Mark Poerio specializes in executive compensation,
employee benefits, and fiduciary matters, especially from a business,
governance, tax, securities, and litigation perspective. He currently
serves as President of the prestigious American College of Employee
Benefits Counsel, and on the executive board of the American Benefits
find more of Mark's Law Alerts and Newsletters, please click here.
Wagner Law Group is a nationally recognized practice in the areas of
ERISA and employee benefits, estate planning, employment, labor and
human resources and investment management.
in 1996, The Wagner Law Group is dedicated to the highest standards
of integrity, excellence and thought leadership and is considered to
be amongst the nation's premier ERISA and employee benefits law
firms. The firm has eight offices across the country, providing
unparalleled legal advice to its clients, including large, small and
nonprofit corporations as well as individuals and government entities
worldwide. The Wagner Law Group's 34 attorneys, senior benefits
consultant and seven paralegals combine many years of experience in
their fields of practice with a variety of backgrounds. Nine of the
attorneys are AV-rated by Martindale-Hubbell
and six are Fellows of the American College of Employee Benefits
Counsel, an invitation-only organization of nationally recognized
employee benefits lawyers. Five of the firm's attorneys have
been named to the prestigious Super
Lawyers list for 2017, which highlights outstanding
lawyers based on a rigorous selection process. The Wagner Law Group
is certified as a woman-owned and operated business by the Women's
Business Enterprise National Council.
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April 26, 2018
Plans: From Success to Backfire
What happens when 3,000 employees over age 55 receive a
buy-out offer because they have more than 10 years of experience?
Fidelity made that offer to 7% of its workforce, and more than 50% of
the eligible employees accepted. Fidelity's "results exceeded [its]
expectations" according to a Bloomberg BNA article.1
For employers such as Fidelity, voluntary severance
plans (VSPs) have the potential to provide a win-win dynamic by which
to downsize (or right-size) their workforces. That is because a
well-designed program will encourage resignations by those who either
want to retire or should leave because they are weak performers.
As a general matter, the most successful VSPs operate
through a few basic steps, as follows:
- The employer
invites a select group or groups of eligible employees to
"request" inclusion in a severance plan (or program)
that promises particular benefits in exchange for general
releases of their claims.
- During a
window period, eligible employees may volunteer to terminate
- Based on its
workforce needs, the employer accepts or rejects employee
requests, and then implements the terminations for those who are
accepted for VSP benefits.
- If the VSP
does not meet its objectives, the employer implements a
follow-on involuntary reduction in force ("RIF").
work well when employers make a reasonable VSP offer, warn that a
less generous RIF could follow, and assure that employee opt-ins are
truly voluntary. If executed poorly, VSPs can spur litigation.
Discussed below are illustrations of both outcomes.
Backfire . . . Delaware Case
A 2017 Delaware case (Girardot v. The Chemours Co.) had its roots in a
corporate spin-off, followed by a VSP, followed by a RIF. The latter
occurred because, in the words of the court, "the voluntary
reduction in force did not sufficiently reduce costs."
Litigation came from VSP participants who alleged that "they
would not have elected to participate in the VSP had they been
informed of the possibility that the [RIF plan] would be implemented
with greater benefits."
The Girardot case highlighted the need for VSP communications
to eligible employees through FAQs, or other vehicles, that explain
how the VSP will operate, as well as how it will differ from a
possible future RIF. Imprecision or ambiguity can open the door for
claims by employees who feel in hindsight that that they were misled
or under-informed about their choices.
Employers should also take VSP precautions with supervisory
employees. Well-intentioned advice could inadvertently convert a VSP
into an involuntary program. This may result, for example, if
particular employees are forewarned that they would be smart to take
the voluntary severance because they are at risk of being terminated
in any event if a RIF occurs. That kind of advice could open the door
for claims that the VSP is a ruse for involuntarily terminating
protected classes of employees (such as older ones).
Employment discrimination laws pose another risk for those
implementing a VSP. Claims may come at all stages - from how the
eligible class is selected to who will be terminated. Problems can
arise from discrimination that is intentional, or statistically
demonstrable. That said, for a VSP that is truly offered on a
voluntary opt-in basis, employers may limit VSP eligibility to select
older employees (as Fidelity did) or other business-justified groups.
ERISA - Often the Best Litigation Shield
Delaware's Girardot decision focused on whether ERISA
governed claims arising under the VSP, and the case was dismissed
because the VSP was not subject to ERISA. The court explained:
one-time, lump sum payments distributed under the VSP did not require
the creation of a new administrative scheme, and the bonus payments
were payable 'per usual Company practices based on financial results'
which, like the continuation of existing benefits for a limited duration,
did not materially alter the existing administrative scheme."
Interestingly, although that VSP was not
structured to fall within ERISA, it could have been. In most cases
that is the best vehicle for controlling a VSP's litigation risk. See
"Say Hello to Smart Goodbyes" for reasons why employers
may want to ERISA-fy their severance practices. In a nutshell, the
benefits of an ERISA severance plan generally include the following:
litigation until there has been an exhaustion of the plan's
claims procedures, which may foreclose claims that are not
review under highly deferential standards, rather than de novo;
in federal court under well-defined ERISA rules applied by a
judge, instead of before a jury in state court; and
- damages that
ERISA limits to plan benefits and potential attorneys' fees,
rather than the full panoply of damages recoverable through tort
claims outside ERISA.
It is not easy to thin a workforce. Voluntary severance plans offer a
means for doing so in a constructive manner that minimizes litigation
risks -- by enabling employees to leave voluntarily, through
execution of claims releases as a condition for severance. As with
any good idea, problems are possible. But they are generally foreseeable
and avoidable by those who execute the VSP thoughtfully.