In Hoff vs. Anadarko Petroleum Corp., the U.S. Court of Appeals for the Tenth Circuit has ruled that an employer is bound by the terms of its own plan and cannot add additional conditions after an employee makes his claim.
Facts. An employee participated in his employer’s severance pay plan. Under the terms of the plan, an employee could leave the employer and become entitled to severance pay during the first year following a corporate acquisition if the employee’s job duties had been “materially” and “adversely” diminished from what they were prior to the acquisition.
The employer was acquired by another company. Before the acquisition, the employee was responsible for a project that entailed managing a budget of $450 million and leading a team of over 300 people. The job required at least 10 years of engineering experience and prior diverse project management experience.
Within a year of the acquisition, the employee had been placed in charge of a project managing a team of fewer than 25 people that required only one or two years of management experience. After seeing his job duties diminished, the employee submitted his resignation and applied for severance benefits.
Under the provisions of the severance plan, an employee could obtain benefits if: (1) a change of control occurred; and (2) the employee resigned for “Good Reason”, meaning the employee’s job duties were “materially and adversely diminished” compared to what they were prior to the change of control. The plan also provided that the employer had “discretionary authority” when construing “ambiguous, unclear or implied (but omitted) terms[.]”
The employer denied the employee’s claim for severance benefits, saying that his responsibilities were not materially and adversely diminished because: (1) he had had retained the same job title; (2) his job duties did not change; and (3) his job duties did not state that he was responsible for projects of any particular size. In addition, the COVID-19 pandemic had reduced the employer’s business and therefore affected the availability of large projects. The employer also asserted that the assignment to smaller projects was temporary, and that temporary reductions in workload did not constitute a “Good Reason.” Finally, the employer said that any court had to apply the “discretionary authority” standard to the employer’s decision to deny benefits.
The employee sued in federal district court which ruled in his favor. The employer then appealed.
Law. The default standard for a court to use in reviewing benefit denials under an ERISA-covered plan is the de novo standard of review, which means that the court will independently review a claim and not defer to the claims administrator’s (or employer’s) decision. However, if the plan document grants discretionary authority to determine benefit entitlement to the administrator (or employer), the court must apply a less demanding “abuse of discretion” standard of review, under which the administrator’s decision will be upheld unless it is determined to be “without reason, unsupported by substantial evidence or erroneous as a matter of law.”
Appeals Court. The Tenth Circuit began its review by noting that the plan’s discretionary authority provision only referred to the employer when construing “ambiguous, unclear or implied (but omitted) terms.” Because neither party argued the Good Reason clause met these criteria, the de novo review standard applied to the interpretation and application of the Good Reason clause.
The Court then ruled that the employee’s everyday experiences on the job changed in a material and adverse way after the acquisition. According to the Court, because the plan does not define the terms “material” and “adverse,” so “we construe them ‘in accordance with their ordinary or natural meaning.’” Using this criterion, the Court ruled that “it is reasonable to conclude that [the employee] had suffered a material and adverse reduction in his job duties.”
The employer maintained that the employee did not resign for Good Reason because his job duties essentially remained the same “on paper,” and nothing in his job duties guaranteed a large- scale project. In fact, he was expected to manage all projects, regardless of size. The Court responded that if this argument was adopted, it would allow any employer to circumvent a severance plan’s provisions by keeping an employee’s job duties unchanged on paper while significantly reducing his actual responsibilities. The Court ruled that, in accordance with plan provisions, the only issue was the degree and extent of diminishment in the employee’s actual duties.
The employer then argued that the employee’s reduced workload did not satisfy the Good Reason clause because the reduction was caused by an economic downturn resulting from the COVID-19 pandemic—not the change of control. Therefore, the employee cannot claim severance benefits since: (1) his diminished workload was caused by an event that had nothing to do with the change of control; and (2) those smaller projects were all that the employer had available because of the economic conditions caused by the pandemic. In addition, the employer argued that it could reject the employee’s claim because the diminished workload was only a temporary reassignment.
Once again, the Court looked to the plan provisions and ruled that these criteria could not be added after the fact as a reason to deny benefits. Nothing in the plan document itself addressed the reasons for the diminished workload or whether a “permanent” reduction in job duties was required. Further, “an ERISA benefit cannot be a moving target where the plan administrator continues to add conditions precedent to the award of benefits.”
The Court concluded that: “The Plan only asks (1) whether a change of control occurred (it did), and (2) whether the employee suffered a material and adverse reduction in his job duties compared to what he enjoyed ‘immediately prior to the Change of Control.’” The Plan provisions made no exception for the reasons behind the employer’s choice to reduce an employee’s job duties in a material and adverse way even if the reasons were outside the employer’s control. The Court therefore upheld the lower court’s decision in favor of the employee.