Court Considers Whether Severance Plan is Subject to ERISA

A recent case out of the Federal district court in New Hampshire, Sargent v. Verizon Services Corporation, illustrates the advantages of designing severance plans to be governed by ERISA, rather than state law. The Supreme Court held in 1987, in Fort Halifax Packing Co. v. Coyne, that only severance plans that include an “on going administrative scheme” are covered by ERISA. ERISA coverage of severance plans provides employers with significant advantages, including no jury trials, no punitive damages, and, most importantly, judicial deference to the reasonable decisions of the plan administrator. Severance plans that are not covered by ERISA may be subject to the vagaries of state law.

The facts of Sargent illustrate the ERISA advantage. In Sargent, in connection with a RIF Program undertaken as part of a sale of assets by Verizon, an employee was offered a lump sum severance benefit as part of a RIF program, conditioned on resignation within a certain time period and the signing of a release. Between the signing of the release and actual resignation, Verizon rescinded the RIF offer because it had identified Sargent as an employee who would be transferred to the buyer of the assets. Sargent resigned anyway and filed a claim for severance benefits, which was denied. He sued, alleging several state law causes of action, including breach of contract, negligent misrepresentation, unpaid wages, unfair business practices, “enhanced compensatory damages” and attorney’s fees. Holding the Verizon severance plan to be covered by ERISA, the court dismissed all of the claims as pre-empted by ERISA. The court’s holding was based on the following factors: (1) the obligation to provide severance was not subject to a single triggering event; (2) the plan administrator had discretion to make eligibility determinations; (3) the plan provided for an appeals process for employees who felt they had been wrongfully denied benefits; and (4) the formality of plan administration (SPD, Forms 5500 and other disclosures) would result in a reasonable employee’s perceiving the plan as an on going commitment to provide the benefits.

As a practical matter, the only substantive requirement for ERISA coverage under Sargent is a plan document that evidences an on going severance program. Eligibility for the program and the amount of benefits thereunder may be completely at the discretion of the administrator. Indeed, the Sargent court is of the view that on going discretion proves ERISA coverage and more discretion seems to make the case even stronger. Once the employer concludes that ERISA applies, the other Sargent factors (appeals process and disclosure to employees and the government) are required by ERISA in any event, so it should come as no surprise that an employer seeking to be covered by ERISA would comply with those requirements.

Employers that pay severance benefits from time to time, even on an ad hoc basis, should carefully consider formalizing plans and processes in order to strengthen the argument of ERISA coverage.