Severance Benefits Under ERISA: Get What You're Entitled To
SEVERANCE BENEFITS UNDER ERISA: GET WHAT YOU’RE ENTITLED TO
Executives faced with the unfortunate circumstances of termination, may be able to demand, as a matter of law, payment for severance benefits. The following article presumes the executive does not possess a written employment agreement, inclusive of severance or change-in-control provisions, and a severance agreement has been offered. In the event the company does maintain a written severance plan, federal law controls the operation of such plans. The article first discusses what is a severance plan and how an executive can demand payment. The article also analyzes the independent contractor issue found in many severance agreements.
An executive can assert he or she is entitled to severance benefits pursuant to the existence of an Employee Retirement Income Security Act (ERISA) severance plan maintained by the company. A severance plan is properly considered an ERISA welfare benefit plan. A plan with one employee is still considered an ERISA severance plan. See Biggers v. Wittek Industries , 4 F.3d 291 (4 th Cir.1993). While œthe term ˜employee welfare benefit plan’ has been held to apply to most, but not all, employer undertakings or obligations to pay severance benefits, a severance plan will fall within the purview of ERISA œonly where such an undertaking or obligation requires the creation of an ongoing administrative program. Schonholz v. Long Island Jewish Medical Center , 87 F.3d 72, 75 (2d Cir.1996). An employer will be bound by the promises made in a written offer of severance benefits. See e.g., Heidgerd v. Olin Corp , 906 F.2d 903, 907 (2d Cir.1990). The executive need not point to unambiguous language to support his or her claim for severance benefits. œIt is enough [to] point to written language capable of reasonably being interpreted as creating a promise on the part of [the employer] to vest [the recipient’s] . . . benefits. American Federation of Grain Millers, AFL-CIO v. International Multifoods Corp ., 116 F.3d 976, 980 (2d Cir.1997). The executive should review the severance agreement to determine if it is payable in lump sum or over a period of months or years. Evidence of a definite intent on the part of the employer œto assume an obligation to pay benefits on a regular basis, and put periodic demands on its assets. McMunn v. Pirelli Tire, LLC , 161 F.Supp.2d 97, 117 (D.Conn.July 19, 2001).
In determining whether an employer’s promise to pay severance benefits constituted an œemployee benefits plan within the meaning of ERISA, courts consider the following factors: (1) whether the employer’s undertaking or obligation requires managerial discretion in its administration; (2) whether a reasonable employee would perceive an ongoing commitment by the employer to provide employee benefits; (3) whether the employer was required to analyze the circumstances of each employee’s termination separately in light of certain criteria. Tischmann v. ITT/Sheraton Corp ., 145 F.3d 561, 566 (2d Cir.1998) (quoting Schonholz, 87 F.3d at 76); see also, McMunn , 161 F.Supp.2d at 117. These factors are not exclusive. Id.
The Supreme Court held that single one time lump sum payments do not constitute an ERISA plan. In Fort Halifax Packing Co. v. Coyne , 482 U.S. 1, 12 (1987) the Court held, the requirement of a one-time, lump sum payment triggered by a single event requires no administrative scheme whatsoever to meet the employer’s obligation. The employer assumes no responsibility to pay benefits on a regular basis, and thus faces no periodic demands on its assets that create a need for financial coordination and control. . .to do little more than write a check hardly constitutes the operation of a benefit plan. Once this single event is over, the employer has no further responsibility. The theoretical possibility of a one-time obligation in the future simply creates no need for an ongoing administrative program for processing claims and paying benefits.
As to the first Schonholz factor, if the employer’s severance agreement paid benefits over period of months or years, it implies the executive’s continued participation over such period and requires managerial discretion on the part of the company. Unlike cases where the severance agreement required the employer to do œlittle more than write a check, See Fort Halifax Packaging Co ., 482 U.S. at 12, a severance agreement that pays benefits over a period of time transforms the severance agreement into an ERISA welfare benefit/severance plan. The continued payment of severance evidences a significant demand on the employer’s assets and management participation.
As to the second Schonholz factor, an executive could reasonably perceive an ongoing commitment by the employer to provide severance benefits based on the agreement establishes a continued participation under the severance plan. See e.g., Brockett v. Reed , 2002 WL 31677019 *8 (N.D.N.Y.July 12, 2002).
As to the third Schonholz factor requiring individual analysis of each employee, this factor is not directly relevant to the executive’s case. His or her severance agreement was provided solely on an individual basis and does not affect the ultimate determination that the employer’s severance plan is governed by ERISA. Id.
Under the foregoing analysis, the executive may be able to claim an entitlement to the severance plan benefits, i.e. separation agreement payments, instead of relying upon the discretion of the employer to award such benefits. In this event, the executive is required to exhaust all administrative remedies with the employer/plan administrator to claim such benefits pursuant to ERISA. This requires written letters to the employer/plan administrator to document the claim for benefits. The employer/plan administrator must respond in writing stating the specific reasons for the approval or denial of claim. In the event this correspondence proves futile, the executive’s only option is to pursue litigation under ERISA in the federal courts. The creation of the administrative record cannot be overemphasized in these cases. Generally, the reviewing court will examine only the evidence contained in the administrative record prior to the decision by the plan or prior to filing suit.
There is another scenario the executive must be aware of. If the employer demands the severance payment is conditioned on completion of an ongoing consulting arrangement, i.e. independent contractor, the executive can defeat this intentional avoidance of ERISA be demonstrating he or she is a œparticipant employee under the severance plan. ERISA defines the term œparticipant in the following manner: œany employee or former employee . . .who is or may become eligible for benefits. 29 U.S.C. § 1002(7). In Firestone Tire & Rubber Co. , 489 U.S. 1 (1989), the Supreme Court interpreted this statutory definition to mean: (1) œeither employees in, or reasonably expected to be in, currently covered employment, or (2) œformer employees who have a reasonable expectation of returning to covered employment or who have a colorable claim to vested benefits. Id . According to the Firestone Court, in order to establish that he may become eligible for benefits, œa claimant must have a colorable claim that (1) he will prevail in a suit for benefits, or that (2) eligibility requirements will be fulfilled in the future. Id . See e.g. McBride , 179 F.3d 737 (plaintiff not employed at time of litigation has standing to bring ERISA whistleblower claim because he was a plan participant when the alleged ERISA violation occurred); Crotty v. J. Gordon Cook , 121 F.3d 541 (9 th Cir.1997) (standing as plan participant unaffected by defendant’s payment of all vested benefits in middle of trial); Mullins v. Pfizer, Inc ., 23 F.3d 663 (2d Cir.1994)(employee has standing to state ERISA misrepresentation claim against employer who induced him to retire). By the mere terms of the severance plan agreement, the executive is an employee and can reasonably expect to be covered under the severance plan.
Once the executive successfully establishes he or she is a œparticipant under the severance plan, the executive must also successfully demonstrate he or she is an œemployee under the severance plan. The Second Circuit, as well as many other jurisdictions, has routinely followed the common law of agency theory to determine who is an œemployee for purposes of an ERISA severance plan:
In determining whether a hired party is an employee under the general common law of agency, we consider (1) the hiring party’s right to control the manner and means by which the product is accomplished. Among the other factors relevant to this inquiry are (2) the skill required; (3) the source of the instrumentalities and tools; (4) the location of the work; (5) the duration of the relationship between the parties; (5) whether the hiring party has the right to assign additional projects to the hired party; (6) the extent of the hired party’s discretion over when and how long to work; (7) the method of payment; the hired party’s role in hiring and paying assistants; (8) whether the work is part of the regular business of the hiring party; (9) whether the hiring party is in business; (10) the provision of employee benefits; (11) and the tax treatment of the hired party.
Drescher v. Shatkin , 280 F.3d 201, 205 (2d Cir. 2002)(quoting, Community for Creative Non-Violence v. Reid , 490 U.S. 730, 109 *114 S.Ct. 2166, 104 L.Ed.2d 811 (1989)).
The first factor dominates the common law agency theory. Id. In assessing the Reid and Drescher factors, it becomes clear the executive is an œemployee pursuant to the severance plan. Typically, the severance plan provides that the employer controls the manner in which executive will render services to the company. Based on his or her length of service and current job responsibilities, it can be presumed the executive will perform the same identical functions during the severance period. In addition, the severance plan may demand the executive report to one particular executive officer who will control the type of work he or she performs, including additional projects and responsibilities. The employer may also demand the executive work a specific number of hours each month, which will be outside their control. Finally, the employer’s efforts to label the executive as an independent contractor, does not comply with the IRS Code. In order for an employer to reap the benefits of an independent contractor status, the employee must provide similar services to two or more entities.
What to Expect If You’re Expecting to Get Fired
For more information about this topic, please contact our Employment Attorneys at Carey & Associates, P.C. at 203-255-4150 or send us an email at firstname.lastname@example.org.
- Employment Counseling
- Pregnancy Discrimination
- Disability Discrimination
- Age Discrimination
- Severance Negotiations
- Sexual Harassment & Gender Discrimination
- Connecticut Executive Compensation Lawyers
- Racial Discrimination
- Wage and Overtime Claims
- Sexual Orientation and Transgender (LGBTQ)
- Whistleblower Protection
- Family Medical Leave Act
- Pension and Disability Benefits Litigation
- Employment Defamation
- Religious Discrimination
- Noncompetition and Nonsolicitation Agreements
- Wrongful Termination
- Retaliation Discrimination
Mark and his team at Carey & Associates are incredibly knowledgeable about Employment Law and have walked me through every step of the way. Their approach and guidance has been extremely effective in dealing with my case. They instill a sense of confidence by laying out the facts, caselaw, and risk assessment to help make well informed decisions. I would highly recommend them to anyone looking for an Employment Attorney.
Contact us for more