Severance plans subject to the Employee Retirement Income Security Act of 1974, as amended (“ERISA”) must satisfy certain compliance requirements, but federal law affords employers significant advantages in the event a participant sues for severance benefits. A recent First Circuit decision, Orabona v. Santander Bank, N.A., illustrates how ERISA preemption of state law protects employers where a former employee asserts state law claims alleging improper termination of employment to avoid paying severance benefits. This post describes the benefits of ERISA preemption, provides an overview of the First Circuit decision, and highlights key aspects courts look to in determining whether a severance program is an ERISA plan.[1]
Benefits of ERISA preemption
If an employee benefit program is not an ERISA plan, ERISA will not preempt an employee’s state law claims in a lawsuit to recover benefits under the program. Application of state law exposes employers to larger damage awards, including punitive damages. If an employee benefit program is an ERISA plan, the program and the employer sponsoring it generally will be protected from the potential damages associated with a state law claim to recover benefits because, with limited exceptions, ERISA preempts all state laws that “relate to” an ERISA plan, and the remedies available under ERISA are generally limited to recovery of denied benefits, enforcement of plan terms, reinstatement of eligibility, and attorneys’ fees (at the court’s discretion).
ERISA preemption also has procedural benefits:
- Before filing a lawsuit, an employee is required to follow the plan’s internal, ERISA-compliant claims procedures.
- If the internal claims review process does not resolve the matter, or if the employee disagrees with the final decision under that process, the employee can sue the employer in federal court, where the judge will apply the federal legal framework of ERISA—not a patchwork of state laws—to decide the case.
- If a severance plan includes language granting the plan administrator complete discretionary authority to interpret the plan and determine eligibility for benefits, courts, as a rule, will apply a deferential standard of review and overturn the plan administrator’s decision regarding a claim for benefits only if the decision was arbitrary and capricious.
The facts
In Orabona, the plaintiff alleged that the employer terminated her employment in 2022 on a pretextual basis to deny her eligibility for benefits under the employer’s Severance Policy. She was terminated for cause days before her entire department was laid off, after the employer discovered that she had forwarded company emails containing confidential client and business information to her personal email, in an explicit violation of the employer’s Code of Conduct. The termination for cause disqualified her from receiving severance benefits under the Severance Policy. Orabona brought multiple state law claims in Rhode Island state court, including breach of implied contract, wrongful termination, negligent misrepresentation, and fraud.
The Severance Policy
The First Circuit did not have to decide whether Santander’s Severance Policy was an “ERISA-regulated plan” because, after pursuing limited discovery at the state court level, the parties agreed that it was. Accordingly, the First Circuit described the arrangement as an “ERISA Severance Policy” and explained that the policy states the terms of employee eligibility and calculation of severance benefits, reserves discretion to Santander, and sets forth claims procedures.
The Court’s holding
The First Circuit held that all of Orabona’s claims were preempted because they “relate to” the Severance Policy under ERISA Section 514(a), which states that ERISA “shall supersede any and all State laws insofar as they may now or hereafter relate to any” ERISA plan. The Court explained that the Supreme Court, the First Circuit, and its sister courts have consistently held that “a cause of action ‘relates to’ an ERISA plan when a court must evaluate or interpret the terms of the ERISA-regulated plan to determine liability under the state law cause of action.”[2]
The First Circuit reasoned that to determine liability under each of the state law claims Orabona brought, the Court must consult the Severance Policy to determine:
- Whether the plaintiff was ineligible for severance benefits because of the grounds on which Santander terminated her employment;
- Whether the plaintiff would have been eligible for severance benefits had her employment been terminated under the subsequent layoff rather than for cause; and
- Whether the employer had discretion to grant or deny severance benefits.
The First Circuit rejected Orabona’s argument that her cause of action was for improper termination rather than a claim for benefits, emphasizing that “[t]he Supreme Court, this court, and our sister circuit courts have held that state law claims were ‘related to’ ERISA where the employer is alleged to have taken actions to prevent the employee from receiving ERISA plan benefits.”
The holding underscores that when a court must evaluate or interpret the terms of the ERISA-regulated plan to determine liability under any and all state law causes of action, ERISA preempts state law.
Accordingly, because Orabona pursued state law claims and alleged damages that were limited to severance benefits (and did not follow the claims procedures under the “ERISA-regulated” Severance Policy), the First Circuit found that her claims could not proceed.
What makes a severance program an ERISA plan?
Typically, federal courts decide if the program falls within ERISA’s scope because, under facts similar to Orabona’s, the parties often vigorously dispute the issue:
- If the remedies for state law claims are available solely under an ERISA plan, ERISA preemption applies, and the employee cannot pursue state law claims for severance benefits.[3]
- If the plan is not an ERISA plan, state law claims survive and must be decided based on state law, possibly subjecting the employer to punitive damages.
To determine whether ERISA covers a severance program, courts engage in a fact-intensive analysis and often focus on whether there is an “ongoing administrative scheme,”[4] and whether an employer retains “discretion” in administering the plan.[5] Severance plans that involve ongoing administrative tasks, such as eligibility determinations and individualized calculations, are more likely to fall within ERISA’s scope. The First Circuit also described employer discretion to administer the arrangement as “a particularly germane factor.”[6] To put the degree of discretion into perspective:
- Scenario A. If the employer merely sends a terminated employee a check every month and continues to pay for insurance premiums for the time specified in the employment contract, ERISA does not apply because “there is nothing discretionary about the timing, amount or form of the payment.”[7]
- Scenario B. ERISA will apply if eligibility for severance benefits is “far from automatic,” and the plan reserves discretion to its administrator to determine whether:
- the employee’s termination was for business reasons or misconduct or cause;
- the termination was voluntary or involuntary;
- the employee suffered a period of unemployment following termination;
- the separation was a qualifying separation.[8]
Takeaways
Although Orabona showcases the benefits of ERISA preemption for employers, the decision does not include an analysis of whether the Severance Policy is a plan subject to ERISA (because the parties had agreed that it was). Employers, however, should be mindful of this analysis when designing or reviewing severance plans.
Although determining whether ERISA applies to a severance plan is fact-intensive, employers who would prefer their plan to be subject to ERISA should, as a starting point, consider whether their plan is more like Scenario A or Scenario B. If the plan is more like Scenario A and ERISA treatment is desired, the plan sponsor should consult with legal counsel about whether and how the plan could become an ERISA plan. If the plan is more like Scenario B, the plan sponsor should discuss with counsel litigation related to severance plans to assess the plan provisions against relevant precedent, while also ensuring compliance with applicable ERISA requirements (e.g., written plan document, summary plan description, and claims procedures).
[1] For a high-level summary of ERISA and tax issues for severance plans, see our June 29, 2021, Benefits Law Update post.
[2] See, for example, Ingersoll-Rand Co. v. McClendon, 498 U.S. 133, 140 (1990); see also Hampers v. W.R. Grace & Co., Inc., 202 F.3d 44, 52 (1st Cir. 2000).
[3] Note, however, if a wrongful termination lawsuit also included a state law claim for reputational damages, for example, that claim would survive ERISA preemption
[4] Fort Halifax Packing Co. v. Coyne, 482 U.S. 1 (1987).
[5] O’Connor v. Commonwealth Gas Co., 251 F.3d 262, 267 (1st Cir. 2001).
[6] Id.
[7] Aguirre-Santos v. Pfizer Pharm., LLC, No. CIV. 12-1393 JAF, 2013 WL 5724061, at *2 (D.P.R. Oct. 21, 2013)
[8] Sargent v. Verizon Services Corp., No. 09-CV-310-SM, 2010 WL 610948, at *6 (D.N.H. Feb. 22, 2010)
