Severance Plan - Litigation
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    >> ERISA Benefits of Severance Plans: Legal Times Article

2021.03.22  Project Completion Plan not under ERISA - Employer Loses. It was a close call. The employer argued for ERISA preemption in order to foreclose former employees from asserting a wide range of possible claims in state court. In Atkins v. CB&I, LLC, the 5th Circuit decided against the employer mostly because the Project Completion Plan under consideration lacked not only the complexity needed to answer the “who” and “how much” questions about the bonus, but also "any special administrative apparatus dedicated to overseeing the Plan." The decision examined each of those points, and signals strategies by which smart employers may position to have ERISA govern their plans. Read on for reasons why that often makes sense! 

2018.04.30  ERISA and Severance Plans: 3rd Circuit Decision Should Prompt Employers to be Proactive.  Pursuant to the Supreme Court's seminal Fort Halifax decision, an ongoing "administrative scheme" is needed in order for a severance plan to become subject to ERISA. Plan designs that build-in elements of discretion generally create a scheme, but the 3rd Circuit just cast some uncertainty to that strategy by holding in Girardot v. Chemours that an ERISA plan does not result from "individualized determinations of the employees’ eligibility to participate in the [VSP] — which involved denying VSP applications of those employees that the Company needed to retain for business reasons."  The court concluded that decisions made over a two-month period do not result in an ongoing scheme, explaining:

  • While this process unquestionably involved an exercise of discretion and constituted more than a simple or mechanical decision, the selections took place in a period of less than two months. We cannot say that this involves long-term or ongoing administrative processes; eligibility, once determined, was 6 not conditioned on the occurrence of any future event that would require administrative consideration or adjudication. Moreover, we conclude that the selection process did not create a risk of employee abuse or mismanagement of the VSP."

The 3rd Circuit's decision should remind employers to take the initiative -- in severance plans and agreements -- to affirmatively address not only whether ERISA will govern plan disputes, but how disputes will get resolved.  There is a  two-edged cut to ERISA.  On the one hand, employers generally lose procedurally when severance is provided through a plan, program, or policy that is not documented as an ERISA plan. In those cases, a court may deem an ERISA plan to occur, with employees receiving maximum ERISA rights and employers being unable to balance those rights with the procedural protections that an ERISA plan may specify. On the other hand, a modest though formal ERISA severance plan enables an employer to benefit --

  • from requiring an exhaustion of the plan's internal claims procedures before litigation moves forward; 
  • from imposing moderate time periods, such as 90 days, within which plan participants must assert claims, as well as locking-in a moderate statute of limitations for court proceedings (such as one year);
  • from litigating in federal court before a federal judge knowledgeable about ERISA, rather than in state court before a jury; and 
  • from securing judicial review under the highly deferential arbitrary and capricious standard that the Supreme Court endorsed in its seminal Firestone decision. 

For further discussion of this topic, see our article titled "Say Hello to Smart Good-byes." It was published several years ago, but cases such as the one above highlight the continued relevance of its advice.


2017.03.04  Voluntary Severance Plans: Case on Point.  For employers wanting to thin their workforces, voluntary severance plans (VSPs) have the potential to create a win-win dynamic. 

2017.03.04  No Administrative Exhaustion Required for Statutory ERISA Claims. The Sixth Circuit has agreed with six other circuit courts (i.e., 3rd, 4th, 5th, 9th, 10th, and DC) in finding that ERISA claims relating to statutory ERISA rights (such as the legality of a plan amendment), in contrast to plan interpretations and applications, are not subject to administrative exhaustion requirements. Hitchcock v. Cumberland Univ. 403(b) DC Plan (6th Cir.).

2015.07.17  Severance Policy Established ERISA Plan – 2nd Circuit Delineates Test; Reinstates Claims 
Applying a three-part test, the Second Circuit held in Okun v Montefiore Medical Center that an ERISA-governed severance plan arose from a policy that represented "a multi-decade commitment to provide severance benefits to a broad class of employees under a variety of circumstances and requires an individualize review whenever certain covered employees are terminated." The ongoing administrative scheme that is required under the Supreme Court's Fort Halifax decision arose in the Okun case from the need for "individualized, frequently recurring review" to determine both:

  1. whether each employee had terminated employment under circumstances qualifying for benefits (i.e., termination without cause, rather than without cause or from resignation), and
  2.  the years of service needed to calculate each eligible employee's severance benefits.

2014.July.11  M&A Severance Payable despite No Job Loss (Plan Drafting Critical)
In Adams v. Anheuser-Busch, the 6th Circuit overturned the denial of severance pay to continuing employees because the seller's plan promised benefits to those "whose employment with the Controlled Group is involuntarily terminated." The court rejected the plan administrator's argument that the plan was ambiguous, applying a de novo review standard and finding an arbitrary and capricious exercise of discretion because there was only one plausible interpretation for the plain meaning of the language in question as it would be construed by an ordinary person. Because most severance plans are open to amendment before payment rights vest (such as upon a change in control), plan sponsors should be careful to study plan terms - and to thoughtfully refine them when needed -- in order to assure that severance is paid only when intended . . . and not, as here, when employment continued. 

2013.Sept.11  "Voluntary" Severance Plans, and ERISA-fication (NJ Decision)
Informal (ad hoc) severance practices carry many litigation risks for employers. At the forefront are claims by which terminated employees seek the same benefits that the employer has paid others. A New Jersey court just dismissed such claims in Mance v Quest Diagnostics, essentially because "Plaintiff claims that benefits under the [voluntary separation (VSA)] plan were offered to Quest employees 'in exchange for voluntary termination' (Compl ¶12). However, Plaintiff also admits that she was involuntarily terminated (Compl,¶6)."  The court found no basis for paying VSA benefits to the plaintiff, giventhe absence of any allegation that the malfeasance of a plan fiduciary deprived her of the opportunity to become a VSA plan participant. Overall, this is another case indicating that a well-drafted severance plan - even one providing for variable benefits determined in the employer's discretion - can defuse claims by those whom an employer excludes from the plan. 

2013.Jul.03  Severance "Good Reason" Dispute Governed by ERISA (5th Circuit)
Although the plan at issue provided for one-time payments, the Fifth Circuit found complete ERISA preemption because the plan required administrative discretion for determining claims eligibility. In Clayton v. ConocoPhillips, Conoco argued that the following features of its severance plan involved an ongoing administrative scheme (as required under the Supreme Court'sFort Halifax test for ERISA preemption): (1) deciding if "good reason" exists as a reason for severance eligibility, (2) making the calculations for the amount due as severance, (3) operating the program over 24 months after a change in control, because the time for employment terminations was not one-time for all, and (4) providing ongoing benefits in the form of bonuses, various insurance coverages, and outplacement assistance. The Fifth Circuit found Conoco’s argument “convincing” – and included numerous cites to applicable cases (see pages 23-24 of PDF).

2013.Jan.30 Unfair Claim Interpretations Undermine "Good Reason" Severance Denial
In Veltri v. Abbott Severance Pay Plan, a NJ district court held that the plan administrator's denial of severance benefits was arbitrary and capricious, resulting in full severance benefits for "good reason" resignations, due to actions by the plan administrator involving --

  • interpreting the plan to allow the employer to have a "cure period" (where that right had to be implied despite the absence of supportive plan language);
  • determining when an employee made a claim for benefits without regard to when the employee disputed his claim regarding his right to resign due to the distance of his office relocation; and
  • "the Administrator's rigid adherence to a formula for computing distance that causes unreasonable results."

2013.Jan.03  WARN Claims Proceed despite Pay in lieu of Notice (D. MD)
Rejecting an employer’s argument that pay in lieu of notice foreclosed WARN claims, a Maryland court held as follows in v.Gray v Walt Disney, 2013 WL 45883: By arguing that they paid their employees “enough,” but less than full, Notice Pay to escape any liability, the defendants put the cart before the horse. Once an employer has failed to either give adequate notice or has failed to continue to paying its employees full wages and benefits for 60 days after a closing, employees are entitled to prove back pay for all of the time they “would have worked” during the 60–day period.