A recent 3rd Circuit Court of Appeals decision should remind employers to take the initiative — in severance plans and agreements — to affirmatively address whether ERISA will govern plan disputes, as well as how disputes will get resolved. This is because a well-drafted ERISA plan should expedite the resolution of employee claims in a cost-effective manner that involves a high level of deference to an employer’s decisions.
It is not always clear when a severance plan triggers the application of ERISA. Years ago, the Supreme Court held in its seminal Fort Halifax decision, that an ongoing “administrative scheme” is needed in order for a severance plan to become subject to ERISA. Plan designs that include built-in elements of employer discretion have generally been considered to have established the administrative scheme contemplated by the Supreme Court in Fort Halifax. The 3rd Circuit, however, has just cast some uncertainty to that strategy by holding in Girardot v. Chemours that an ERISA plan does not result from “individualized determinations of the employees’ eligibility to participate in the [VSP] – which involved denying VSP applications of those employees that the Company needed to retain for business reasons.” The court concluded that decisions made over a two-month period do not result in an ongoing scheme, explaining:
While this process unquestionably involved an exercise of discretion and constituted more than a simple or mechanical decision, the selections took place in a period of less than two months. We cannot say that this involves long-term or ongoing administrative processes; eligibility, once determined, was not conditioned on the occurrence of any future event that would require administrative consideration or adjudication. Moreover, we conclude that the selection process did not create a risk of employee abuse or mismanagement of the VSP.
There is truly a two-edged cut to ERISA. On the one hand, employers generally lose procedurally when severance is provided through a plan, program, or policy that is not documented as an ERISA plan. In those cases, a court may deem a plan to be covered by ERISA, with employees receiving maximum ERISA rights and employers being unable to balance those rights with the procedural protections that an ERISA plan may specify. On the other hand, a modest though formal ERISA severance plan enables an employer to benefit –
- from requiring an exhaustion of the plan’s internal claims procedures before litigation moves forward;
- from imposing moderate time periods, such as 90 days, within which plan participants must assert claims, as well as locking-in a moderate statute of limitations for court proceedings (such as one year);
- from litigating in federal court before a federal judge knowledgeable about ERISA, rather than in state court before a jury; and
- from securing judicial review under the highly deferential arbitrary and capricious standard that the Supreme Court endorsed in its seminal Firestone decision.
Please let us know if you have plan design questions, or could use a quick review of your severance arrangements. For general discussion of this topic, see the article titled “Say Hello to Smart Goodbyes” which was primarily authored by The Wagner Law Group partner Mark Poerio. It was published several years ago, but cases such as the 3rd Circuit case described above, highlight the continued relevance of its advice.