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  6.  » Federal Court Provides Test for Whether Severance Pay Policy is an ERISA Plan

Federal Court Provides Test for Whether Severance Pay Policy is an ERISA Plan

On Behalf of | Aug 27, 2015 |

In Okun v. Montefiore Medical Center, the Second Circuit Court of Appeals created a three-part test to determine whether a severance pay policy is an “employee welfare benefit plan” as defined in ERISA.

Law. The Supreme Court established the standard for determining whether an employer’s severance policy is a “plan” subject to ERISA in Fort Halifax Packing Co., Inc. v. Coyne. In Fort Halifax, the Court held that a one-time lump sum severance payment (triggered by a plant closing) did not create an ERISA plan because it did not create the need for an “ongoing administrative arrangement.”

Under Fort Halifax, the crucial questions for determining whether an employer’s severance policy is a plan subject to ERISA are: 

  • Is the severance policy more than a one-time lump sum payment to a group of employees triggered by a single event that is not expected to recur?
  • Does the severance policy require an ongoing administrative scheme?  

Background. In Okun, the plaintiff, a physician, sued his former employer for denial of severance benefits in violation of ERISA. The severance policy at issue provided that all full-time physicians who are terminated other than for cause were entitled to twelve months’ severance pay.

The plaintiff resigned, but before his last day of employment the employer terminated him for cause. In response, the plaintiff sued the employer, claiming that his former employer terminated him as a pretext to avoid providing him with the severance package.

At trial, the employer defended against the claim on the basis that its severance policy was not “any plan, fund or policy” as required under ERISA’s definition of a covered employee welfare benefit plan. The district court agreed that the employer’s severance policy was not an ERISA plan and dismissed the plaintiff’s claim. The plaintiff then filed an appeal with the Second Circuit.

Second Circuit. The Second Circuit reversed the district court and broadly interpreted ERISA’s statutory language, finding that Congress’s use of the word “any” in the definition of “employee welfare benefit plan” shows that the definition was intended to be broad and independent of the specific form of the plan. The court noted that the term “employee welfare benefit plan” had been held to apply to most employer obligations to pay severance benefits.

In analyzing the case, the Second Circuit established three factors to be used in determining whether an employer’s severance policy is an ERISA “plan, fund or policy”: 

  • Whether the employer’s undertaking or obligation requires managerial discretion in its administration;
  • Whether a reasonable employee would perceive an ongoing commitment by the employer to provide employee benefits; and
  • Whether the employer was required to analyze the circumstances of each employee’s termination separately in view of relevant criteria. 

The Second Circuit concluded that the employer’s policy represented a multi-decade commitment to provide severance benefits to a broad class of employees under a wide variety of circumstances and required individualized review whenever potentially eligible employees were terminated. This review requires managerial discretion and individualized evaluation. As a result, the Second Circuit found that the employer assumed the obligation to pay severance benefits on a regular basis, and, therefore, faced periodic demands on its assets that required long-term administration and control. 

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