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Disallowing Severance Pay May Violate ERISA

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in Human Resources

Severance plan documents sometimes stipulate that employees who are fired "for cause" are disqualified from benefits. That places a burden on plan administrators to fairly review the facts before making a benefits determination. This includes checking out the employer's policies, procedures, and enforcement. If an employer was lax in any of these areas, and benefits were denied, they may be called on the courtroom carpet for violating the Employee Retirement Income Security Act  (ERISA).


Nosy, Yes! Misconduct, No!

An employee was told she would receive severance benefits if she were terminated within two years of a merger with another company. Before the severance period ran out, the 23-year company veteran was fired "for cause" after she accessed a manager's folder that contained performance information about other employees. The file, which was stored on the company's shared computer drive, did not require a special password to open it.


The plan administrator denied the worker's claim for severance benefits based on the plan's mandate that an employee fired "for cause" was ineligible. The worker sued, claiming she was wrongly denied benefits under the Employee Retirement Income Security Act (ERISA). A court decided the employee was indeed entitled to severance pay.


Accessing a file on a shared computer drive did not rise to the level of "cause," according to the court. Reasons: The employer had no safeguards in place to protect confidential information stored on the shared computer drive; the file was not marked confidential; and the company did not have a policy that prohibited the employee from viewing the material. (Johnson v. U.S. Bancorp Broad-Based Change in Control Severance Pay Program, D.C. MN, No. 02-4924 [DWF/JSM], 2003)


Delinquent Discipline

Severance disputes may erupt even if a terminated worker's misconduct clearly violates a written policy. The termination reason may be legally questioned, for example, when managers let the misconduct slide for several months and then terminate just before a reduction-in-force (RIF) is implemented.


A 30-year company veteran regularly used her corporate credit card for personal purchases, a policy no-no. Four months after the policy violation was discovered - but two weeks before a layoff - the employee was terminated. Had the employer eliminated the employee's job during the RIF instead of firing her beforehand, she would have been eligible for substantial severance benefits.


Believing her employer terminated her in order to avoid paying her those severance benefits, the employee sued the company for violating ERISA. A court allowed the case to proceed to trial. Delaying discipline to just before the RIF was announced raised an inference that the employer may have fired her to prevent her from obtaining those severance benefits. (Huske v. Honeywell International, Inc., D.C. KS, No. 03-2003-KHV, 2004)


Severance plan pointers: ERISA requires that plan administrators conduct thorough and fair reviews of severance claims. If an employee is terminated for cause in a severance situation, administrators shouldn't make a determination about benefits without investigating. Check to see whether: 1) a written handbook policy exists that bars the misconduct; 2) employees were aware of the policy; 3) enforcement was consistent; 4) safeguards were in place to prevent misconduct; and 5) discipline was timely.

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