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

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.  They can also spur litigation if employees feel they were misled or would have made different decisions with better information.  A March 29th decision from Delaware’s federal district court is discussed below because the case involves a typical VSP structure, and a litigation risk for employers to avoid. 
As a general matter, VSPs operate through a few basic steps, namely:

  1. The employer invites select groups of employees to “request” inclusion in a severance plan (or program) that promises particular benefits in exchange for general releases of their claims.
  2. During a window period, eligible employees may request that the employer accept their offer to terminate employment.
  3. Based on its workforce needs, the employer accepts or rejects employee requests, and then implements the terminations.
  4. If not enough employees (or the “wrong” employees) sign-up for the VSP, the employer implements a follow-on involuntary reduction in force (“RIF”).

The Delaware case mentioned above (Girardot v. The Chemours Co.) has its roots in a corporate spin-off, followed by a VSP, followed by a RIF.  The latter occurred because, in the words of the court, “the voluntary reduction in force did not sufficiently reduce costs.”  Litigation came from VSP participants who alleged that “they would not have elected to participate in the VSP had they been informed of the possibility that the [RIF plan] would be implemented with greater benefits.”  
Strategically, VSPs often work best if employers announce them with a warning to the effect that a RIF – providing lesser benefits – may follow if the VSP does not result in sufficient downsizing.  The specter of a tagalong RIF encourages poorly performing employees to opt-into the VSP, in order to secure its greater severance benefits.  Ultimately, employers need to carefully construct  and communicate the interplay between a VSP and a RIF.  They also need to take precautions with supervisory employees in order to avoid having  well-intentioned managers risk converting the VSP into an involuntary programs by forewarning select employees that they had better take the voluntary severance. 
The Girardot case described above highlights one key litigation risk in this context, namely: employers need to be sure the VSP is communicated to eligible employees through FAQs or other means that generally address how the VSP differs from the RIF.  Imprecision or ambiguity can open the door for claims that employees were misled or under-informed about their choices. 
Another significant risk comes from employment discrimination laws.  Employers need to be careful when they decide who is eligible for the VSP as well as which volunteers to accept or reject for severance. Problems can arise from discrimination that is intentional, or statistically demonstrable.
Finally, Delaware’s Girardot decision focused on whether ERISA governed claims arising under the VSP.  The court found ERISA to be inapplicable because –

  • the one-time, lump sum payments distributed under the VSP did not require the creation of a new administrative scheme, and the bonus payments were payable ‘per usual Company practices based on financial results’ which, like the continuation of existing benefits for a limited duration, did not materially alter the existing administrative scheme.   

Interestingly, the VSP was not structured to fall within ERISA, although it could have been.  See “Say Hello to Smart Good-byes” for reasons why employers may want to ERISA-fy their severance practices, in order to mitigate litigation risks.

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.

The 2nd Circuit's decision should remind employers about the two-edged cut of ERISA. On the one hand, they 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 that 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 litigating in federal court before a federal judge, 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.

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.