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    The Lawletter Blog

    PENSIONS: What Severance Contracts Are Subject to Federal ERISA Law?

    Posted by Gale Burns on Wed, Dec 24, 2014 @ 10:12 AM

    The Lawletter Vol 39 No 10

    Matt McDavitt, Senior Attorney, National Legal Research Group

        While many employers create severance contracts as incentives for employees to remain during mergers or sales of the company, few employers realize that some severance agreements are governed by the Employee Retirement Income Security Act ("ERISA") and that federal ERISA law preempts state law when such severance contracts are introduced during litigation.

         However, not all employer severance contracts are subject to preemption by federal ERISA law. The ERISA statutes do not define which severance agreements are governed by federal law; fortunately, a line of federal case law has clarified how this determination is made.

    [I]n determining whether a plan requires an on-going administrative scheme, we must consider four factors: [1] whether the payments under the plan are one-time lump sum, or continuous, payments; [2] whether the employer undertook any long-term obligation with respect to the payments; [3] whether the severance payments come due upon the occurrence of a single, unique event, or any time that the employer terminates employees; and [4] whether the plan requires the employer to engage in a case-by-case review of the employees.

    Rosati v. Cleveland-Cliffs, Inc., 259 F. Supp. 2d 861, 871 (D. Minn. 2003). Importantly, the envisioned onetime, lump-sum payment removing a severance contract from ERISA preemption does not refer to the fact that each employee would receive a lump-sum payout of the severance benefit upon actual or constructive termination; instead, it refers to the unlikely scenario wherein all benefited employees would receive their severance payouts at the same time, via one payment pooling their separate benefits. Thus, where employees eligible under the severance package qualify at differing times, requiring individualized analysis of the benefits due as well as a separate payout to each qualified employee, the severance contract is subject to, and controlled by, ERISA law.

         Additionally, a severance plan will be subject to ERISA law where the employer must invest in ongoing administration of the plan, such as where payments to qualified employees will occur periodically, or where the employer must make case-by-case benefits determinations to determine the proper payout:

         ERISA will preempt a state law breach of contract claim if the claim requires the court to interpret or to apply the terms of an employee benefit plan. An employee benefit plan can include severance payments. The decisive inquiry in determining whether a severance plan falls within ERISA's coverage is whether the plan requires an ongoing administrative program to meet the employer's obligation. ERISA applies when a severance plan potentially places periodic demands on an employer's assets that create a need for financial coordination and control. In contrast, the requirement of a one-time, lump-sum payment triggered by a single event requires no administrative scheme whatsoever to meet the employer's obligation, and ERISA therefore does not apply.

    Bowles v. Quantum Chem. Co., 266 F.3d 622, 631 (7th Cir. 2001) (citations omitted) (internal quotation marks omitted).

         Thus, an ERISA-governed severance contract is one in which the employer (or other administrator) must maintain an administrative scheme to deal with processing ongoing severance benefit requests, the benefits determination must be made by analyzing each employee's individual factors, and payment will be made individually to each qualifying employee rather than by some onetime, mechanically determined method.

    Topics: ERISA, pensions, severance contracts

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