In Shuman v. Microchip, the U.S. Court of Appeals for the Ninth Circuit has established criteria for the “special scrutiny” required when an employee waives his or her ERISA-covered benefit rights.
Facts. In anticipation of a potential acquisition, a company created an ERISA-covered severance pay plan for its employees. After the acquisition, the new employer terminated several employees and offered them significantly lower benefits than promised in the plan in exchange for a release of all potential ERISA claims. The employees signed the releases but then sued the new employer in a class action lawsuit, challenging the enforceability of the releases and alleging violations of ERISA, including breach of fiduciary duty and denial of benefits.
Specifically, the employees claimed that the new employer breached its “fiduciary duties by misinterpreting the [plan] as having expired and encouraging the employees to sign releases in exchange for reduced severance benefits” because the employer knew or should have known that the plan remained valid.
In response, the employer argued that the case should be dismissed because the employees had “knowingly and voluntarily” waived their right to pursue ERISA claims.
The District Court sent the case to the Appeals Court requesting clarification on the appropriate criteria for it to use to determine the enforceability of the waivers.
Appeals Court. The Ninth Circuit began its analysis by ruling that, “[I]n accord with ERISA’s purposes and guided by other circuits’ approaches, we conclude that, when a breach of fiduciary duties is alleged, courts must evaluate releases and waivers of ERISA claims with ‘special scrutiny designed to prevent potential employer or fiduciary abuse.’”
While it noted that different courts had established different criteria for this “special scrutiny,” the Ninth Circuit held that in its jurisdiction, the lower courts “must consider alleged improper conduct by the fiduciary in obtaining a release as part of the totality of the circumstances concerning the knowledge or voluntariness of the release or waiver. In evaluating the totality of the circumstances to determine whether the individual entered into the release or waiver knowingly and voluntarily, lower courts should consider the following non-exhaustive factors: (1) the employee’s education and business experience; (2) the employee’s input in negotiating the terms of the settlement; (3) the clarity of the release language; (4) the amount of time the employee had for deliberation before signing the release; (5) whether the employee actually read the release and considered its terms before signing it; (6) whether the employee knew of his rights under the plan and the relevant facts when he signed the release; (7) whether the employee had an opportunity to consult with an attorney before signing the release; (8) whether the consideration given in exchange for the release exceeded the benefits to which the employee was already entitled by contract or law; and (9) whether the employee’s release was induced by improper conduct on the fiduciary’s part.”
The Ninth Circuit remanded the matter to the District Court for its application of the aforementioned factors.