On August 11, 2011, the US Court of Appeals for the Eighth Circuit issued an opinion in Dakota, Minnesota & Eastern Railroad Corporation v. Schieffer. The key issue in this case was whether severance provisions in an employment agreement that cover one person may qualify as an ERISA plan for preemption purposes.

Kevin Schieffer and his employer, Dakota, Minnesota & Eastern Railroad (DM&E), entered into an employment agreement. Soon before regulatory approval of a merger, Schieffer was terminated without cause, which triggered the agreement’s severance provisions. DM&E paid Schieffer a lump sum cash severance payment, but Schieffer alleged that DM&E breached its obligation to provide certain employee benefits.

Schieffer filed a demand for arbitration under the agreement's arbitration provision. DM&E filed an action in the US District Court for the District of South Dakota to enjoin the arbitration, claiming that the employment agreement was a severance plan under ERISA and therefore demand for arbitration was preempted by ERISA. The federal district court granted Schieffer's motion to dismiss, holding that the employment agreement was not an ERISA plan because the severance payments did not require an ongoing administrative scheme. This standard is frequently applied by courts in determining whether or not a plan falls under ERISA. DM&E appealed.

The Eighth Circuit ruled that the employment contract is not an employee benefit plan under ERISA. It also held that portions of the complaint may still be covered under ERISA's preemption provisions and remanded the case for further proceedings.

While the Eighth Circuit agreed with the district court's resolution of the ERISA plan issue, it focused its analysis on ERISA's statutory language and the broader context of the preemption issue rather than on the administrative scheme standard that the District Court relied on.

ERISA defines an employee welfare benefit plan as a plan, fund or program:

The court concluded that a plan or program under ERISA applies to benefits provided for a class of employees, not a single employee. The court noted that, no matter how complex a contract may be to administer, the regulation and enforcement of an individual employment contract between an employer and a single employees is an important prerogative of the states.

In remanding the case for further proceedings, the court held that Schieffer's demands for the payment of benefits may still be preempted by ERISA to the extent that they relate to other DM&E plans that are ERISA plans.

This case is particularly noteworthy because whether a one-person employment contract may be an ERISA plan was an issue of first impression in the Eighth Circuit. The federal appeals courts differ as to whether a contract with a single employee to provide post-termination benefits may be an ERISA plan.

For information on the advantages and disadvantages of maintaining an ERISA-compliant severance pay policy, see ERISA Considerations For Severance Pay Policies Checklist.