An Ounce of Litigation Prevention for Executive Benefits...and Severance: Lessons from an Employer's Quagmire in New Jersey

There are three instructive takeaways from the April 24th decision in Weller v. Linde Pension Excess Program (D. NJ). In that case, the employer failed in its effort to end the case before significant discovery and expense would result. Worse for the employer: the litigation arose after the executive had terminated employment, collected severance, and signed a general release of claims. So what went wrong?

First, settlement agreements work best when they hard-wire dollar amounts or refer to attached statements summarizing what will be paid, and when payment will occur. Otherwise, post-settlement determinations about benefit payouts may open the door to back-end litigation, because employees generally cannot waive claims that arise after the date on which a settlement agreement is reached. In the Weller case, the settlement agreement took effect July 1, 2015 . . . with one loose end. The terminated executive was entitled to receive a payment in early 2016 to close out his participation in its Pension Excess Program. At that time, the employer sent the executive a statement explaining the basis for sending him just under $19,000. The executive claimed he should have received $131,145 because his severance pay should have factored into his excess pension calculation. Hence a serious dispute emerged.

That leads to the second lesson from the Weller case. The employer's Pension Excess Program omitted any claims procedures, and apparently omitted common litigation protections such as judicial review under an "arbitrary and capricious" standard. Because of those omissions, litigation occurred under a de novo standard of review, meaning the courts will decide on their own which party has the better argument - with no deference to the employer's interpretation of its plan. Applying de novo review, the Weller court denied summary judgment for the employer. It is common to think of claims procedures as being limited to ERISA plans (because ERISA requires them). However, claims procedures and other dispute resolution provisions are certainly allowed in other plans - such as incentive compensation, cash bonus, and equity award plans. Employers are well-advised to include some level of litigation protections for just the reasons that backfired in the Weller case. A list of dispute resolution provisions to consider can be found within this webpage, associated with classes that Mark Poerio, Partner at The Wagner Law Group, has taught for years at Georgetown Law School.

Finally, the facts of the Weller case bring a reminder about a procedural precaution to take when finalizing severance agreements and claims releases. Because future claims cannot be released, it is smart to execute releases only on the day employment terminates, or afterward. According to the Weller case, the separation agreement took effect July 1, 2015, but Weller's employment ended two months later. During that tail-end period, employment-related claims could have arisen. For instance, age discrimination, or other Title VII discrimination, could have occurred and triggered litigation despite the separation agreement. When separation agreements are negotiated and signed before employment is actually terminated, severance should be structured to be paid only after an employee has signed a simple, second-stage certification or release confirming a release of claims through the final date of employment.

Overall, it royally pains employers to pay healthy severance and then to be sued. Fortunately, some front-end precautions are available to protect against that.