 23.

6

For terminations without cause, the period of time for the payment of severance benefits may be the remainder

of the term of the contract. Often, however, the employer and the employee will agree on a fixed period of time for the

payment of severance benefits. Salwen, at 27. Salary continuation payments are frequently paid in accordance with the

employer’s regular payroll periods. Snyder § 9:45.

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A recent survey of 100 executive employment agreements reported that 36% of the employers

based the severance pay on the executive’s base salary, while 64% of the employers based the

severance pay on the executive’s base salary plus bonuses. Salwen, at 53. The same survey reported

severance payout periods of between 3 and 3.5 years for chief executive officers in 41% of the

contracts, and payment periods of 5 years or more in 11% of the contracts. For other executives, the

survey reported severance payout periods of between 3 and 3.5 years in 29% of the contracts, and

payout periods of 5 years or more in 13% of the contracts. Salwen, at 54 tbl.2-33.

The inclusion of severance provisions in employment contracts has migrated from the private

sector to the public sector. These provisions are used to attract skilled employees to serve in at-will

positions, Village of Oak Lawn v. Faber, 880 N.E.2d 659, 668 (Ill. App. Ct. 2007), and to retain key

employees who might seek employment elsewhere, City of Omaha v. City of Elkhorn, 752 N.W.2d

137, 148 (Neb. 2008). Employment contracts that contain a severance provision provide important

protections for managers in government service who are in the position of “serving at the pleasure

of a governing body with the possibility of being dismissed for any reason at any time.” Sizemore

v. City of Madras, No. 02-74-KI, 2005 WL 273006, at *9 (D. Or. Feb. 2, 2005).

While the issue has not been exhaustively litigated, courts have concluded that a provision

for severance pay in a government employee’s employment contract is not inconsistent with an

employee’s at-will status. Thus, at-will government employees who have a severance pay provision

in their employment contract may still be terminated at any time for any reason. However, the

government employer must honor its contractual obligation to pay severance benefits if the employee

is otherwise entitled to them. McGregor v. Bd. of Comm’rs, 674 F. Supp. 858, 861 (S.D. Fla. 1987);

Stephenson v. City of Claycomo, 246 S.W.3d 22, 30 (Mo. Ct. App. 2007) (holding that a

municipality owed a fire chief severance benefits equal to five years of his gross salary); Myers v.

Town of Plymouth, 522 S.E.2d 122, 124 (N.C. Ct. App. 1999) (upholding a severance provision in

an employment contract even though it “may have deterred” the municipality from terminating the

employee). In these circumstances, the provisions in a government employee’s employment contract

regarding the length of the term of employment and severance benefits are not in conflict and may

be given separate effect. Dice v. City of Montesano, 128 P.3d 1253, 1258 (Wash. Ct. App. 2006).

III.

Mr. Allmand’s employment contracts contained severance provisions. Even though there

is no standard severance provision, the substantive and procedural aspects of the provisions in Mr.

Allmand’s employment contracts essentially mirror the severance provisions used by other

corporations and governmental employers. Thus, I must respectfully disagree with the Court’s

conclusion that the severance provisions in Mr. Allmand’s employment contracts “have few of the

characteristics associated with a traditional severance package.” Because the courts must construe

contracts based on their substance, there is little room for reasonable doubt that the contractual

provisions at issue are, as found by the District Court, severance provisions.

For the purpose of this appeal, we may comfortably presume that the District Court correctly

decided that the provisions in Mr. Allmand’s employment contracts providing for a multi-year term

of employment were invalid because they conflicted with Mr. Allmand’s status as an at-will

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employee. However, the fact that these provisions are invalid does not undermine the remaining

provisions in the contracts. See Taylor v. Butler, 142 S.W.3d 277, 287 (Tenn. 2004) (holding that

a void arbitration clause does not invalidate the remainder of the contract); Bratton v. Bratton, 136

S.W.3d 595, 602 (Tenn. 2004) (recognizing that the unenforceability of one provision of a severable

contract does not excuse the enforcement of the remainder of the contract). Accordingly, the validity

of the severance provisions in Mr. Allmand’s contracts must stand or fall on its own.

One final question remains – whether an otherwise valid contract can be undermined on the

ground that enforcing the contract will cause financial hardship on one of the parties. Under

Tennessee law, the answer to that question is resoundingly “no.” Tennessee law favors allowing

competent parties to strike their own bargains, 21 Steven W. Feldman, Tennessee Practice: Contract

Law & Practice § 1:6, at 17 (2006), and also favors enforcing written contracts. Bob Pearsall

Motors, Inc. v. Regal Chrysler-Plymouth, Inc., 521 S.W.2d 578, 580 (Tenn. 1975). Accordingly,

it is not our role to assay the wisdom of a contract or to relieve a party from its contractual

obligations simply because they have proved to be burdensome. Ellis v. Pauline S. Sprouse

Residuary Trust, 280 S.W.3d at 814.

There is no rule of law or policy that dictates applying these general contract principles to

government contracts with any less rigor than they are applied to contracts between private parties.

I agree with the Court’s observation that while requiring the Ripley defendants to honor their

contractual commitments in Mr. Allmand’s employment contracts may be onerous, that fact alone

does not provide a sufficient basis for invalidating the severance provisions in his employment

contracts.

For these reasons, I respectfully dissent.

______________________________

WILLIAM C. KOCH, JR., JUSTICE

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