In developing severance plans, employers should take note of the factors courts will consider in determining whether a plan would be considered an “employee welfare benefit plan” under the Employment Retirement Security Act (ERISA). Severance benefits do not implicate ERISA unless they require the establishment and maintenance of a separate and ongoing administrative scheme, and it appears that the employer’s intention is to provide benefits on a regular and long-term basis.
On April 30, 2018, the U.S. Court of Appeals for the Third Circuit affirmed the dismissal of a lawsuit initiated by a class of former employees against Chemours Company under ERISA related to an employee severance plan (Giraradot, et al. v. The Chemours Company).
In September of 2015, Chemours announced a voluntary reduction-in-force program called the Chemours Voluntary Separation Program (VSP). Chemours had sole authority and discretion to determine which employees would be eligible to participate in the VSP, and it would approve all of the eligible employees no later than November 30, 2015. Once approved, employees in the VSP were generally required to end their employment between December 1, 2015 and March 31, 2016; however, the VSP contemplated that Chemours could select some employees to continue working part-time for up to six months after April 1, 2016.
VSP participants were required to complete an appropriate knowledge transfer and execute a Release Agreement, which contained a non-disparagement provision and a one year restrictive covenant. VSP participants were also ineligible for re-hire within 12 months, except that Chemours had the sole discretion to rehire them for specialty consulting projects.
Payment for VSP participants was a lump sum severance benefit of one week of base pay for each full year of service, with both a minimum benefit of two weeks of base pay and a cap of 26 weeks of base pay, i.e., a maximum benefit of six months of base pay. They were also entitled to a lump sum payment equal to the costs of three months of COBRA medical coverage and to the payment of a prorated bonus for their year of separation to be made in accordance with Chemours’ procedures and based on the company’s performance.
Chemours moved to dismiss the claim pursuant to Fed. R. Civ. P. 12(b)(6), on the basis that the severance plan was not subject to ERISA. The primary issue for the court to decide was whether the VSP fell under the definition of an “employee welfare benefit plan” defined in ERISA, 29 U.S.C. § 1002(1). The court noted that severance benefits do not implicate ERISA unless they require the establishment and maintenance of a separate and ongoing administrative scheme. The crucial factor in determining whether a program constitutes an ERISA plan is whether the employer expresses the intention to provide benefits on a regular and long-term basis. The Third Circuit applied the analysis in Fort Halifax Packing Co. v. Coyne, 482 U.S. 1, 12 (1987) and held the VSP was not subject to ERISA.
The court reasoned that Chemours did not express an intention to provide regular and long-term benefits because it merely entered into an obligation to provide lump-sum payments to a class of employees over a defined and relatively brief period. The court further explained the “amount of these lump sum payments did not require a new administrative body or the exercise of discretion” and it “involved the mechanical application of a simple formula based on time of employment with the Company.” There was no indication of an ongoing administrative scheme. The court also noted the potential payment of prorated bonuses also did not imply a need for an ongoing administrative scheme because in the event bonuses were paid, it would be in accordance with usual company practices, on a one-time basis, and there was no need to create a new administrative program to determine eligibility or amounts.
The court further held that although Chemours made individualized determinations of the employees’ eligibility to participate in the VSP for a two month period, it did not involve long-term or ongoing administrative processes. The court found that the ancillary rights granted or obligations imposed upon the VSP participants (a knowledge transfer requirement, restrictive covenant, non-disparagement provision, and right to reapply) did not make the VSP an ERISA plan because there was a time-limited obligation, it did not implicate ongoing administration, and it required passive and ministerial observation. The court concluded the VSP did not involve a new or ongoing administrative scheme and was not subject to ERISA.
The result of this decision means that Chemours is not subject to the requirements of ERISA in the implementation of its VSP. ERISA requires plans to disclose to participants certain information about the plan’s features and funding. ERISA also has requirements for the participation, vesting, benefit accrual, funding, and accountability of plan fiduciaries and provides participants with a private right of action to sue for benefits and breaches of fiduciary duty.
Employers should consult legal counsel to discuss the potential implications of ERISA when developing severance plans. If you have questions or would like additional information, please contact Jim McMackin (firstname.lastname@example.org; 302.888.5849) or Allyson DiRocco (email@example.com; 302.888.5210).