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Severance Litigation - Precautions for Employers to Consider

2019.09.05  One-Two Punch to Defuse Severance and Other Benefit Disputes.  Yesterday, in Bangaru v. Shell,  the 5th Circuit shut the door on a former Shell executive who sought $1.5 million of severance based on his interpretation of the severance laws of his home country (India). The Court described the plaintiff’s arguments as confusing and granted summary judgment to Shell.  Shell succeeded mainly because its severance-related documents were straightforward and did not open the door for claims based on improper interpretations or miscalculations.

The Court observed that Shell’s employment agreement and severance-related documents did not mention any of the notices that Bangaru claimed he should have received. Further, regarding calculation of his severance, Bangaru never explained how Shell had made mistakes in applying its severance formula. He instead sought enhanced severance based on Indian retrenchment law, but did not provide any clear and concise justification for that under the terms of any employment or severance plan. In dismissing his claim, the court state that it “is left guessing as to what Indian retrenchment law encompasses or how it affects these calculations.” The Shell case shows why the precise drafting of severance-related agreements and plans is the surest step by which employers may avoid costly severance litigation.

Two other employer precautions will also knockout gadfly claims for enhanced severance benefits.  The first involves plan documentation.  Informal severance practices generally foment claims that past severance pay levels create a current expectation - and right - for terminated employees to collect no less than the same level of severance in the future. ERISA often supports such relief, because there are numerous cases holding that past severance practices have resulted in a deemed ERISA plan . . . thereby giving former employees the best of all worlds: ERISA-based arguments for benefits, plus an ERISA right to recover attorneys fees, but without the usual deference that an ERISA plan may provide for employer determinations. 

Therefore, employers who routinely pay severance (like Shell) are almost always best served to formalize their practices into a plan document, even if significant discretion is exercised over what to pay. Further, structuring a plan to fall within ERISA enables an employer to benefit from (1) requiring exhaustion of plan remedies before litigation occurs, (2) having courts review plan determinations under a highly deferential "arbitrary and capricious" standard, (3) litigating in federal court where ERISA limits claims to those involving the collection of plan benefits, rather than under state law with wide-ranging tort claims and damages being possible, and (4) having a federal judge rather than a state jury decide claims.

The second precaution for employers to consider involves the dispute resolution provisions within their severance plans (as well as all other employer-sponsored benefit plans). The Shell case, and its prompt dismissal of the former employee's claims, brings to mind one precaution that discourages unfounded claims, namely: allowing the party who substantially prevails in litigation to recover its attorney's fees. When included in a plan, that provision has the potential to discourage any plan participants from pushing forward with aggressive claims. There are many other precautions to also consider, such as short plan deadlines and shortened statutes of limitations that require the prompt assertion of any claims.

Overall, any employer that sees a recession or possible workforce reductions on the horizon would be smart to get its house in order now concerning any plans or agreements that could give rise to severance payments or claims.  There are straightforward means by which to establish uniform (or at least consistent) dispute resolution mechanisms. Better-drafted processes could broadly assure the efficient resolution of all benefit claims - from pension to health and welfare to equity awards and severance. Coincidentally, employers may improve, or initiate, protections relating to trade secrets, non-solicitation, and non-competition. What should not be an option is a haphazard or reactive approach to claims and protective covenants. If that happens, there is sure to be a day coming for regret over the loss of simple, smart opportunities.

By Mark Poerio, with assistance from Jordan Mamorsky.