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Employer Can Select Individuals Who Receive Severance Benefits

by | May 17, 2023 |

The U.S. Court of Appeals for the Seventh Circuit has ruled, in Carlson v. Northrop Grumman Severance Plan, that an employer can use its discretion to individually select which terminated employees will receive severance benefits if it reserves the right to do so in the plan document.

Facts. The employer’s severance plan provided that employees regularly scheduled to work at least 20 hours a week who were laid off were entitled to severance benefits if the employee “received a cover memo, [to that effect] signed by a Vice President of Human Resources (or his/her designee)… addressed [to the individual] by name.”

After a series of layoffs, several terminated employees who did not receive severance benefits sued, claiming that their eligibility for benefits was established by the fact that they regularly worked more than 20 hours a week. They claimed the memo was not a requirement but merely a “ministerial document that verifies eligibility under the 20-hour standard.”

The district court ruled in favor of the employer, finding that the plan’s language gave the employer’s HR Department discretion to choose who, if anyone, gets severance pay upon being laid off. It added that ERISA does not prevent the employer from possessing and exercising discretion to determine severance benefit recipients.

Appeals Court. The Court noted that “the Plan makes the receipt of severance benefits contingent on receipt of a HR Memo, which plaintiffs and the other class members did not get. Welfare-benefit plans under ERISA—unlike retirement plans—need not provide for vesting, and the terms of welfare-benefit plans are entirely in the control of the entities that establish them. When making design decisions, employers may act in their own interests.” The Court explained that this means employers can include a discretionary component in the plan’s provisions that allows for individual determinations for severance benefits eligibility.  Consequently, the Court concluded that the severance plan was permitted to delegate the exercise of this discretion to its HR Department or some other entity.

The employees also argued they were entitled to severance benefits because, in earlier layoffs, the employer had provided a HR Memo to every laid-off employee who had worked enough hours.  However, the Court ruled that this fact was not relevant because an employer possessing discretion may change the way that discretion is exercised.

Therefore, the Court affirmed the lower court’s decision.