Last week we looked at whether your severance arrangement might in reality be an ERISA severance plan. Click here if you missed it. Let’s re-visit our fictitious employer, Wonderful Widgets (or W.W). W.W may or may not have inadvertently created a severance plan, subject to ERISA. That may not be a bad thing, though. Why might W.W. want to create such a plan? Alternatively, why might it be better not to? Are there some do’s and don’ts for employers in either scenario? That’s our topic for the week–after the jump…
Why might W.W. want to create an ERISA severance plan? Suppose W.W. is a large company, wants to attract top talent, and also hires for some risky ventures. A formal severance plan with top benefits could be part of the package used to entice those candidates. Can that be done without creating an ERISA plan? Yes, though it could mean that WW will then be left the potentially arduous task of negotiating possible severance packages every time it either is looking to entice top talent or when it has to let employees go–and a company undertaking risky ventures might go through phases where it has to terminate more than a few employees. In this type of scenario, WW would then be running the risk of discrimination claims individual negotiations result in significant differences in the severance packages of similarly situated employees.
What if you simply offer the same package to everyone, and it’s a one-time lump sum payment, or you offer a certain number of weeks’ pay for every year of service and leave it at that? In fact many companies do exactly that. Again though, that type of arrangement may not be sufficient if you are looking to entice top talent, or if you are terminating an officer or other top-tier employee and you want to exercise a certain amount of control over that person’s post-employment behavior.For example, WW may want to ensure that its officers do not work for competitors or start a competing business for two years after termination. Depending on the restrictive covenant, those officers may effectively be unable to work for that entire time. The severance package will have to be sufficient to justify the restrictions. Under a formal severance plan, there could be different packages offered to different groups of people meeting certain eligibility criteria.
Now, you may be thinking, “Isn’t this getting unnecessarily complicated? Why can’t I just have a severance arrangement for top officers and one for the rest of my employees, set a lump sum or certain number of weeks’ pay and have them sign an agreement? Why do I need to create a plan, subject to potentially stringent federal laws?” You can do that. You may still want to do that. Perhaps the biggest advantage to an ERISA plan is the degree of deference you will receive if any of your terminated employees should file a claim against you regarding severance. If you have an ERISA plan and you comply with reporting and disclosure requirements, you may benefit from some very employer-friendly provisions. If a disgruntled former employee has a dispute about the severance package you are offering, then pursuant to ERISA, s/he must first go through the procedure set forth in your plan. That procedure usually involves a plan administrator making some type of determination. The employee cannot file suit before following that procedure. If the employee does not agree with the plan administrator’s determination, s/he can file suit, but must do so in federal court, and the matter will be decided by a judge, not a jury–and the judge must give some deference to the administrator’s determination. While that is not necessarily an automatic win for the employer, the odds are stacked heavily in the employer’s favor.
What might a non-ERISA severance package dispute look like? The answer to that will depend in part on whether you have a written severance agreement, and will largely depend on specific facts. If you do not have a written agreement, the court could still find that you have an implied contract, and can interpret your behaviors and past practices to determine your obligations. If you do have a written agreement, the court will start by applying contract principles — in accordance with the laws of the state in which the dispute arose, unless your written agreement stipulates otherwise. These cases will generally be in state court and will be heard by a jury. Essentially someone else could end up deciding your intentions and obligations. Your wishes or determinations will not receive deference from the court.
On the other hand, if you use severance agreements without creating an ERISA severance plan, you will not need to designate (and possibly hire) a separate person to administer a written plan. You will not need to determine eligibility criteria, and, at least in theory, you might have more flexibility in tailoring severance packages for departing employees–as long as you make sure your packages do not discriminate against similarly situated employees in classes protected by anti-discrimination laws.
So, if you want to create an ERISA plan make sure you:
- Put your plan in writing;
- Specifically state in the plan that the Plan Administrator has broad discretion in administering and interpreting the plan;
- Clearly set forth your dispute resolution procedures;
- Consult with and have an ERISA attorney assist you in constructing and writing the plan and ensuring its compliance;
- Comply with all reporting and disclosure requirements;
If you do not want your severance arrangement subject to ERISA, you should:
- (Still) put the terms in writing;
- Make sure that determining eligibility does not require someone to determine eligibility or level of benefits;
- Make sure that providing any benefits does not require ongoing administration by anyone, other than to ensure payment of an agreed upon sum;
- Consult with competent employment/ERISA counsel and have him/her write/review your severance agreement(s) and ensure your arrangement(s) do not leave you open to discrimination claims.
Next week we get to look at COBRA/ACA issues regarding departing employees’ health benefits. Don’t miss it!
Disclaimer: This post’s contents are for informational purposes only, are not legal advice and do not create an attorney-client relationship. Always consult with competent employment counsel on any issues discussed here.
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