Generally speaking, many employers do not think about the Employee Retirement Income Security Act (ERISA) when it comes to severance, whether at the front end, when employment agreements or policies are negotiated and planned, or at the back end, when termination occurs and the severance is paid. However, a recent case from a trial court in Pennsylvania serves as an important reminder about when ERISA is triggered and why employers should care.

What was the Case About?

The parties in the case — an executive and his employer — had entered into an employment agreement which provided the executive severance benefits if the company terminated him without cause. Under the severance provisions, the executive would receive continued base salary payable over the next five years — amounting to nearly $1.6 million — and continued health coverage for the same period. However, payment of the severance benefits was contingent upon the executive’s ongoing compliance with non-compete and non-solicitation restrictions, and the employer could cease providing continued medical coverage if the executive obtained comparable coverage with another employer. The employer had the responsibility to monitor and determine ongoing compliance with these provisions.

When the employer later terminated the executive and refused to pay severance, the executive sued for benefits in Pennsylvania state court. The employer transferred the case to federal court, arguing that ERISA applied, and that court considered this issue raised by the employer.

Does ERISA Apply?

In deciding whether ERISA applied to the severance payments, the court focused on whether the severance payable under the employment agreement involved a “separate and ongoing administrative scheme.” It highlighted several facts that demonstrated the existence of such an ongoing administrative scheme that caused ERISA to apply. For example, the employer had the discretion to decide whether a termination was with or without cause, the payments and provision of benefits continued over five years (rather than being paid in a lump sum), and the employer had the ongoing duty to monitor the non-compete, non-solicitation, and medical coverage provisions.

Okay, ERISA Applies, But Why Do I Care?

Being subject to ERISA can confer many benefits to employers, provided they properly take into account and understand the cons or requirements of such application:

Benefits or Pros

  • Employees can only sue for benefits and legal fees — no punitive or compensatory damages
  • Uniform administration of benefits
  • Courts give deference to employer administrative decisions
  • Unhappy individuals must exhaust claims and appeals procedures of plan before filing suit
  • Generally dealt with in federal, not state court (which some attorneys think is better)

Requirements or Cons

  • May require reporting and disclosure requirements (depending on benefits provided and whether exemptions are available), e.g., annual reports/summary plan descriptions
  • Must follow the terms of the plan, except where discretion is reserved
  • Plan should contain claims and appeals procedures (or incorporate them by reference to another agreement or plan)
  • Failure to comply with certain Department of Labor or IRS requirements may result in fines or penalties

Okay, I Care, But What Should I Do?

Contact your legal counsel or other trusted employee benefits adviser. Deciding whether ERISA applies, and what to do if it might, is not always straightforward. Good advisers will not only know the law and review your documents, but they will involve you in the process, letting you know what will likely happen if your decision is challenged in court, and what risks and benefits are involved.