Does It Matter If Your Severance Agreement Is Covered By ERISA?

Severance Agreement

Severance agreements are common in the employment arena, especially in the Virginia corporate world and the rest of the country. There are a variety of reasons why an employer may offer a severance agreement to an employee that is leaving, such as:

  • Liability protection, especially for discrimination-based legal claims.
  • Maintaining positive goodwill with a departing employee.
  • Getting the employee to sign a confidentiality, noncompete or nonsolicitation agreement.

And in return for these benefits, employers provide something to employees. Often, this includes cash payments (either a lump sum or multiple payments spread out over time), as well as other benefits, like health insurance coverage or positive references.

A severance agreement is not the same as a severance package. Unlike a severance agreement, an employer gives a severance package without receiving anything in return.

Regardless of whether the employer is trying to help out a soon-to-be former employee or protect itself and manage its risks, there is one issue that employers sometimes forget: whether the severance agreement is subject to the Employee Retirement Income Security Act of 1974, most commonly known as ERISA.

What Is ERISA?

ERISA is a federal law that dictates how employers must administer and run employee benefit plans. These plans often provide retirement and health insurance benefits to a company’s workers. ERISA does not require employers to provide these benefits to employees, but if they do, ERISA requires that the employer provide the benefits subject to certain rules.

ERISA also sets out the legal duties of the employer, including fiduciary obligations and disclosures employers must make to its employees concerning their benefits. In essence, ERISA exists to ensure employees receive the benefits promised by employers.

ERISA is a very large and complex law. Many companies will hire special, expensive lawyers just to help them design and implement a retirement or benefit plan that complies with ERISA. If you find this hard to believe, take a look at the ERISA statute and try to make sense of it all. Be warned that reading ERISA also serves as an effective sleep aid.

Therefore, it’s not surprising that many employers will create a severance agreement for one or more employees and have no idea whether it is subject to ERISA, and if so, what that means for them.

When Is a Severance Agreement Subject to ERISA?

Not all severance arrangements must follow ERISA guidelines. The single most important factor when deciding if a severance agreement must abide by ERISA mandates is whether the agreement requires the implementation of an “ongoing administrative scheme.”

As a general rule, the more discretion an employer has concerning the administration and implementation of the severance agreement, the more likely it will be an ERISA plan.

What Requirements Does ERISA Place on Severance Agreements?

If a severance agreement is subject to ERISA, the agreement must:

  • Be in writing.
  • Require the employer to file special paperwork with the federal government.
  • Include an administrative process for handling disputes concerning benefits provided by the severance agreement.
  • Provide all participants with a Summary Plan Description.
  • Outline all the details about how the severance plan works, including eligibility, benefit formulas and exclusions.

If an employer doesn’t comply with these rules, they could potentially face very expensive penalties.

Why Employees Should Care

Generally speaking, whether or not a severance arrangement is subject to ERISA is not a major concern for most employees. However, if the employee’s severance agreement is covered by ERISA, there are a number of things employees should be aware of concerning their legal rights under the severance agreement and how they can enforce them.

First, ERISA has a special provision that allows it to override state law. This means the terms of the severance agreement, including enforcement, will generally be subject to federal law, not state law. This is important because state laws tend to have greater availability of legal remedies for employees, such as punitive damages

Second, before an employee can bring suit in court for claims under the severance arrangement, they will first have to complete the administrative and appeals process put into place by the employer.

Third, if an employee manages to file suit in court, the trial will usually be a bench trial. This means the judge will decide the case, not a jury.

Fourth, the employer may establish its own deadline (as long as it’s reasonable) for which a beneficiary can bring suit under the severance agreement.

Fifth, the employer can decide to which court a prospective beneficiary must bring suit for an ERISA claim.

Sixth, an employer may offer an ERISA severance agreement to an employee that contains provisions that require the employee to waive most job-related legal claims. However, simply because a severance agreement is subject to ERISA, does not automatically mean an individual loses his or her right to bring an employment legal claim against the employer, such as for discrimination.

Summing It Up

– Many employers use severance agreements to help departing employees or to persuade employees to give up certain legal rights, including bringing an employment lawsuit against the employer.

– ERISA is a federal law that sets out requirements for employers who decide to provide employee benefits plans to its workers.

– A severance agreement may be subject to ERISA if it requires an ongoing administrative scheme that must be handled by the employer.

– If a severance agreement falls under ERISA’s jurisdiction, it will require that the employer make certain disclosures to plan participants, as well as impose other requirements on the employer.

– An ERISA severance agreement will also allow an employer to set out how any legal disagreements coming from the severance agreement must be resolved.

If you have any questions concerning a potential severance agreement from your employer, it might be best to consult with an experienced Virginia severance agreement lawyer. You can do this by contacting the Spiggle Law Firm.

Our firm can help you gain a better understanding of the benefits provided by the severance arrangement, what your employer expects in return for those benefits and your ability to enforce the terms of the severance agreement.