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Severance Plan Not Covered by ERISA

On Behalf of | May 24, 2018 |

The Third Circuit Court of Appeals has ruled, in Girardot v. The Chemours Company, that an employer’s severance plan is not a welfare benefit plan as defined under ERISA and, therefore, plan participants are not entitled to the protections provided by ERISA.

Facts.  In conjunction with a corporate spin-off operation, the employer announced the creation of a Voluntary Separation Program (“VSP”).  Employees were told that they could elect to be considered for the program only during a specified time period and that additional requests would be considered on a strict, “exception-only” basis.  Participants in the VSP would be terminated and were entitled to payment of a specified lump sum severance benefit plus three months’ COBRA premiums.

The employer stated in a summary of the VSP that it had sole authority and discretion to determine which employees would be eligible to participate in the VSP and that the employer could select some participants to continue working part-time for up to six months after the expected termination date.

When the VSP did not attract a sufficient number of employees, the employer announced a new severance plan with greater benefits.  Some employees who had accepted the original VSP sued under ERISA, saying they would not have elected to participate in the VSP had they been informed of the possibility that a new severance plan would be implemented with greater benefits.

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 Supreme Court held that a one-time lump sum severance payment 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?

Third Circuit.  Recognizing the Supreme Court’s ruling, the Third Circuit added that “simple or mechanical determinations do not necessarily require the establishment of an administrative scheme” and that ERISA plans “involve administrative activity potentially subject to employer abuse.”  In this case, the employer did not express an intention to provide regular and long-term benefits. On the contrary, it merely entered into an obligation to provide lump sum payments to a class of employees over a defined and relatively brief period. “Determining the amount of these lump sum payments did not require a new administrative body or the exercise of discretion – rather, it involved the mechanical application of a simple formula based on time of employment with the” employer.  Also, the selection and extension-of-employment processes did not involve an ongoing administrative scheme nor did they create a risk of employee abuse or mismanagement of the VSP.

Therefore, because the VSP was not covered under ERISA the court dismissed the lawsuit.