Illinois ERISA Lawyer Blog

Executives in Chicago and the Midwest, especially working for small to mid-size employers, often negotiate into their employment agreements some form of deferred compensation and/or severance compensation. Until the relationship between executive and employer sours, the parties only think about the tax considerations of executive compensation. But when there is a dispute between employer and executive, and the executive must take measures to enforce the agreement, the question becomes whether the compensation is covered by ERISA or not. Results are mixed, and always turn on a fact specific inquiry. Consequently, there are no hard and fast rules.

One such executive recently filed a complaint in state court and faced a motion to remove to Federal court under ERISA by his former employer. See Hoffner v. Bank of Choice Holding Co., No. 11-266 (D. Colo. June 21, 2011). In that case, the bank entered into an "Executive Salary Continuation Agreement" with Mr. Hoffner, whereby the bank would pay Hoffner $50,000 for ten years upon retirement and reaching age 65. But if Hoffner voluntarily terminated his employment prior to reaching age 65, he would receive the balance of an accrued liability account--an unfunded account maintained on the bank's books recording a liability to pay Hoffner's post-retirement compensation. But nothing in the record suggested how the bank accrued the liability, whether on a straight line method or otherwise. The agreement only provided that the bank would place "appropriate reserves" in the accrued liability account.

The court ultimately held the parties' deferred compensation agreement did not meet the definition of an ERISA-governed plan. The court applied the element test of the seminal case, Donovan v. Dillingham, 688 F.2d 1367 (11th Cir. 1982). The court held the intended benefits were not reasonably ascertainable, there was not a reasonably ascertainable class of beneficiaries, and there was not a sufficient ongoing administrative scheme (see Fort Halifax Packing Co. v. Coyne, 482 U.S. 1 (1987)). The court rejected the bank's argument that only the kind of benefits should be reasonably ascertainable, rather than the amount. Also, nothing suggested these benefits were provided to a class of beneficiaries--they were only provided to this one employee. Note, however, that other courts have held there could be a "class of one." Finally, without illuminating its rationale, the court held this agreement did not provide benefits "whose provision by nature requires an ongoing administrative program to meet the employer's obligation." Siemon v. AT&T Corp., 117 F.3d 1173, 1178 (10th Cir. 1997).

If you have questions about how to enforce provisions of your executive employment agreement or benefit plan, contact a skilled ERISA lawyer.

There appears to be a widespread assumption among employees and executives in Chicago and the rest of Illinois that severance plan benefits are only available if a worker loses his or her job. While this is often the case, it is not always the case. What event or events trigger an entitlement to severance plan benefits truly depends on what the plan says triggers such entitlement. Often, plans condition eligibility for severance plan benefits upon an involuntary termination of service. In addition, many plans state such termination cannot be for "cause." Again, what defines "cause" can vary from plan to plan, and is almost always found in a written plan document if the plan is covered by ERISA. (For more information on ERISA coverage of severance plans, click here).

Some plans, however, provide more generous eligibility for severance benefits, which take into account some measure of a reduction in earnings. Such is the case with one severance plan which covered former Kos Pharmaceutical employees who became employees of local pharmaceutical giant, Abbott Laboratories. The Kos/Abbott plan referenced provides for benefits even if a covered employee terminates his or her own employment for "Good Reason." Adair v. Abbott Severance Plan for Employees of Kos Pharmaceuticals, 2011 U.S. Dist. LEXIS 18696, at *2-3 (D.N.J. Feb. 24, 2011). The plan defines "good reason" as involving a 10% reduction in the participant's base salary, or any "material reduction" in the total cash compensation the participant is "eligible to earn." Alternatively, "good reason" can include a demotion or certain reductions in job responsibilities. Abbott's interpretation of this language has been the subject of controversy in recent cases. Id.; Veltri v. Abbott Severance Pay Plan for Employees of Kos Pharmaceuticals, 2010 U.S. Dist. LEXIS 5374 (D.N.J. Jan. 25, 2010).

If you think you may be entitled to severance benefits even though you have not lost your job, consult an attorney well versed in ERISA.

Workers in Chicago and the Midwest now have even more compelling of a reason to consult an ERISA lawyer before signing a severance agreement. In late January, the United States Court of Appeals for the Seventh Circuit rendered an opinion in Howell v. Motorola, Inc., No. 07-3877, 2011 U.S. App. LEXIS 1193 (7th Cir. Jan. 21, 2011) holding that any member who signed a release as part of a severance agreement after being terminated from employment could not pursue a claim against the former employer or the plan for a breach of fiduciary duty--even if that breach of fiduciary duty resulted in a denial of benefits due.

The case stemmed from Motorola's offering of employer stock as part of its participant-directed 401(k) plan. In 1999, Motorola involved itself, though an affiliate, in a lending deal with a Turkish telecom company, Telsim, whereby Motorola loaned Telsim $1.8 billion. Telsim pledged a number of shares of its own stock as security. Prior to July 1, 2000, Motorola only had 4 options in its 401(k) plan, employer stock being one of them, and the plan limited participants to investing no more than 25% of their account balances in employer stock. Thereafter, Motorola began offering 9 different options, including employer stock, but lifted the restriction so that employees could invest 100% of their retirement savings in Motorola stock.

In April 2001, Telsim missed the first repayment deadline and had diluted the stock that served as collateral for the Motorola loan, and as Motorola released more information about the Telsim deal, the stock price declined. The plaintiffs alleged that Motorola did not adequately disclose the terms of the Telsim deal or the risk to which Motorola was exposed, and that as more information was released regarding the deal, the stock price declined.

The Seventh Circuit held Howell's claims against Motorola were dismissed because he signed a release as part of a severance agreement that would release Motorola from any past breaches of fiduciary duties under ERISA. Even though Howell tried to argue that his claim was really one for benefits due under ERISA 502(a)(1)(B), the court nevertheless dismissed. This case demonstrates precisely why it is so important to consult an attorney versed in ERISA prior to signing any severance agreement.

With every dip in the economy and rise in unemployment, we see a rise in the number of involuntary separations of service (i.e., layoffs). Many workers who have been laid off had an expectation that if they were laid off, they would receive some severance. This expectation could develop several ways. Perhaps the employer issued you a written description of a severance plan that outlined the number of weeks of compensation and benefits you would receive in the event of an involuntary separation of service. Alternatively, maybe there was nothing in writing, but the employer had an established practice of providing severance based on certain guidelines.

As long as there are severance plans in the workplace, there will be an employer that does not pay severance to somebody as previously promised. Contacting a lawyer who is not versed in ERISA and can not tell the difference between an ERISA severance plan and a non-ERISA severance plan could potentially cost you months, or even years, in obtaining your severance.

Though most employers are savvy enough to structure severance plans to be ERISA welfare benefit plans, some mistakenly structure them as pension plans. Under section 3(1)(B) of ERISA, a covered welfare plan is "any plan, fund, or program . . . established or maintained by an employer . . . for the purpose of providing for its participants or their beneficiaries . . . any benefit described in section 186(c) of this title . . . ." Severance is a benefit described in section 186(c).

Under section 3(2), a pension plan is "any plan, fund, or program . . . established or maintained by an employer . . . to the extent that [it] . . . results in a deferral of income by employees for periods extending to the termination of covered employment or beyond." Whether the plan is a pension or welfare plan is not germane to this post other than to demonstrate the various ways in which the plan could be covered by ERISA.

Continue reading "As Corporate Downsizing Is on the Rise, So Is Mishandling of Severance Cases by Attorneys" »