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Court Determines Employer’s Severance Plan is Subject to ERISA

On Behalf of | Oct 27, 2016 |

The Fifth Circuit Court of Appeals determined, in Gomez v. Ericsson, Inc., that an employer’s severance plan was governed by ERISA because it required ongoing administration and allowed the employer to make discretionary decisions on eligibility and benefit amounts.

Background. In Gomez, the plaintiff was employed by the defendant for approximately three years before being terminated as a result of a reduction-in-force. In connection with this termination and reduction-in-force, the employer presented the employee with a severance agreement that required him to return all of the employer’s property and execute a waiver and release in exchange for receiving severance pay under the terms of the employer’s two severance plans.

The terms of both severance plans required that the plan administrators calculate benefits and make initial determinations of eligibility, including whether the employee was terminated because of a layoff or reduction-in-force. The plan administrators were further required to determine whether an employee was eligible to participate in one or both of the plans. Finally, eligibility under both plans was conditioned on an employee executing a valid waiver and release of claims agreement.

The plaintiff executed and returned the severance agreement to the employer. However, before returning the employer’s laptop computer, he proceeded to delete all information from its hard drive, including work-related files. According to the employer, the deleted files were the only source of raw data gleaned during the plaintiff’s final project. Therefore, the employer refused to pay the plaintiff severance benefits on the basis that he failed to return company property.

District Court Decision. Following the exhaustion of the plans’ administrative appeal processes, the plaintiff sued the employer in federal court, claiming that the plans were not governed by ERISA, which would allow him to file a contract claim in state court.

At trial, the district court ruled against the plaintiff, finding that the plans were governed by ERISA. In turn, the plaintiff appealed the decision to the Fifth Circuit Court of Appeals.  

Fifth Circuit. In addressing the issue of whether the severance plans at issue were covered by ERISA, the Fifth Circuit explained that some severance plans are covered by ERISA. Under Supreme Court precedent, the primary determinant is whether a severance plan requires an ongoing administrative program that might give rise to employer abuse or conflicting regulation of the plan. Thus, a severance plan that requires an ongoing administrative program is covered by ERISA.

In reviewing the facts, the Fifth Circuit found that, due to the large size of the plans (i.e., covering more than 10,000 employees), ongoing administrative activity was required by the employer. Moreover, the Fifth Circuit found that eligibility determinations and benefit calculations (involving detailed formulas and offsets) under the plans required ongoing administrative activity by the employer.  As a result, the Fifth Circuit upheld the lower court’s determination that ERISA governed the plans and the plaintiff’s lawsuit.