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Employer's Severance Policy Is Subject to ERISA: Second Circuit
Practical Law Legal Update 9-617-5602 (Approx. 5 pages)
Employer's Severance Policy Is Subject to ERISA: Second Circuit
by Practical Law Employee Benefits & Executive Compensation
| Published on 21 Jul 2015 • USA (National/Federal) |
In Okun v. Montefiore Med. Ctr., the US Court of Appeals for the Second Circuit held that a severance policy was an employee welfare benefit plan governed by the Employee Retirement Income Security Act of 1974 (ERISA).
The Second Circuit has held that a severance policy was an employee welfare benefit plan governed by the Employee Retirement Income Security Act of 1974 (ERISA) (Okun v. Montefiore Med. Ctr., 793 F.3d 277 (2d Cir. 2015))
Background
After working as a physician for his employer for 23 years, the employee/plaintiff in this case informed his supervisor that he planned to leave in a few months to take a job with a different employer. Shortly thereafter, the employer fired the employee for cause, citing comments that the employee made in front of a guest speaker during a meeting.
The employer maintained a severance policy under which all full-time physicians employed before August 1996 and terminated for a reason other than cause were entitled to either 12 months notice or six months severance pay. Employees with more than 15 years of service were also entitled to automatic review of the amount of severance pay by the employer's president. However, employees terminated for cause were not eligible for the severance policy. The employer had maintained a severance policy in one form or another since 1987, and the policy at issue in this case had been in place, without revision, since 1996.
The employee claimed that his for-cause termination was a pretext for the employer to interfere with his right to severance payments under the severance policy and ERISA, in violation of ERISA Section 510 (29 U.S.C. § 1140; see Practice Note, ERISA Litigation: Interference with Protected Rights (Section 510)). However, the district court determined that the severance policy was not a plan governed by ERISA and dismissed the employee's complaint for lack of jurisdiction.
Severance Policy Satisfied ERISA's Definition of Plan
On appeal, the Second Circuit vacated and remanded. The court reasoned that ERISA applies to "any plan, fund, or program" as that phrase is used in ERISA's definition of employee welfare benefit plan (29 U.S.C. § 1002(1); see Practice Note, Severance Benefits, Plans and Agreements: Overview: Severance Arrangements Subject to ERISA). The court noted that ERISA's use of the word "any" with respect to a plan, fund or program reflected Congress's intent that the definition of employee welfare benefit plan should be interpreted broadly.
However, the court also cited the US Supreme Court 's Fort Halifax decision, which held that a state law requiring employers to provide a one-time severance payment to employees following a plant closing did not require an employer to maintain an employee welfare benefit plan (and so the state law was not preempted by ERISA) (482 U.S. 1 (1987); see ERISA Considerations For Severance Pay Policies Checklist: Compliance with ERISA). Since Fort Halifax, the Second Circuit has applied three non-exclusive factors to assess whether an employer's arrangement involves the kind of administrative scheme inherent in a "plan, fund, or program," including whether:
- The employer's undertaking or obligation requires managerial discretion in its administration.
- A reasonable employee would perceive an ongoing commitment by the employer to provide employee benefits.
- The employer was required to analyze the circumstances of each employee's termination separately in light of certain criteria.
The Second Circuit concluded that the employer's severance policy fell within the meaning of "any plan, fund, or program" for purposes of the ERISA definition. According to the court, the policy represented a multi-decade commitment to providing severance benefits to a broad class of employees under a wide variety of circumstances, and required an individualized review whenever certain covered employees were terminated. The court determined that the severance policy satisfied each of the three factors, reasoning that:
- The policy required:
- the employer to determine whether an employee left voluntarily, or was terminated for cause or for a reason specified in the policy; and
- the employer's president to conduct a discretionary review of the amount of severance benefits for certain employees.
- The policy's longstanding nature could have given employees the impression that the employer had undertaken an ongoing commitment to provide severance benefits. (The fact that the employer reserved the right to modify the policy did not outweigh this factor.)
- The employer retained sufficient managerial discretion in reviewing the amount of severance and classifying a termination as for or without cause.
As a result, the Second Circuit concluded that the severance policy at issue was a plan, fund, or program under ERISA's definition of employee welfare benefit plan.
Practical Impact
This severance case is a reminder that ERISA plan status is often in the eye of the beholder (or, more aptly, the particular reviewing court), and small variations in design and administration can make the difference between whether a severance arrangement is or is not subject to ERISA. The district court in this case, for example, reached very different conclusions in analyzing the same three factors regarding ERISA plan status that the Second Circuit later considered. As to the third factor (whether an employer must separately analyze each employee's termination), for example, the district court reasoned that this factor weighed against ERISA status because:
- Payments under the policy were not conditioned on satisfaction of any criteria.
- Once an employee qualified for severance, severance payments were made based on a math calculation involving how much the employee was owed.
Disagreeing, the Second Circuit concluded that there was sufficient managerial discretion in the review by the employer's president for this factor to cut in favor of ERISA plan status.
As a result, the employee will be able to move forward with his ERISA Section 510 claim.
Why ERISA Status Matters: Serious Consideration Cases
There are numerous consequences (good and bad) that follow from ERISA plan status, and employers should carefully consider whether they want their severance arrangements to be subject to ERISA—and implement them accordingly (see generally Practice Note, Voluntary Benefits: Why It Matters Whether ERISA Applies). As one example, if a severance arrangement is subject to ERISA, then plan sponsors and administrators will have heightened fiduciary duties under ERISA. This includes a duty not to make material misrepresentations and omissions about the severance plan. Relatedly, under the "serious consideration" line of cases developed by the Eleventh Circuit and adopted by other circuit courts in the late 1990s and early 2000s, a plan administrator has a fiduciary duty under ERISA to inform inquiring participants of the existence—or expected existence—of an ERISA plan (or changes to the plan) once the plan or changes are under "serious consideration" (see Winkel v. Kennecott Holdings Corp., 3 F. App'x 697, 702 (10th Cir. 2001) (collecting cases)). Under this line of cases, which can apply in the severance context, serious consideration of a change in plan benefits does not happen until a specific proposal is being discussed:
- For purposes of implementation.
- By senior management with the authority to carry out the change.