District Court Case Highlights Advantages of ERISA Severance Plans

by Hogan Lovells

Specialists have long touted certain significant advantages to employers that come along with maintaining ERISA severance plans, and a recent district court case highlights some of these advantages.

On November 9, 2017, in the unpublished opinion of Huddleston v. Scottsdale Healthcare Hospitals Inc, 2017 U.S. Dist. LEXIS 185985 (Nov. 9, 2017), an Arizona district court concluded that because a severance plan unambiguously stated it was a severance plan under ERISA, a former employee’s state-law claims for severance benefits were preempted by ERISA and the resulting claim for benefits under the employer’s severance plan were dismissed based on the employee’s failure to exhaust his administrative remedies under the plan.

The plaintiff had accepted an offer of employment with the defendant, and the offer letter stated that upon receipt of an executed non-compete agreement, the plaintiff would receive a nine-month severance package in the event of an involuntary termination of employment. The plaintiff signed the non-compete agreement. The offer letter included a copy of the applicable severance plan, which explicitly stated that it was intended to be a severance pay plan within the meaning of ERISA § 3(2)(B)(i). The plan also contained a claims procedure, which required a beneficiary to file any claim for severance pay with the Plan Administrator under Department of Labor regulations and using specified procedures.

Approximately one year later, the defendant sent the plaintiff a notice that (i) it had amended its severance plan, which superseded the severance plan that existed at the time of the offer of employment, (ii) the plaintiff’s level of employment was no longer eligible to participate in the severance plan and, (iii) as a result, the non-compete agreement signed by the plaintiff when he accepted the job was null and void. A few months later, the plaintiff was terminated without cause, and the defendant refused to pay severance to the plaintiff.

The plaintiff filed suit, alleging various state law causes action, including breach of contract, breach of an implied covenant of good faith and fair dealing, promissory estoppel, treble wages and declaratory judgment. The defendant moved to dismiss all of the plaintiff’s claims on the grounds that they were preempted by ERISA and the plaintiff failed to exhaust his administrative remedies under the plan. The court agreed with the defendant, dismissing the case in its entirety. The court held that the defendant’s severance plan was clearly and unambiguously an ERISA severance plan and, accordingly, (i) the plaintiff’s state law claims were preempted by ERISA and (ii) in order to bring an action arising from the ERISA severance plan, the plaintiff was required to first exhaust the administrative remedies under the severance plan before filing suit.

This decision illustrates some of the significant advantages of ERISA severance plans, which may be well-worth the inconvenience of the documentary and reporting requirements that come along with maintaining an ERISA plan.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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