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News Items, by Subject

Severance pay

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More Organizations Are Expanding Severance Benefits
"Forty-four percent of 1,500 HR professionals polled ... said their organizations offer severance benefits to all workers -- not just executives and senior managers -- representing a 6 percent increase from 2017. A majority of respondents cited projecting an employee-first workplace culture as the top reason for expanding severance, followed by taking care of employees and protecting brand reputation." (Society for Human Resource Management [SHRM]; membership may be required to view article)
How Should Boards Handle Involuntary CEO Retirement?
"[I]nvoluntary retirement scenarios are kind of uncharted territory.... Companies should consider incorporating an involuntary retirement provision in new employment agreements, new award agreements or long-term incentive plans going forward. Make it transparent, explicit up front, and set the expectation that if there's a termination that meets these qualifications, it might be handled a different way than an involuntary termination." (Meridian Compensation Partners, LLC)
Getting the Most Bang for Your Buck Out of a Severance Release
"In a recent Iowa case, an employee who signed a release in connection with a severance agreement later attempted to bring an ERISA claim for breach of fiduciary duty against the employer's ESOP plan.... Because the employee's acceptance of the release was knowing and voluntary, and because it was broad enough to cover the trustee as a fiduciary of the ESOP and to cover ERISA claims for breach of fiduciary duty, the court granted summary judgment in favor of the trustee." [Innis v. Bankers Trust Co. of South Dakota, No. 16-650, (S.D. Ia. Apr. 30, 2019)] (Hawley Troxell)
Does a Requirement to Pay 'Target Variable Compensation' Include Equity Awards?
"The Court noted the defendants' interpretation of [the severance agreement] was reasonable, but that it was not the only reasonable interpretation. Just as conceivable, according to the Court, was that the term 'Incentive Compensation' could mean certain items that may be paid in cash or equity ('compensation, variable compensation, bonus, benefit') as well as one item that is only paid or payable in cash ('award'). According to the Court, under this interpretation, regardless of whether the equity awards are 'paid or payable in cash,' they would be included in Batty's accrued Incentive Compensation." [Batty v. UCAR International Inc., No. 2018-0376 (Del. Ch. Apr. 3, 2019)] (
Review Equity Award Forms for Massachusetts Employees
"[U]nder the new [Massachusetts] rules: [1] Employers must pay or provide for 'garden leave' or 'other mutually-agreed upon consideration' if a post-employment noncompete covenant is included; [2] The duration, geographic reach and scope of the noncompete must fit within specified parameters; and [3] A post-employment noncompete restriction is enforceable only in limited circumstances[.]." (Skadden)
Severance Planning During an Economic Boom
"While many employers think they do not have an ERISA-covered plan -- because it is not written or is not distributed to employees -- they may in fact have a de facto plan if they have a routine policy for providing severance benefits that requires ongoing administrative discretion.... ERISA coverage is generally a good thing." (Morgan Lewis)
Sixth Circuit Rules That Employees Need Not Return Severance Pay Before Suing
"This decision means that notwithstanding the fact that the employee signed a severance agreement and accepted severance pay upon leaving the company, the employee may still be able to sue and keep the severance money -- if the employee claims she was coerced into signing the agreement.... [T]he Sixth Circuit's decision only relates to whether employees must return severance pay; it does not address whether employees can disclaim and void the actual severance agreement itself. " [McClellan v. Midwest Machining, Inc., No. 17-1992 (6th Cir. Aug. 16, 2018)] (Seyfarth Shaw LLP)
Former Employee Need Not Repay Severance Before Moving Forward with Discrimination Claim
"Under the common law of many states, ... the party seeking to invalidate a settlement agreement must first 'tender back' the monies received before proceeding in court. The Sixth Circuit majority concluded (in agreement with the EEOC, which submitted a brief in support of the employee's position), based upon policy and practical reasons, that the tender back doctrine does not apply to federal discrimination claims.... In eliminating a duty to pay back the money first, the opinion eliminates a deterrent to challenging releases." [McClellan v. Midwest Machining, No. 17-1992 (6th Cir. Aug 16, 2018)] (Foley & Lardner LLP)
So, You Think You Have a Strong Severance Agreement?
"How do employees convince a judge to invalidate a release agreement that they signed? Mainly by demonstrating that the employer coerced the employee into signing, or otherwise put the employee under duress.... While it may be tempting to add language to the agreement that would seem to prevent the employee from filing claims with government agencies, employers should tread lightly.... valid and enforceable severance agreement, like any contract, requires adequate consideration." (HR Daily Advisor)
Participant Is Entitled to Deferred Compensation Benefits Despite Termination for Refusal to Transfer Positions
"Defendants argued that Peck was an at-will employee without any employment contract assigning him to a specific position or specific duties so the company could direct him to perform whatever duties it chooses. Thus, his refusal to accept the new position constitutes a 'refusal to perform' the 'material duties and obligations' of his employment. The Court determined that Defendant's interpretation of the Plan is incorrect because it is incompatible with the terms of the Plan and 'upsets the parties' reasonable expectations about the duties of a person's employment with the company.' It would require an at-will employee's 'material duties and obligations' to be completely unconnected to his or her current position." [Peck v. SELEX Systems Integration, Inc., No. 17-7138 (D.C. Cir. July 17, 2018)] (Kantor & Kantor)
Third Circuit Severance Plan Decision Should Prompt Employers to be Proactive
"A recent 3rd Circuit Court of Appeals decision should remind employers to take the initiative -- in severance plans and agreements -- to affirmatively address whether ERISA will govern plan disputes, as well as how disputes will get resolved. This is because a well-drafted ERISA plan should expedite the resolution of employee claims in a cost-effective manner that involves a high level of deference to an employer's decisions." [Girardot v. The Chemours Company, No. 17-1894 (3d Cir. Apr. 30, 2018)] (The Wagner Law Group)
Third Circuit Dismisses Employees' Class Action Suit and Finds Chemours' Severance Plan Is Not Subject to ERISA
"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." [Girardot v. The Chemours Company, No. 17-1894 (3d Cir. Apr. 30, 2018)] (Morris James LLP, via JDSupra)
Voluntary Severance Plans: From Success to Backfire
"[T]he benefits of an ERISA severance plan generally include ... [1] no litigation until there has been an exhaustion of the plan's claims procedures, which may foreclose claims that are not promptly asserted; [2] judicial review under highly deferential standards, rather than de novo; [3] litigation in federal court under well-defined ERISA rules applied by a judge, instead of before a jury in state court; and [4] damages that ERISA limits to plan benefits and potential attorneys' fees, rather than the full panoply of damages recoverable through tort claims outside ERISA." (The Wagner Law Group)
So, You Think You Have a Strong Severance Agreement?
"Give time for the employee to evaluate the agreement ... Allow the employee to file charges with government agencies ... Ensure that you are giving the employee something of value." (HR Daily Advisor)
[Official Guidance] Text of IRS Publication 15 (Circular E): Employer's Tax Guide, for Use in 2018 (PDF)
70 pages. "What's New -- 2018 federal income tax withholding.... Employers should implement the 2018 withholding tables as soon as possible, but not later than February 15, 2018.... P.L. 115-97 suspends the exclusion for qualified moving expense reimbursements from your employee's income beginning after December 31, 2017, and before January 1, 2026.... Reminders: ... Severance payments are subject to social security and Medicare taxes, income tax withholding, and FUTA tax." (Internal Revenue Service [IRS])
District Court: No ERISA Preemption Where Determination of Benefits Was Non-Discretionary
"Under a recent decision from the Central District of California, employers may not be able to invoke ERISA preemption and remove cases to federal courts where the benefits claims at issue are not 'complex' and do not implicate administrative discretion." [Amlani v. Baker's Burgers, Inc., No. 17-2278 (C.D. Cal. Jan. 10, 2018)] (Seyfarth Shaw LLP)
Employers, Employees Scramble to Consider Tax-Related Actions to Take Before Year-End
"Should we prepay our 2018 premium in 2017, so we can reap the benefit of a deduction in a 35 percent tax bracket? If we do, can we collect premiums from employees in 2018 and repay ourselves, if we prepaid the employee portion too, before the end of this year? ... We self-insure our medical benefits. Should we think about prefunding 2018's anticipated claims and administration expenses? ... We offer retiree health benefits. Should we prefund those expenses? ... Should we prefund severance payments? ... Should we prefund disability benefits?" (Lockton)
Fifth Circuit Court of Appeals Finds Severance Plan Administrator Abused Discretion
"The Court found that the administrator's interpretation of a severance plan, which resulted in denying the former executive's claim for severance pay, was an abuse of discretion because it directly contradicted the terms of the severance plan." [Langley v. Howard Hughes Mgmt. Co., L.L.C. Separation Benefits Plan, No. 16-20724 and 17-20217 (5th Cir. June 1, 2017; unpub.)] (Baker McKenzie)
[Discussion] Correction of Release Timing Language After Termination
"I have a situation involving a 2005 employment agreement that makes severance payments (to be paid in installments over 18 months) contingent upon a release of claims being signed no later than 45 days following delivery of the required release by the Company but without any other of the necessary release timing provisions in IRS Notice 2010-6 and IRS Notice 2010-80. The individual has been terminated, so we do not appear to have the ability to correct the provisions without penalty per 2010-6. A large portion of the severance -- but not all -- is exempt from Section 409A. If we cannot find a basis for claiming the release timing provisions satisfactory and must pay an excise tax, can we exclude the severance amount exempt from 409A from the excise tax calculations? There is a concern that the entire severance benefit may be subject to the excise tax because the entire employment agreement/severance payment are not exempt." (BenefitsLink Message Boards)
Benefits of Adopting a Formal Severance Plan Under ERISA
"Severance arrangements that do not qualify as ERISA plans are subject to state law, which can leave an employer at both a substantive and a procedural disadvantage. State law requirements can vary from state to state, which makes compliance difficult.... [M]any of these state laws ... include provisions that expose an employer to substantial risk in a lawsuit for nonpayment, including in some states punitive damages, jury trials, and potential personal liability for company officers." (Morgan Lewis)
Company Discretionary Offer of Voluntary Separation Agreements Did Not Create ERISA-Covered Severance Plan
"[T]he District Court found that having an administrative scheme by itself did not establish an informal ERISA-covered severance plan.... [T]he Court found that a reasonable person could not determine the class of intended beneficiaries, the intended benefits or the process to request VSA benefits. Accordingly, Quest did not create an informal ERISA plan." [Mance v. Quest Diagnostics Inc., No. 12-7361 (D.N.J. Feb. 21, 2017; unpub.)] (Jackson Lewis P.C.)
Separation Agreement Drafting Error Corrected by Michigan Appeals Court
"The agreement provided that the employee, who was then earning approximately $125 thousand per year, was to receive $80,805.97 per week for 34 weeks!.... The trial court found that a unilateral mistake had clearly occurred, supported by both the testimony of the company's director of human resources (who stated that she mistakenly inserted the total amount to be received over the 34-week payment period, or $80,805.97, as the weekly payment amount) and the reference to certain separation pay guidelines in the agreement ... [T]he Court did not ascribe much credence to the employee's affidavit, in which he stated his belief that severance pay in excess of $80 thousand per week was 'fair based on my 28 years of service.' " [El-Hayek v. Trico Products Corp., No. 331283 (Mich. App. June 27, 2017; unpub.)] (Jackson Lewis P.C.)
Severance Plans and ERISA
"[Y]ou may want to make your severance plan subject to ERISA.... [I]ncentive plans generally would become subject to ERISA as an employee pension benefit plan, while severance plans generally would be subject to ERISA as employee welfare benefit plans. In fact, ERISA contains numerous advantages for the employer/plan sponsor[.]" (Winston & Strawn LLP)
[Official Guidance] Text of IRS Rev. Proc. 2017-28: Credit or Refund of FICA or Railroad Retirement Tax -- Employee Consents (PDF)
16 pages. "The purpose of this revenue procedure is to provide guidance to employers on the requirements for employee consent used by an employer to support a claim for credit or refund of overpaid taxes under the Federal Insurance Contributions Act (FICA) and the Railroad Retirement Tax Act (RRTA) ... This revenue procedure clarifies the basic requirements for both a request for employee consent and for the employee consent, including the requirement that an employee consent must include the basis for the claim for refund and be signed by the employee under penalties of perjury. In addition, this revenue procedure permits, but does not require, employee consent to be requested, furnished, and retained in an electronic format as an alternative to a paper format. It also contains guidance concerning what constitutes 'reasonable efforts' if employee consent is not secured in order to permit the employer to claim a refund of the employer share of overpaid FICA or RRTA taxes." (Internal Revenue Service [IRS])
[Guidance Overview] Text of IRS Audit Techniques Guide: Golden Parachute Payments (PDF)
10 pages. "The parachute examination can occur during the examination of either the corporation's or the individual's return. As the examination begins and throughout its course, [certain] items should be considered[.]" (Internal Revenue Service [IRS])
Does a Separation Agreement and Release End the Relationship Between an Executive and an Employer?
"[A] federal district court in California ruled in favor of the former executive seeking to recover vested SERP benefits that the company claimed he had released.... The court ... essentially held that a company cannot trick a former employee into signing away rights to compensation and benefits to which he is indisputably entitled." [Buster v. Mechanics Bank (N.D. Cal. Nov. 17, 2016)] (Winston & Strawn LLP)
'Change of Control' Severance Plan Isn't Governed by ERISA, Court Rules
"To decide whether ERISA applied, the court looked to whether the Executive Retention Plan involved an 'ongoing administrative program,' and concluded that it did not. First, the court concluded that the plan did not require managerial discretion as to amount of severance, timing of payouts, or the form of severance. Moreover, most of the factors supporting a 'Good Reason' separation did not involve any discretionary determination. Second, an employee wouldn't see the plan as involving an ongoing commitment to provide benefits -- only one severance payout was involved, and the plan only came into play for a two-year period. Third, the plan didn't have the usual earmarks of an ERISA plan, such as a plan administrator, fiduciary, administrative review, or procedure to submit claims. Fourth, the plan was not a pension plan because it was not contingent on retirement and did not involve deferred income." [Hall v. LSREF4 Lighthouse Corporate Acquisitions, LLC, No. 16-6461 (W.D.N.Y. Nov. 10, 2016)] (Zuckerman Spaeder LLP)
Did You Consider the COBRA Implications of Your Severance Arrangement?
"[T]wo examples ... will help illustrate the risk: [1] Under the employer's severance program, covered employees are entitled to six months of company-paid health premiums.... [2] Employer enters into a severance agreement with an employee, which provides for three months of paid 'garden' leave, after which employment is terminated. The agreement provides that during the leave period, the company will pay the health premiums. In both cases, the terms of the arrangement do not address COBRA. This leaves open the question of whether the applicable COBRA period begins at severance/leave commencement, or after." (Thompson Coburn)
Court Determines Employer's Severance Plan is Subject to ERISA
"In reviewing the facts, the Fifth Circuit found that, due to the large size of the plans (i.e., covering more than 10,000 employees), ongoing administrative activity was required by the employer. Moreover, the Fifth Circuit found that eligibility determinations and benefit calculations (involving detailed formulas and offsets) under the plans required ongoing administrative activity by the employer. As a result, the Fifth Circuit upheld the lower court's determination that ERISA governed the plans and the plaintiff's lawsuit." [Gomez v. Ericsson, Inc., No. 15-41479 (5th Cir. July 8, 2016)] (The Wagner Law Group)
New SEC Settlements Show Continued Focus on Whistleblower Protection and Severance Agreements
"The latest in a recent string of settled orders, which include the SEC's first case based solely on retaliation for whistleblower reporting, further highlight the agency's resolve to prevent corporate actions that could chill reporting of possible legal violations. These cases, along with other recent settlements, send a message to companies about the importance of enhancing anti-retaliation controls and ensuring that employee severance agreements and company policies are consistent with the SEC's whistleblower rules." (Wilmer Hale)
Fifth Circuit Provides Guidance on When ERISA Governs Severance Plans
"The Gomez court held that '[i]t is thus the existence or nonexistence of an 'ongoing administrative program' ... that is the key determinant of whether severance plans are governed by ERISA' rather than the form of the payments. 'Even for plans that result in only a lump-sum payment, that administrative scheme can be found in a number of other features that require discretion the eligibility determination; calculations of the payment amount (such as deductions and detailed formulas); the provision of additional services beyond the severance payment (such as insurance); and the establishment of procedures for handling claims and appeals.' " [Gomez v. Ericsson, Inc., No. 15-41479 (5th Cir. July 8, 2016)] (Robinson + Cole LLP)
[Guidance Overview] Companies Should Review Employee Agreements and Policies Following SEC's Aggressive Stance on Impediments to Whistleblowing
"Whether or not the SEC's asserted positions would ultimately prevail in court, in light of these settlements and the SEC's apparent enforcement position, employers should consider reviewing their policies, codes of conduct, and employee agreements to ensure that that they do not include provisions that the SEC may assert deter employees from coming forward with information about potential securities law violations. Even those companies not subject to the SEC's jurisdiction may wish to undertake such measures, as the SEC's stance is similar to that now taken by the [NLRB] and the [EEOC][.]" (Wilson Sonsini Goodrich & Rosati)
SEC Cracks Down on Anti-Whistleblower Severance Agreements
"By levying over $600,000 in fines in the span of two weeks, the SEC is sending a strong message to corporate America that severance agreements cannot unduly limit workers from reporting possible whistleblower tips. This surge in enforcement may require you to revise your current template settlement agreements to remove offending language, and might also encourage you to revisit past agreements and make retroactive amends." (Fisher Phillips)
SEC Brings Additional Enforcement Actions Against Companies With Employee Agreements That Impede Whistleblowing
"It is important to note that the mere existence of improperly restrictive language can lead to a Rule 21F-17 violation. In three of the four enforcement actions, the SEC expressly acknowledged that it was unaware of any instance in which the agreement had prevented any employee from communicating with the SEC or in which the company had taken action to enforce the agreement against any employee." (Sidley Austin LLP)
SEC Scrutinizing Severance Agreements for Compliance with Dodd-Frank
"The SEC's recent announcements signal an expansion of the SEC's scrutiny of broad confidentiality and covenant-not-to-sue or release provisions, which the SEC views as a deterrent to whistleblowing under Dodd-Frank." (Greenberg Traurig)
SEC Enforcement Action Finds Confidentiality and Waiver Provisions in Severance Agreement Violate Dodd-Frank Whistleblower Protections
"As part of the settlement, BlueLinx will pay a $265,000 penalty and must inform all parties to the severance agreements that it does not prohibit former employees from: [1] providing information to, or communicating with, SEC staff without notice to BlueLinx; or [2] accepting a whistleblower award from the SEC pursuant to Section 21F.... [C]ompanies under the jurisdiction of the SEC should proceed with caution when entering into any employment related contract that contains restrictions on the use of confidential information, and should categorically avoid including waivers of whistleblower bounties." (Schiff Hardin)
SEC Whistleblower Actions Suggest Immediate Changes to Severance and Release Agreements
"For decades, employers have required terminating employees to advise them of any facts of which the employee is aware that constitute or might constitute a violation of any ethical, legal, or contractual standards or obligations of the company.... [W]here some employers seem to have gone too far [is] by asking that the former employee not take part in or benefit from any litigation of governmental actions involving such matters." (Winston & Strawn LLP)
SEC Enforcement Actions May Require Changes to Severance Agreements
"Standard severance clauses covering [1] confidential information and [2] prohibitions against receiving additional monetary awards have been deemed unlawful by the SEC, resulting in settlements and fines exceeding $600,000, plus other sanctions.... 'No further recovery' clauses may need to be removed or redrafted to permit recovery of whistleblower bounties under Dodd-Frank. Confidentiality clauses ... may need carve-outs that permit disclosure to the SEC or other government agencies, without requiring prior notification to the company." (BakerHostetler)
Does Your Severance Plan Trigger ERISA? Why You Should Care and What You Should Do
"[T]he 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." [Zgrablich v. Cardone Industries Inc., No. 14-4665 (E.D. Penn. Feb. 3, 2016)] (Foley & Lardner, via Lexology)
Severance Plan Was Subject to ERISA, and Properly Denied Benefits to Employee Who Didn't Return Deleted Files
"Affirming summary judgment against an employee who was denied severance pay because he failed to return company property, the Fifth Circuit first held that ERISA governed the severance plans because they required more than a single lump-sum payment but involved ongoing plan administration and discretionary decisions on eligibility and amount of pay. On the merits, the appeals court agreed with the lower court that the plan allowed the employer to deny severance benefits on the ground that the employee failed to return company property (the deleted computer files) upon termination." [Gomez v. Ericsson, Inc., No. 15-41479 (5th Cir. July 8, 2016)] (Wolters Kluwer Law & Business)
[Guidance Overview] New IRS Regs Under Sec. 409A
"One common sense tweak made by the regulations is to clarify that stock awards made to prospective service providers still may qualify for the important 'stock rights' exception to 409A. This would apply to a service provider who is reasonably anticipated to begin providing services within 12 months after the grant date, if the person actually begins providing services during that 12-month period (or the award lapses if services do not commence by the deadline). Note that a service provider may be an employee, non-employee director, or an entity." (Winston & Strawn LLP)
[Guidance Overview] New Proposed Regs Issued Under Section 409A
"Some commentators had expressed concerns about the administrative impracticability of making timely payments of death benefits ... The Proposed Regulations add payment timing flexibility by providing that an amount payable due to the death of a service provider or his or her beneficiary that is to be paid at any time during the period beginning on the date of death and ending on December 31 of the calendar year immediately following the year of death ... will be treated as timely paid for purposes of Section 409A if it is paid at any time during this period." (Wilson Sonsini Goodrich & Rosati)
[Guidance Overview] The 409A Proposed Regs: Clarifying Guidance for Employers
"[A] noncompliant plan term may be amended in a manner permitted under applicable correction guidance even though the noncompliant plan term may not have been eligible for correction under that guidance (for example, due to applicable timing requirements). In addition, the portion of the unvested amount that is affected by the correction is not subject to income inclusion, additional taxes, or applicable premium interest, and the IRS does not need to be notified of the correction." (Drinker Biddle)
Beware the Vested Salary Continuation Trap in Drafting Employment Agreements
"Experienced and capable chief executives can be hard to find, particularly when it comes to leadership positions of a limited duration ... [so] it is understandable that the executive would want the agreement to contain protections against the premature or unanticipated termination of the contract by the hiring agency.... [But some contracts simply] provide that upon the expiration or termination of the contract by either party (and for whatever reason), the executive will continue to receive 'salary continuation' for the specified period. Unless these payments are properly structured as a 'bona fide severance pay plan' under IRC section 457(e)(11) -- that is, payable only upon the unanticipated termination of employment -- the executive and the agency likely have an income tax (or income tax reporting) problem." (Best Best & Krieger LLP)
Some Executive Rewards Decline, Other Perks Hold Steady
"As shareholders and advisory groups continue to scrutinize executive compensation, the number of executives entitled to tax gross-ups and other financial rewards triggered by a change in control of management is declining.... A major trend impacting change-in-control arrangements is the move toward performance-based long-term incentives ... Among other notable findings: Decline in tax gross-up payments ... Decrease in severance multiples.... Conditions on cash severance payment." (Society for Human Resource Management [SHRM]; membership may be required to view article)
Court Rules Employment Agreement Severance Provisions Can Constitute ERISA Plan
"The District Court ultimately agreed with the employer and found that the severance provisions in the executive's individual employment agreement established an ERISA plan. The court's analysis focused on five main points: Intended benefits ... Class of beneficiaries ... Source of financing ... Procedures for receiving benefits ... Ongoing administrative scheme." [Zgrablich v. Cardone Industries, Inc., No. 15-4665 (E.D. Penn. Feb. 3, 2016) (Winston & Strawn LLP)
How to Involve Compensation Committees in M&A-Related Decisions
"[T]he compensation committee should be involved in the design and execution of acquisition-related executive compensation programs in order to maximize the likelihood that key employees are retained and the acquisition is successful, while appropriately managing the company's financial risk. Here are a few of the M&A-related items that compensation committees are most likely to focus on." (Towers Watson)
Is a Severance Policy More Like an ERISA Plan, a Writing Desk, or a Raven?
"[If] the administration of a severance policy requires a measurable amount of discretion, you can bank on it being treated as an ERISA plan.... Having a severance policy governed by ERISA is not a crisis, but an opportunity. Instead of waiting for a court to apply those factors and decide for you, why not just go ahead and make sure that your severance policy is an ERISA plan? Yes, it's true that ERISA requires administrative hurdles, but these are relatively straight-forward ... These administrative requirements are outweighed by ERISA's advantages." (DLA Piper LLP via Lexology)
Benefits Litigation Update, Fall 2015 (PDF)
Articles include: [1] Will a third wave of suits over the contraceptive mandate bring the culture wars to corporate employee benefits? [2] Okun v. Montefiore: Are your severance policies subject to ERISA? [3] The House of Representatives challenges the ACA in court; [4] Increased litigation risks for fraudulent concealment fiduciary breach claims; [5] Data breach litigation targeting employers; and [6] LeBlanc v. SunTrust Bank: beware the payroll practices exemption under ERISA. (Epstein Becker Green, for the ERISA Industry Committee)
Is Your Company's Severance Policy Subject to ERISA? Should You Care? (PDF)
"There are clearly advantages to having a program governed by ERISA rather than applicable state law. However, left unsaid in the Okun decision is the sponsor's potential reporting and disclosure deficiencies under ERISA. Specifically, since [the employer] did not consider the arrangement subject to ERISA, it took no steps to file the one-time notice with the DOL, nor the annual returns that presumably would be required (assuming a small plan exception would not be applicable). This could result in substantial penalties." (Wilkins Finston Friedman Law Group LLP)
Vast Majority of Companies Provide Enhanced Severance Benefits Below the NEO Level in a Change in Control
"The survey responses suggest that enhancing severance for terminations in conjunction with a CIC is widespread. The vast majority (93%) of respondents indicated they do so for some portion of employees below the NEO level, with two-thirds (67%) of those companies offering enhanced cash compensation (salary and/or bonus) and accelerated vesting of equity and about a quarter (26%) offering only accelerated vesting of equity." (Towers Watson)
Is Your Severance Policy an ERISA Plan?
"[A]n advantage to ERISA coverage is that the employer can reserve to itself discretion to decide claims, which discretion will be respected by a court so long as the decision was not arbitrary and capricious. Disadvantages to ERISA coverage are that a Form 5500 may need to be filed annually, employees can bring a federal court lawsuit alleging a violation of ERISA, and prevailing claimants can recover attorneys' fees. A recent decision by the ... Second Circuit highlights the fact that even where an employer believes it has established a severance policy and has not explicitly characterized that policy as an ERISA plan, the arrangement may in any event be considered a plan subject to ERISA's requirements." [Okun v. Montefiore Medical Center, No. 13-3928 (2d Cir. July 17, 2015)] (Stinson Leonard Street)
CEO Contractual Protection and Managerial Short-Termism (PDF)
37 pages. "[F]irms with CEO contractual protection are less likely to cut R&D expenditures to avoid earnings decreases and are less likely to engage in real earnings management.... [T]his effect increases with the duration and monetary strength of CEO contractual protection.... [T]he effect is stronger for firms in more homogeneous industries and for firms with higher transient institutional ownership, as protection is particularly important for CEOs in these firms, and is stronger when there are weaker alternative monitoring mechanisms." (The Accounting Review)
Section 409A Corrections to Employment Agreements: Time for an Ounce of Protection in 2015
"[IRS Chief Council Memorandum 201518013] supports the correction of defective severance provisions if that occurs in the year before a termination of employment occurs. The IRS memo was actually unfavorable to the taxpayer, because it rejected a 409A correction that took place in the year severance occurred. While time remains this year, it is worth reviewing any agreements, plans, or releases that provide for severance." (Paul Hastings LLP)
Fifth Circuit Severance Pay Decision Emphasizes the Need for a Strong Administrative Record
"[T]he court found that the severance plan administrator acted arbitrarily and capriciously because the administrative record contained no specific evidence supporting the determination that the plaintiff was fired for a violation of the employer's policies.... The court found that a mere citation to a policy, absent any specific evidence indicating how the policy was violated, was not substantial evidence that the plaintiff was actually fired for having violated the policy. Importantly, the court also found that the plan administrator failed to provide the plaintiff with a full and fair review of the claim because the plan administrator did not describe the specific reasons for the denial of benefits as required by [DOL] regulations" [Napoli v. Johnson & Johnson, Inc. No. 14-31000, (5th Cir. Sept. 8, 2015; unpublished)] (Winston & Strawn LLP)
When Does ERISA Govern a Severance Plan?
"The court first observed that ERISA's definition of employee welfare benefit plan was expansive, including 'any plan, fund, or program,' and explained: '[u]se of the word "any" and inclusion of three undefined, overlapping descriptors (plans, funds, and programs) suggests that Congress intended the definition of "employee welfare benefit plan" to be broad and independent of the specific form of the plan.' ... The court noted that ERISA did not require long-term commitments or discretionary determinations, but stated that 'these factors are useful analytic tools to the extent that they help us decide the ultimate question of whether a particular undertaking or obligation is a "plan, fund, or program" '." [Okun v. Montefiore Medical Center, No. 13-3928 (2d Cir. July 17, 2015)] (Robinson + Cole LLP)
Second Circuit Provides Test for Whether Severance Pay Policy Is an ERISA Plan
"The Second Circuit concluded that the employer's policy represented a multi-decade commitment to provide severance benefits to a broad class of employees under a wide variety of circumstances and required individualized review whenever potentially eligible employees were terminated. This review requires managerial discretion and individualized evaluation. As a result, the Second Circuit found that the employer assumed the obligation to pay severance benefits on a regular basis, and, therefore, faced periodic demands on its assets that required long-term administration and control." [Okun v. Montefiore Medical Center, No. 13-3928 (2d Cir. July 17, 2015)] (The Wagner Law Group)
Second Circuit Creates Three-Part Test for Determining Whether Severance Policy Falls Under ERISA
"The Court established three factors that courts will consider when deciding the ultimate question of whether a particular undertaking is an ERISA 'plan, fund, or program:' '[1] whether the employer's undertaking or obligation requires managerial discretion in its administration; [2] whether a reasonable employee would perceive an ongoing commitment by the employer to provide employee benefits; and [3] whether the employer was required to analyze the circumstances of each employee's termination separately in light of certain criteria.' " [Okun v. Montefiore Medical Center, No. 13-3928 (2d Cir. July 17, 2015)] (Reid and Riege, P.C.)
Maintained and Unmodified Since 1996, Severance Policy Plausibly an ERISA Plan
"In effect without revision since 1996, the medical center's written severance policy involved the kind of undertaking that came within the meaning of ERISA's 'any plan, fund, or program' language. To the court, the policy represented a decades-long commitment to provide severance benefits under a wide variety of circumstances; it required managerial discretion in its implementation and an individualized review whenever certain covered employees were terminated." [Okun v. Montefiore Medical Center, No. 13-3928 (2d Cir. July 17, 2015)] (Wolters Kluwer Law & Business)
The Changing Landscape of Golden Parachutes in a Say-on-Pay World
"Facing pressure from shareholders, many companies have modified their parachute arrangements to require both a [change in control (CIC)] event and corresponding termination of employment by the company before payments are triggered. Such double-trigger requirements have continued to rise, with 95% of agreements now having them, a 10-percentage-point increase for CEOs and an 11-point increase for other [named executive officers (NEOs)] since 2010. The involuntary termination must take place within a specified length of time, called the 'protection period,' which is typically two years following the CIC event." (Towers Watson)
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