It is not uncommon for employers to have executive severance plans that pay substantial severance if an executive loses employment in connection with a change in control. In a recent federal district court decision, a former chief executive officer sued an employer for $700,000 claimed to be owed as severance as a result of termination of employment within one year of a change in control. The severance plan paid only if the executive lost employment within the one year period following the change in control. The new employer, however, decided to terminate the executive just after the one year anniversary. The new CEO had told the executive about three months before the one year anniversary that the executive would be terminated after the one year period expired. Approximately three weeks before the one year period ended, the executive was placed on “garden leave,” in other words, relieved of all responsibilities and told to stay home. His official termination date was one week following the anniversary of the change in control date.
The court found that under the terms of the severance plan the executive had not been terminated within one year of the date of the change in control. Therefore, under the terms of the plan the executive was not entitled to benefits.
However, the court was willing to consider a claim that the executive made for benefit interference under ERISA. ERISA prohibits an employer from discharging, fining, suspending, expelling, disciplining or discriminating against a participant or beneficiary for the purpose of interfering with the attainment of any right to which the participant may be entitled under an ERISA plan. The court interpreted this language to prohibit an employer from terminating or otherwise taking adverse action against an employee with the specific intent of preventing that employee from obtaining ERISA benefits. The court found that the executive had sufficiently alleged that the employer had manipulated the date of termination with the specific intent of depriving the employee of the severance benefits to which he would otherwise have been entitled.
The case was before the court on the employer’s motion to dismiss so the court accepted as true the allegations made by the executive. The motion to dismiss was denied. The court said that there could be benign reasons why the company would pay the employee for 30 days after stripping the employee of all responsibilities but that there was also the possibility that the employer had improper motives for the timing of the employment termination given the fact that the garden leave saved the employer over $700,000 in severance pay.
Employers with similar change in control severance plans should keep in mind this ERISA provision if they contemplate terminating an employee shortly after the employee would no longer be eligible for severance benefits.