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Severance Litigation under Agreements, not Plans
     >>>  See specifically: "Good Reason" / "Just Cause" / EEOC Notice re Age Discrim Waivers


2019.05.23  An Ounce of Litigation Prevention for Executive Benefits … and Severance:
Lessons from an Employer’s Quagmire in New Jersey.  
There are three instructive takeaways from the April 24th decision in Weller v. Linde Pension Excess Program (D. NJ).  In that case, the employer failed in its effort to end the case before significant discovery and expense would result. Worse for the employer: the litigation arose after the executive had terminated employment, collected severance, and signed a general release of claims.  So what went wrong?

First, settlement agreements work best when they hard-wire dollar amounts or refer to attached statements summarizing what will be paid, and when payment will occur. Otherwise, post-settlement determinations about benefit payouts may open the door to back-end litigation, because employees generally cannot waive claims that arise after the date on which a settlement agreement is reached.  In the Weller case, the settlement agreement took effect July 1, 2015 . . . with one loose end. The terminated executive was entitled to receive a payment in early 2016 to close out his participation in its Pension Excess Program. At that time, the employer sent the executive a statement explaining the basis for sending him just under $19,000. The executive claimed he should have received $131,145 because his severance pay should have factored into his excess pension calculation. Hence a serious dispute emerged.


That leads to the second lesson from the Weller case. Its Pension Excess Program omitted any claims procedures, and apparently omitted common litigation protections such as judicial review under an “arbitrary and capricious” standard. Because of those omissions, litigation occurred under a de novo standard of review, meaning the courts will decide on their own which party has the better argument – with no deference to the employer’s interpretation of its plan. Applying de novo review, the Weller court denied summary judgment for the employer.  It is common to think of claims procedures as being limited to ERISA plans (because ERISA requires them). However, claims procedures and other dispute resolution provisions are certainly allowed in other plans – such as incentive compensation, cash bonus, and equity award plans.  Smart employers normally include some level of litigation protections for just the reasons that backfired in the Weller case.  A list of dispute resolution provisions to consider appears within this webpage associated with classes that Mark Poerio of our firm has taught for years at Georgetown Law.

 Finally, the facts of the Weller case bring a reminder about a procedural precaution to take when finalizing severance agreements and claims releases. Because future claims cannot be released, it is smart to execute releases only on the day employment terminates,  or afterward. According to the Weller case, the separation agreement took effect July 1, 2015, but Weller’s employment ended two months later.  During that tail-end period, employment-related claims could have arisen. For instance, age discrimination, or other Title VII discrimination, could have occurred and triggered litigation despite the separation agreement. When separation agreements are negotiated and signed before employment ends, severance should be structured to be paid only after an employee has signed a simple, second-stage certification or release confirming a release of claims through the final date of employment.


Overall, it royally pains employers to pay healthy severance and then to be sued. Fortunately, some front-end precautions are available to protect against that.


2016.07.08  ERISA Covers Severance Plan Paying Lump Sum.  The Supreme Court's seminal Fort Halifax decision limits ERISA coverage to those severance plans that involve an ongoing administrative scheme.  Simple lump sum payment plans often fall outside ERISA when they are considered to involve little if any discretion to determine benefit amounts and eligibility. In Gomez v. Ericcson, the 5th Circuit recently found that ERISA covered a lump sum payout plan because of the employer discretion needed to determine (1) benefit amounts taking into years of service, offsets, and deductions, (2) whether some terminations were for "good reason" and (3) whether eligible participants had satisfied the plan's conditions requiring both a return of employer property and  execution of a claims release satisfactory to the employer.  This comprehensive decision surveys years of ERISA case law pertinent to its application to severance plans, and provides design insights for employers who want to secure the ERISA advantages noted in the following item.


2016.07.07  Severance Insights: From Drafting to ERISA-fying.  It really hurts to pay severance, to get a claims release, and then to be sued!  Unfortunately, that happened in this case which provides a reminder about two precautions. First, employers should consider using an ERISA severance plan in order to take advantage of its numerous protections against litigation.  These may include internal limitations periods for claims, exhaustion of remedies, litigation before a federal judge rather than a state jury, claims limited to collecting plan benefits, and deferential judicial review.  Second, employers should draft their release agreements not only to specify the exact dollar amount being paid, but also to close the door on having former employee’s second-guess the severance they receive.
     Absent these precautions, an employer risks litigation if a broad-based release agreement expresses the amount payable (1) through a formula, (2) by reference to the employer's promise to pay benefits due under a different agreement or plan, such as a severance plan, or (3) subject to the former employee's right to enforce a different agreement.  In the case noted above, the former employee sought to enforce rights under an "Executive Severance Agreement" ("ESA").  The litigation proceeded under ERISA, but without giving the employer the benefit of otherwise available ERISA protections.  For one claim, the Illinois district court held in favor of the former employee, who had already collected over $700,000 of severance. The court explained:​​

  • The claims alleged in Count 1 clearly seek to "enforce the terms of the [ESA]." In this count, Plaintiff alleges that, under the ESA, (1) he is owed additional severance because he was fired during a change in control as defined by the ESA, and (2) he is eligible for SERP benefits under the terms of the ESA. Regardless of whether these claims have merit, they turn on the proper application of the ESA. They are therefore preserved under Paragraph 5(g) of the Release.​

Overall, the interplay between the claims release and the underlying severance agreement gave the former employee room to collect severance and then sue for more, by questioning whether the initial payment fully discharged the employer's obligation.  Overall, employers are generally best served procedurally by an ERISA-fied severance plan, and substantively by precise release agreements.


2013.Mar.28  (2013 WL 1235235)  ERISA n/a Employment Agreement's Severance Provision.   The 8th Circuit rejected the employer's argument that ERISA applied to a former CEO's claims for severance benefits that were brought under a employment agreement providing benefits mirroring those set forth in an ERISA severance plan. The decision explains:"Here, the Employment Agreement was, on its face, a complete, free-standing agreement; Sections 3(c) and 5 provided independent post-termination contract benefits to which Scheffer was not entitled under DM&E’s pre-existing ERISA plans."

2013.Mar.18   Severance Benefits Denied – ERISA Controls Employment Agreement Dispute.  In Yarber v. Capital Bank, a North Carolina federal district court applied the Supreme Court’s Fort Halifax ERISA standards to an employment agreement's change-in-control severance provision, and dismissed the complaint because the bank CEO had no right to benefits and had not been misled when he executed a TARP waiver of them.  In finding that the CEO’s employment agreement involved an administrative scheme triggering ERISA coverage, the court cited extensive federal case law, and explained in part -- 

  • Determining whether Yarber was terminated for cause, or whether he voluntarily terminated due to a "material adverse change" in his employment status, the assignment of "materially inconsistent" duties, or the failure to provide "substantially similar or greater benefits taken in the aggregate" would require Capital Bank to exercise substantial discretion to determine his eligibility for severance pay. [citations omitted] Moreover, because Capital Bank had similar contracts with other employees, Compl.~56, Capital Bank would need to maintain records and create some administrative process to ensure that the bank determined severance pay eligibility in a fair and consistent manner. See Collins, 147 F.3d at 596. This factor weighs heavily in favor of finding an ERISA plan.   [Page 7 of Slip Opinion]