Voluntary Severance Plans
For employers wanting to downsize their workforces, a win-win result is possible through voluntary severance plans (VSPs). A well-designed program has the potential to encourage resignations by those who either want to retire or should leave because they are weak performers. As a general matter, the most successful VSPs operate through a few basic steps, namely:
VSPs can work well when employers assure opt-ins are voluntary yet at the same time carefully warn about the potential for less generous RIF if the VSP does meet its objectives. If executed poorly, VSPs can spur litigation. Discussed below are illustrations of both outcomes..
VSP Risks and Precautions
The Girardot case highlighted the need for VSP communications to be made to eligible employees through FAQs, or other vehicles, that explain how the VSP will operate, as well as how it will differ from a possible future RIF. Imprecision or ambiguity can open the door for claims by employees who feel in hindsight that that they were misled or under-informed about their choices.
ERISA – Often the Best Litigation Shield
Delaware’s Girardot decision focused on whether ERISA governed claims arising under the VSP. The court found ERISA to be inapplicable (and dismissed the ERISA case) 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 a VSP’s litigation risks. In a nutshell, the benefits of an ERISA severance plan generally include the following:
It is not easy to right-size a workforce. Voluntary severance plans offer a means for doing so in a constructive manner that minimizes litigation risks -- by enabling employees to leave voluntarily, through execution of claims releases as a condition for severance. As with any good idea, problems are possible. But they are generally foreseeable and avoidable by those who execute the VSP thoughtfully.
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