:: Employer Practice Of Payments In Exchange For Releases Does Not Constitute ERISA Plan
To be sure, the record supports Kawski’s claim that Johnson & Johnson had an ongoing practice of providing release agreements to certain employees. But Kawski points to no communication or other evidence suggesting that “a reasonable employee would perceive an ongoing commitment” by Johnson & Johnson to provide such payments.
Kawski v. Johnson & Johnson, 2009 U.S. App. LEXIS 19573 (2d Cir. N.Y. Sept. 1, 2009) (unpublished)
The Second Circuit recently addressed an important issue that can arise in the context of employment termination. In this case, the plaintiff, on behalf of herself and similarly situated employees, alleged that her employer had an ongoing practice of offering payments in exchange for a release of claims. The key issue: was this practice, in effect, an employee welfare benefit plan?
This is a issue frequently overlooked. While an ERISA plan is required to be described in a written document, an ERISA plan can be created through pattern and practice even though not described in a written document. This fact creates substantial risk that a course of payments on termination of employment may give rise to a severance pay plan. That is essentially what the plaintiff alleged in Kawski.
The Elements Of The Claim
These battles always take place on the turf marked off in the seminal Fort Halifax Packing v. Coyne Supreme Court opinion. Severance benefits paid by a plan out of general assets are of course employee welfare benefits under 29 U. S. C. § 1002. But the mere payment of this type of benefits does not constitute a “plan”.
Thus, in Fort Halifax, the Court held that a state law requirement of a one-time, lump-sum payment triggered by a single event (plant closing) required no administrative scheme and thus was not preempted by ERISA. Drawing on that authority, the factors that must be evaluated were recapitulated by the Second Circuit opinion as follows:
“A finding that a particular program is a ‘plan’ under ERISA depends in part upon whether that program ‘requires an ongoing administrative program to meet the employer’s obligation.’” Kosakow v. New Rochelle Radiology Assocs., 274 F.3d 706, 736 (2d Cir. 2001) (quoting Fort Halifax Packing Co. v. Coyne, 482 U.S. 1, 11, 107 S. Ct. 2211, 96 L. Ed. 2d 1 (1987)).
Accordingly, this Court considers three factors in determining whether an employee benefit was granted pursuant to an ERISA plan:
(1) “whether a reasonable employee would perceive an ongoing commitment by the employer to provide employee benefits”; (2) “whether the employer’s undertaking or obligation requires managerial discretion in its administration”; and (3) “whether the employer was required to analyze the circumstances of each employee’s termination separately in light of certain criteria.”
(citations omitted)
No Proof Of Ongoing Commitment
In the case at bar, the Second Circuit found no ongoing commitment to make the severance payments at issue.
To be sure, the record supports Kawski’s claim that Johnson & Johnson had an ongoing practice of providing release agreements to certain employees. But Kawski points to no communication or other evidence suggesting that “a reasonable employee would perceive an ongoing commitment” by Johnson & Johnson to provide such payments.
This was fatal to the plaintiffs’ claims.
Discovery Issues
The question of permissible discovery in this context is a persistent problem. In this case, the district court refused further discovery despite the filing of a Rule 56(f) affidavit.
The denial of a motion under Rule 56(f) is reviewed for abuse of discretion. A district court decision will not be reversed where a plaintiff fails to show “how the facts sought are reasonably expected to create a genuine issue of material fact.”
The plaintiff sought a certain manual and additional evidence but the district court had ruled the discovery would be merely cumulative and thus fail to meet the standard of reasonable expectation noted above. The Second Circuit agreed, stating:
Kawski argues that she was entitled to additional discovery related to a Johnson & Johnson document titled “Worldwide Policy Manual” that includes a template release agreement. We do not agree that this manual provides a reasonable basis for the suspicion that additional evidence of an ERISA plan may exist. The manual states that separation agreements will “not normally be necessary” and that the template is being provided “for informational purposes.” Based on this statement, any employee who had seen the manual could not have reasonably perceived a commitment by Johnson & Johnson to offer payments. Nor does the template suggest there could be further evidence of an administratively complex benefits scheme.
Kawski also argues that Johnson & Johnson failed to conduct a document review to determine conclusively whether any exceptions were made to its practice of determining eligibility for a release agreement based on a simple test. The district court did not abuse its discretion in denying further discovery on this issue, which would have been cumulative and unlikely to bear on any material question of fact.
Note: As one reads these cases, it is easy to overlook the time and effort taken to reach the conclusion arrived at by the Court of Appeals. The risks of a holding that the employer inadvertently instituted a severance pay plan with the broad commitment that entails justifies a vigorous defense. At the same time, that burden also warrants a careful review of what precautions might forestall the need to fight such a battle. Many employers meet this issue head on by implementing a severance pay structure compliant with ERISA that provides the limited benefits intended for the classes of employees meeting specified criteria.
That approach has merit since an employer can craft the terms of the plan in any manner it wishes. Furthermore, the standard of judicial review of a benefit denial is quite favorable to the employer. Of course, there are reporting and disclosure requirements, so that decision is not without some costs.
Minimum Administration - On the question of whether there is a plan or not, the employer must argued insufficient administration to invoke the ERISA regime. In this case, the argument went like this:
With respect to the other factors, the record supports the claim that Johnson & Johnson’s determination of eligibility was based on a simple policy — employees who were involuntarily terminated and eligible for benefits under Johnson & Johnson’s ERISA plan were offered release agreements. And in most cases, the amount of the payment was based on “simple arithmetic calculations” akin to those we have found insufficient to constitute the type of “managerial discretion” that is one hallmark of an ERISA plan. James v. Fleet/Norstar Fin. Group, Inc., 992 F.2d 463, 468 (2d Cir. 1993). This practice cannot be characterized as the type of complex administrative scheme that ERISA was designed to regulate. See Fort Halifax, 482 U.S. at 11.
The employer’s best argument was the lack of commitment to the payments and this was the decisive factor in the opinion that won the day. The finding on the managerial discretion issue is problematic.
In Fort Halifax (footnote 10), the Supreme Court distinguished the Burlington cases (finding the existence of a plan) by stating:
The employer [Burlington] had made a commitment to pay severance benefits to employees as each person left employment. This commitment created the need for an administrative scheme to pay these benefits on an ongoing basis, and the company had distributed both a Policy Manual and Employees’ Handbook that provided details on matters such as eligibility, benefit levels, and payment schedules. 772 F.2d, at 1143-1144, and n. 1; 765 F.2d, at 323.
Fort Halifax Packing Co. v. Coyne, 482 U.S. 1, 15 (U.S. 1987) (emphasis added)
While the facts are sparse on this issue, the complexity of the administrative program appears a closer question in my view given the foregoing language from Fort Halifax.
29 U. S. C. § 1002(1) - The statutory context for this dispute is set forth below:
The terms “employee welfare benefit plan” and “welfare plan” mean any plan, fund, or program which was heretofore or is hereafter established or maintained by an employer or by an employee organization, or by both, to the extent that such plan, fund, or program was established or is maintained for the purpose of providing for its participants or their beneficiaries, through the purchase of insurance or otherwise, (A) medical, surgical, or hospital care or benefits, or benefits in the event of sickness, accident, disability, death or unemployment, or vacation benefits, apprenticeship or other training programs, or day care centers, scholarship funds, or prepaid legal services . . .
Unpublished Opinions - While the treatment of the issues in the Kawski opinion are of interest, it is important to observe the restrictions on unpublished summary orders in the Second Circuit. See, Court’s Local Rule 32.1 and Federal Rule Of Appellate Procedure 32.1.
