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If you don't tell me, I won't know
Excerpted from Kansas Employment Law Letter, by Jay M. Rector
Granting severance pay to a departing employee is nothing new. Nor is requiring the employee receiving the severance pay to sign a release agreement a particularly novel concept. An underlying level of complexity, however, is created by the oft-ignored but very important fact that many severance pay programs - intended or not - will qualify as employee welfare benefit plans subject to the vagaries of the Employee Retirement Income Security Act of 1974 (ERISA). As one employer learned the hard way, that ERISA coverage can instantly make the simple . . . complex. You further agree that for a period of two years after your employment termination from UNUM, you will not directly or indirectly solicit, assist, or induce any of UNUM's sales representatives, other employees, or brokers to terminate their relationships with UNUM or to become employed by or associated with another insurance company. You acknowledge and agree that UNUM has a valid need to protect its business by prohibiting such solicitation and that these restrictions are both reasonable and necessary to protect UNUM's business.Apparently wishing to solicit, assist, and/or induce, Cirulis got a lawyer and repeatedly filed objections and requested negotiations with UNUM about the nonsolicitation clause. He also appealed to the severance pay plan's administrator, complaining about the company's refusal to eliminate or amend the clause. His objections, requests, and appeals, however, were to no avail. In fact, nine months after his discharge, the company advised him that its patience was exhausted and that he was no longer eligible for any severance benefits in light of his refusal to sign the release agreement and now his alleged violation of the nonsolicitation clause. Court's decision What to do? Well, file a lawsuit, of course. At first, however, Cirulis found the litigation pathway to be rather unfulfilling - so unfulfilling, in fact, that a Kansas federal district court dismissed all of his claims without a trial. The court ruled that (1) his failure to sign the release justified UNUM's denial of benefits, (2) conditioning benefits on the nonsolicitation provision was a reasonable exercise of the plan administrator's discretion, and (3) the former employee failed to establish that UNUM acted in bad faith, which would be necessary for Cirulis to recover penalties. Cirulis' 13 years in the life insurance industry, however, apparently weren't wasted. Refusing to accept the initial "no," he proceeded to sell his case to the appellate court. After hearing Cirulis' pleas for relief, the Tenth U.S. Circuit Court of Appeals reversed the district court's decision and ruled in his favor. In so ruling, the court pointedly mentioned that the former employee didn't know about the nonsolicitation clause in the required release until June 24, 1999. That was two and a half months after he learned his position would be terminated and one week before he was formally discharged. The court also made mention of the fact that by that time, the severance pay plan itself had been in effect for years. The appeals court found that by failing to provide notice to employees that severance benefits would be conditioned on a nonsolicitation provision (in addition to a legal waiver), the plan administrator's conduct contravened ERISA's mandate that employee welfare benefit plans must be written to give employees notice of their rights and obligations under the plan. In short, Cirulis made the sale. Cirulis v. UNUM Corporation Severance Plan, 2003 U.S. App. LEXIS 3925 (2003). Bottom line If you choose to offer severance pay plans to your employees, keep in mind that depending on how the program is structured, it may well be covered by ERISA. While that coverage can certainly provide some important advantages (primarily the preemption of some lawsuits under state law), it also raises the complexity bar and creates additional issues. In the above case, UNUM stumbled across only one of those issues - the need to more fully disclose employees' rights and obligations under the plan. Other ERISA issues that might arise in the implementation or sponsorship of an ERISA-covered severance pay plan are numerous and beyond the scope of this article. But these issues range from the mundane - creating a summary plan description and filing required annual reports - to the more esoteric requirement that fiduciary standards be satisfied. If you're implementing or sponsoring a severance pay program and don't know what those issues are, seek legal help. Copyright 2003 M. Lee Smith Publishers LLC. This article is an excerpt from KANSAS EMPLOYMENT LAW LETTER. KANSAS EMPLOYMENT LAW LETTER does not attempt to offer solutions to individual problems but rather to provide information about current developments in Kansas employment law. Questions about individual problems should be addressed to the employment law attorney of your choice.
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