Guest Article

(From the October 10, 2011 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

One-Person Individually-Negotiated Employment Agreement Is Not an ERISA Plan

A recent Eighth Circuit Court of Appeals case illustrates the complexity of determining whether an employment agreement is an ERISA plan, and the impact of that decision on the employee's ability to bring suit. In a case of first impression for the Eighth Circuit, the Court ruled that as matter of law a one-person, individually-negotiated employment agreement is not an ERISA plan.

Facts

The President and CEO of the company entered into an employment agreement that provided lucrative benefits if he was terminated "without cause" or if he resigned for "good reason" as defined in the contract. Four years later, as a merger of the company was imminent, the employee was terminated "without cause" and the agreement's various severance provisions were triggered. However, a dispute arose regarding the amounts owed and the employee filed a demand for arbitration as provided under the agreement. His request for arbitration also included a demand for double damages under the state's failure-to-pay statute. The company sued to enjoin the arbitration, claiming that the agreement was an ERISA severance plan and, as a result, the arbitration and claim for double damages under state law was preempted by ERISA. The Federal district court granted the employee's motion to dismiss the company's action, holding that the employment agreement was not an ERISA plan.

Eighth Circuit's Decision

The Eighth Circuit Court of Appeals essentially agreed with the lower court. Several other circuit courts have held that a single-employee contract that provides post-termination benefits may be an ERISA plan if it has an "administrative scheme." However, the Eighth Circuit Court of Appeals rejected this approach after examining the language of 29 USC § 1002(1), which defines an ERISA welfare plan as "any plan, fund, or program...established or maintained by an employer...to the extent that such plan, fund, or program was established or is maintained for the purposes of providing for its participants or their beneficiaries" the prescribed benefits. This language, the Court reasoned, strongly implies that "plan" and "program" refers to benefits that an employer provides to a class of employees. Further, the Court reasoned that ERISA was not intended to preempt state contract law—the result that would occur if a one-person employment agreement was deemed to be an ERISA plan:

Therefore, the Court ruled that the employment agreement was not an ERISA plan—and, as a result, the claim for double damages would survive. However, the agreement included a provision that provided for a continuation of benefits (e.g., health insurance, life and disability insurance, credit toward retirement benefits, vacation accruals)—a provision that the employee claimed was breached when the company decided to make his severance payment in a single lump sum. With regard to the employee's demands under the ERISA plans, the Court ruled that the state law remedies would be preempted; however, if the employee's demands were simply for payment of amounts that were pegged to what would have been paid under the ERISA plans, the state law remedies would not be preempted. The case was sent back to the district court for further proceeding in accordance with the Court's decision.

The information in this Washington Bulletin is general in nature only and not intended to provide advice or guidance for specific situations. If you have any questions or need additional information about articles appearing in this or previous versions of Washington Bulletin, please contact: Robert Davis 202.879.3094, Elizabeth Drigotas 202.879.4985, Mary Jones 202.378.5067, Stephen LaGarde 202.879-5608, Erinn Madden 202.220.2692, Bart Massey 202.220.2104, Tom Pevarnik 202.879.5314, Sandra Rolitsky 202.220.2025, Deborah Walker 202.879.4955. Copyright 2011, Deloitte.