When a Mississippi soft drink worker was laid off, she signed a release of all employee claims in exchange for a severance package of $23,000. But then she sued, charging that she should not have been classified as exempt and wanted $19,000 in overtime and damages. The company cried ‘Foul. We gave you severance for your agreement not to sue.’

What happened. “Mason” worked as an hourly route settlement clerk for PepsiAmericas for 5 years and was promoted to route settlement supervisor in 2004. She was laid off 2 years later. At termination, she signed an agreement not to file “any complaints, charges, lawsuits, or any other claims against the Company arising out of the employment relationship and/or termination of employment” and was given the severance package. But in 2007, she sued, seeking unpaid overtime under the Fair Labor Standards Act (FLSA), because, she said, the supervisory position was really nonexempt.

Pepsi asked the federal district court judge to allow it to “set off” the severance amount from any overtime for which a jury might find it liable, and the judge agreed. At the next stage, he also agreed that the severance given to Mason exceeded anything she might win for overtime, and the case was dismissed. Mason appealed to the 5th Circuit, which covers Louisiana, Mississippi, and Texas.

What the court said. Before appellate judges, Pepsi argued that a decision they had made in an earlier case should apply to it. In that case, a Texas city had paid firefighters wages that fluctuated widely by pay period, sometimes overpaying and sometimes underpaying them. When the firefighters sued for unpaid overtime, the court allowed the city to offset the amounts of past overpayments against the overtime due. They deemed the overpayments as prepayments of overtime. But that situation didn’t resemble Mason’s case.

Instead, judges pointed to another earlier ruling in which they had written, “To clutter [FLSA] proceedings with the minutiae of other employer-employee relationships would be antithetical to the purpose of the Act.” And in this case, they wrote, “We continue to look with disfavor on set-offs unless the money being set-off can be considered wages that the employer prepaid to the employee.” So Mason’s case will be heard by a jury in district court. Martin v. PepsiAmericas, U.S. Court of Appeals for the 5th Circuit, No. 09-60896 (2010).

Point to remember: By April 2011, the Department of Labor plans to seek documentation from employers for all jobs classified as exempt. Here, judges may have suspected that Mason’s supervisory job should indeed have been seen as nonexempt.