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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