For employers wanting to thin their workforces, voluntary severance plans (VSPs) have the potential to create a win-win dynamic. They can also spur litigation if employees feel they were misled or would have made different decisions with better information. A March 29th decision from Delaware’s federal district court is discussed below because the case involves a typical VSP structure, and a litigation risk for employers to avoid.

As a general matter, VSPs operate through a few basic steps, namely:

  1. The employer invites select groups of employees to “request” inclusion in a severance plan (or program) that promises particular benefits in exchange for general releases of their claims.
  2. During a window period, eligible employees may request that the employer accept their offer to terminate employment.
  3. Based on its workforce needs, the employer accepts or rejects employee requests, and then implements the terminations.
  4. If not enough employees (or the “wrong” employees) sign-up for the VSP, the employer implements a follow-on involuntary reduction in force (“RIF”).

The Delaware case mentioned above (Girardot v. The Chemours Co.) has its roots in a corporate spin-off, followed by a VSP, followed by a RIF. The latter occurred because, in the words of the court, “the voluntary reduction in force did not sufficiently reduce costs.” Litigation came from VSP participants who alleged that “they would not have elected to participate in the VSP had they been informed of the possibility that the [RIF plan] would be implemented with greater benefits.”

Strategically, VSPs often work best if employers announce them with a warning to the effect that a RIF – providing lesser benefits – may follow if the VSP does not result in sufficient downsizing. The specter of a tagalong RIF encourages poorly performing employees to opt-into the VSP, in order to secure its greater severance benefits. Ultimately, employers need to carefully construct and communicate the interplay between a VSP and a RIF. They also need to take precautions with supervisory employees in order to avoid having well-intentioned managers risk converting the VSP into an involuntary programs by forewarning select employees that they had better take the voluntary severance.

The Girardot case described above highlights one key litigation risk in this context, namely: employers need to be sure the VSP is communicated to eligible employees through FAQs or other means that generally address how the VSP differs from the RIF. Imprecision or ambiguity can open the door for claims that employees were misled or under-informed about their choices.

Another significant risk comes from employment discrimination laws. Employers need to be careful when they decide who is eligible for the VSP as well as which volunteers to accept or reject for severance. Problems can arise from discrimination that is intentional, or statistically demonstrable.

Finally, Delaware’s Girardot decision focused on whether ERISA governed claims arising under the VSP. The court found ERISA to be inapplicable because –

the one-time, lump sum payments distributed under the VSP did not require the creation of a new administrative scheme, and the bonus payments were payable ‘per usual Company practices based on financial results’ which, like the continuation of existing benefits for a limited duration, did not materially alter the existing administrative scheme.

Interestingly, the VSP was not structured to fall within ERISA, although it could have been. See “Say Hello to Smart Good-byes” for reasons why employers may want to ERISA-fy their severance practices, in order to mitigate litigation risks.