Voluntary Severance Plans: From Success to Backfire

What happens when 3,000 employees over age 55 receive a buy-out offer because they have more than 10 years of experience? Fidelity made that offer to 7% of its workforce, and more than 50% of the eligible employees accepted. Fidelity’s “results exceeded [its] expectations” according to a Bloomberg BNA article.¹

For employers such as Fidelity, voluntary severance plans (VSPs) have the potential to provide a win-win dynamic by which to downsize (or right-size) their workforces. That is because a well-designed program will encourage resignations by those who either want to retire or should leave because they are weak performers.

As a general matter, the most successful VSPs operate through a few basic steps, as follows:

1. The employer invites a select group or groups of eligible employees to “request” inclusion in a severance plan (or program) that promises particular benefits in exchange for general releases of their claims.
2. During a window period, eligible employees may volunteer to terminate employment.
3. Based on its workforce needs, the employer accepts or rejects employee requests, and then implements the terminations for those who are accepted for VSP benefits.
4. If the VSP does not meet its objectives, the employer implements a follow-on involuntary reduction in force (“RIF“).

VSPs can work well when employers make a reasonable VSP offer, warn that a less generous RIF could follow, and assure that employee opt-ins are truly voluntary. If executed poorly, VSPs can spur litigation. Discussed below are illustrations of both outcomes.

Backfire . . . Delaware Case

A 2017 Delaware case (Girardot v. The Chemours Co.) had its roots in a corporate spin-off, followed by a VSP, followed by a RIF. The latter occurred because, in the words of the court, “the voluntary reduction in force did not sufficiently reduce costs.” Litigation came from VSP participants who alleged that “they would not have elected to participate in the VSP had they been informed of the possibility that the [RIF plan] would be implemented with greater benefits.”

VSP Precautions

The Girardot case highlighted the need for VSP communications to eligible employees through FAQs, or other vehicles, that explain how the VSP will operate, as well as how it will differ from a possible future RIF. Imprecision or ambiguity can open the door for claims by employees who feel in hindsight that that they were misled or under-informed about their choices.

Employers should also take VSP precautions with supervisory employees. Well-intentioned advice could inadvertently convert a VSP into an involuntary program. This may result, for example, if particular employees are forewarned that they would be smart to take the voluntary severance because they are at risk of being terminated in any event if a RIF occurs. That kind of advice could open the door for claims that the VSP is a ruse for involuntarily terminating protected classes of employees (such as older ones).

Employment discrimination laws pose another risk for those implementing a VSP. Claims may come at all stages – from how the eligible class is selected to who will be terminated. Problems can arise from discrimination that is intentional, or statistically demonstrable. That said, for a VSP that is truly offered on a voluntary opt-in basis, employers may limit VSP eligibility to select older employees (as Fidelity did) or other business-justified groups.

ERISA – Often the Best Litigation Shield

Delaware’s Girardot decision focused on whether ERISA governed claims arising under the VSP, and the case was dismissed because the VSP was not subject to ERISA. The court explained:

“the one-time, lump sum payments distributed under the VSP did not require the creation of a new administrative scheme, and the bonus payments were payable ‘per usual Company practices based on financial results’ which, like the continuation of existing benefits for a limited duration, did not materially alter the existing administrative scheme.”

Interestingly, although that VSP was not structured to fall within ERISA, it could have been. In most cases that is the best vehicle for controlling a VSP’s litigation risk. See “Say Hello to Smart Goodbyes” for reasons why employers may want to ERISA-fy their severance practices. In a nutshell, the benefits of an ERISA severance plan generally include the following:

• no litigation until there has been an exhaustion of the plan’s claims procedures, which may foreclose claims that are not promptly asserted;
• judicial review under highly deferential standards, rather than de novo;
• litigation in federal court under well-defined ERISA rules applied by a judge, instead of before a jury in state court; and
• damages that ERISA limits to plan benefits and potential attorneys’ fees, rather than the full panoply of damages recoverable through tort claims outside ERISA.

Conclusion

It is not easy to thin a workforce. Voluntary severance plans offer a means for doing so in a constructive manner that minimizes litigation risks — by enabling employees to leave voluntarily, through execution of claims releases as a condition for severance. As with any good idea, problems are possible. But they are generally foreseeable and avoidable by those who execute the VSP thoughtfully.

¹See also Boston Globe, “More than 1,500 Fidelity workers take buyouts.”