• Eighth Circuit Decides That Severance Benefits Provided Under an Employment Agreement Do Not Constitute an ERISA Plan
  • October 27, 2011 | Authors: Wilhelm L. Gruszecki; Kari Knight Stevens
  • Law Firm: Blank Rome LLP - Philadelphia Office
  • In the recent case of Dakota, Minnesota & Eastern Railroad Corp. v. Schieffer, (8th Cir. 2011), the Eighth Circuit Court of Appeals, addressed whether a one-person contract may be a plan that is subject to the requirements of the Employee Retirement Income Security Act of 1974 ("ERISA"). Relying on the language of ERISA's definition of "employee welfare benefit plan" and the broader context of ERISA preemption, the federal district court held that an individual contract providing severance benefits to a single executive employee is not an ERISA employee welfare benefit plan.

    Dakota involved an executive who entered into an employment agreement with his employer. The agreement provided benefits in the event of his termination without cause or resignation for good reason. The employer terminated the executive without cause, triggering the severance provisions of the agreement. Disputes arose. The executive filed a demand for arbitration under the agreement. The employer commenced an action in federal district court to enjoin the arbitration, contending that ERISA preempts the arbitration. Relying on prior Eighth Circuit precedent, the district court concluded that the severance benefit was not covered by ERISA because it did not require an ongoing administrative scheme. The Eighth Circuit affirmed, but instead, used the broader holding described above.

    To conclude that benefits are payable under an ERISA plan, courts have held that the benefits must require an ongoing administrative program to meet the employer's obligation. For example, a one-time, lump-sum payment triggered by a single event has generally been viewed as not requiring an ongoing administrative scheme. The relevant considerations have included whether the payments are one-time lump sum payments or continuous payments, whether the employer undertook any long term obligation with respect to the payments, whether the severance payments come due upon the occurrence of a single unique event or any time that the employer terminates employees and whether the severance arrangement under review requires the employer to engage in a case-by-case review of employees.

    The Eighth Circuit stated that the ongoing administrative analysis was not necessary because as defined in ERISA, the term "employee welfare benefit plan" implies that an employer provides benefits to a class of employees, and more significantly, its use of the phrase "providing for its participants or their beneficiaries" reflects the Congressional intent that a covered plan is one that provides welfare benefits to more than one person. It further found that the conclusion that ERISA does not preempt a one person plan is consistent with the broader view that Congress did not intend to regulate individual employment contracts.

    Comment: ERISA provides employers with substantial advantages with respect to severance plan administration. If ERISA applies, state laws allowing punitive damages, bad faith claims and jury trials are all avoided. The argument for ERISA coverage is strengthened if the employer adopts a plan document that reflects an ongoing administrative scheme, complies with the SPD rules and files a Form 5500 for the plan. The argument may have been strengthened in the Dakota case if the employer had taken these actions and if the the employment agreement had specifically referred to the plan.